Roth Conversions are a Big Deal

It is no secret 2020 took the world by surprise and will be the year we all remember. It also seems investors have learned there are many things we certainly cannot control. However, when it comes to financial planning, and in particular tax and retirement planning, there are significant opportunities we all should consider now since they may not be available for long. If you haven't considered Roth conversions before, 2020 may be the year.

Why 2020? It's because we have historically low tax rates and some have suggested they could rise in the near term. Taxes could also rise due to the increasing budget deficit, increased stimulus spending and highest deficit since World War II. For those whose employment has been impacted by the Covid-19 pandemic, this may present planning opportunities. And the obvious may be that higher tax rates put tax-deferred retirement savings at risk; so some of us may want to pay off the "debt" at the lowest possible tax rates.

KEY CONSIDERATIONS:

Assess overall market conditions and factors to determine if a Roth IRA conversion makes sense.

Determine which group of assets and/or asset class to convert.

Work with Advisor or CPA to determine the amount to convert.

Determine how you will pay the income tax on the conversion.

Compare other viable long-term tax planning strategies.

NEXT STEPS

Evaluate your need for a 2020 tax conversion. One option is to perform a series of smaller annual conversions over time. This fills up the lower tax brackets each year and manages the tax liability. Also, be sure funds are available to pay the taxes.

A second option is to convert larger amounts in 2020. By now, you should have a reliable estimate of 2020 income. If the pandemic caused business losses, a job status change from retirement or unemployment, or a large change to income, this year may allow for a larger conversion.

This popular planning strategy can allow you to pay lower tax rates today and allow the funds in your Roth IRA to grow tax-free. It can also allow for the potential for 100% tax-free withdrawal from your Roth in the future.

While a Roth IRA conversion can remove some risk of uncertainty to your planning process, keep in mind your Roth is not subject to required minimum distributions (RMDs). Smaller RMDs can reduce tax liability and increase sustainable lifetime income.

The benefits can be significant, but this strategy is not for everyone.

As always we are here to help.

Best,

CAM Investor Solutions

Source: AICPA; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

History and Presidential Elections

What History Tells Us About US Presidential Elections and the Market

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.

Stocks have rewarded disciplined investors for decades, through Democratic and Republican presidencies. It’s an important lesson on the benefits of a long-term investment approach.

Shareholders are investing in companies, not a political party. And companies focus on serving their customers and growing their businesses, regardless of who is in the White House.

US presidents may have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few.

The anticipation building up to elections often brings with it questions about how financial markets will respond. But the outcome of an election is only one of many inputs to the market. Below is a link to an interactive exhibit that examines market and economic data for nearly 100 years of US presidential terms and shows a consistent upward march for US equities regardless of the administration in place. This is an important lesson on the benefits of a long-term investment approach.

Follow this link to learn more about each presidency:   Interactive Exhibit - Markets Under Each Presidency

As always, we are here to help.

Best,

CAM Investor Solutions

Source: In US dollars. Stock returns represented by Fama/French Total US Market Research Index, provided by Ken French and available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html; US Government Presidential and Congressional data obtained from the History, Art & Archives of the United States House of Representatives. US Senate data is from the Art & History records of the United States Senate; Federal surplus or deficit as a percentage of gross domestic product, inflation, and unemployment data from Federal Reserve Bank of St. Louis (FRED). GDP Growth is annual real GDP Growth, using constant 2012 dollars, as provided by the US Bureau of Economic Analysis. Unemployment data not reported prior to April 1929; Dimensional Fund Advisors; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Will I Have Enough

Many investors in retirement have certain goals in common: more money rather than less, minimal wealth volatility, and enough financial cushion to cover the extra costs of, hopefully, living a very long life.

Retirees have generally tried to meet those goals with a simple rule of thumb: hold a balanced stock/bond portfolio and withdraw at a sustainable rate. Historically this worked in large part because risk-free rates averaged 5.9% the last 65 years. Risk-free rates form the foundation of expected total return to every risky asset, i.e.:

Expected total return = risk-fee rate + expected risk premium

So, total returns to stocks and bonds were sufficiently high to meet investor needs. After all, if you followed the rule of thumb, withdrawing 4% of your portfolio in retirement when risk-free rates were 5%+, you didn't need to worry much about running out of money, and you probably ended up having plenty to pass on to your heirs. It was all pretty easy.

Unfortunately, the days of adequate and reliable expected total returns on a traditional stock/bond balanced portfolio could look different. Risk-free rates are near zero or negative in all developed markets, and global yield curves appear to forecast persistently low or negative rates for some time to come. Low or negative risk-free rates can pull down the expected total returns on all investments, stocks and bonds alike.

What about volatility? Volatility is driven by the non-risk-free portion of returns, so it doesn't decline just because expected total returns are lower. Given the potential new combination of lower expected total return and not lower volatility, simple math tells us that the probability of a low or negative cumulative return over any future period may now be (much) higher in some asset classes. Recent research calls this "The New Arithmetic of Financial Planning" and it represents a direct challenge to traditional retirement analysis.

So risk-free rates have collapsed vs. historical averages, but what about risk premiums? Risk premiums are unknowable in advance, of course, but what's not unknowable is just how tenuous realized risk premiums on traditional asset classes can be. For example, in Japan the equity risk premium has been negative for the last three decades, and counting. In the U.S., stocks have experienced a worst-case drawdown of 865. And while investors don't need to be reminded of the 55% drop in their equity portfolios ten years ago, what some may find surprising is that in just the last 12 months, the average small stock in the U.S. is down 9%, and the average international stock is down 1%. Investors are not entitled to the equity risk premium - certainly over shorter periods (10-20 years) and even over periods that many investors typically consider very long term (30 years+).

As we look ahead to the future, it is also interesting to note several of the following which may impact one's financial planning assumptions going forward:

Historically, the equity risk premium has been reliant on the outsized performance of a small number of companies.

Over the last 93 years, 4% of stocks have driven 100% of U.S. stock market wealth creation. The other 96% are a push.

About 25 stocks (out of about 26,000 ever to exist) have driven 30% of all stock market wealth creation. 

Some may ask, where is the next Microsoft and Amazon? Here are a few more thoughts to keep in mind for planning purposes:

Something perhaps not well known to most investors is that companies are staying private longer.

Sarbines-Oxley may be forcing some of this reaction by company executives.

The significant growth in available private market capital is also a reason since an IPO may not be needed.

How can investors capture the hyper-performance in their early few post-IPO years?

Microsoft and Amazon went public with much lower valuations than companies today such as Uber, Peloton and Lyft just to name a few.

While there is a significant amount of data and evidence on this topic, most agree that future expected returns could be lower going forward in some areas of the market. To be clear, lower does not mean negative nor does it imply a forecast for a recession or a stock market crash. However, it may mean that one's current financial planning or longevity planning assumptions are affected. What this evidence does make pretty clear is the case for smart diversification, risk management, and holistic financial planning.

As always we are here to help.

Best,
Marc

Source: U.S. Treasury 10-year constant maturity rates; Morningstar; Bloomberg; Thomson Reuters; Stone Ridge Asset Management; Oliver Wyman: Longevity Risk Premium October 2019; Bessembinder, Hendrik, et al., "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics, forthcoming; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

End of Year Personal Financial Planning

The end of the year presents a unique opportunity to look at your overall situation and take advantage of some personal financial planning. With factors like tax reform, life changes or just working towards your goals, now is an especially important time to review things. Taking what we now know about the new tax law and weaving together all of the other areas of your personal finances is one of the key ways we provide value to our clients as their trusted adviser. Below are some things we’d like to help you think through before the year ends.

Income Tax Planning– Ensure you are implementing tax reduction strategies like maximizing your retirement plan contributions, tax loss harvesting in portfolios and making charitable contributions can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from before.

Estate Planning– Examine a flowchart of your current estate plan to visualize what would happen to each of your assets and how the current estate tax law will impact you. Be sure that your estate planning documents are up to date – not just your will, but also your power of attorney, health care documents and any trust agreements. You should also confirm that the beneficiary designations are in line with your desires. If you have recently been through a significant life event such as marriage, divorce or the death of a spouse, this is especially important right now.

Investment Strategy– Recently, we’ve seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing, and understanding the importance of maintaining discipline during these times is imperative. Regular portfolio rebalancing will allow you to maintain the appropriate amount of risk in your portfolio, and if you are retired and living off your portfolio, managing sequence of returns risk is vital to your success. In addition, you also want to maintain an appropriate cash reserve to cover living expenses for a certain period of time so that you do not have to sell equities in a down market.

Charitable Giving– There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock could make sense in order to avoid paying capital gains taxes. Further, you may want to consider bunching charitable deductions by deferring donations to next year or making your planned 2019 donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor advised fund for your charitable giving.

Retirement Planning– Think about your future when working becomes optional. Whether you expect a typical full retirement or a career change to something different, determining an appropriate balance between spending and saving, both now and in the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you.

Cash Flow Planning– Review your 2018 spending and plan ahead for next year. Understanding your cash flow needs is an important aspect of determining if you have sufficient assets to meet your goals. If you are retired, it is particularly important to maintain a tax efficient withdrawal strategy to cover your spending needs. Do you have a well-defined Withdrawal Policy Statement (WPS) in place? If you have not yet reached age 70.5, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70.5 make sure you are taking your required minimum distributions because the penalties are significant if you don’t.

Risk Management– It is always a good idea to periodically review your insurance coverages in various areas. Recent catastrophic events like hurricanes and wildfires serve as a powerful reminder to make sure your property insurance coverage is right for your needs. If you are in a Federal disaster area, there are additional steps necessary to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life, disability and long-term care insurance.

Education Funding– Funding education costs for children or grandchildren is important to many people. While the increase in college costs have slowed some lately, this is still a major expense for most families. It is important to know the many different ways you can save for education to determine the optimal strategy. Often, funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous.

Elder Planning – There are many financial planning elements to consider as you age, and it is important to consider these things before it’s too late. Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understands your plans will help reduce future family conflicts and ensure your wishes are considered.

The decisions you make each year with your personal finances will have a lasting impact.  We hope these reminders have begun to generate some insight to areas of your personal financial planning that need attention. We are honored to those of you where we serve as your trusted adviser and partner. Please contact us to discuss any year-end planning needs.

As always, we appreciate our relationship with you and we are here to help.

Best,
Marc

Schedule a Personal Financial Planning Review Today

 

Source:  Bloomberg; AICPA. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Tesla and Tax Law Part 2

While unrelated to tax law, once again Tesla has been the hype across the media given recent SEC action and the company's legal woes. Regardless of which side you may reside on (for or against Tesla), it seems the roller coaster ride could continue for some time.

Our recent blog post in August focused on very important IRS tax law guidance (that was overshadowed by the initial Tesla news that spurred these recent SEC legal issues). As we enter the final quarter of 2018, its important tax payers focus and pay close attention to these recent tax law changes that may have a significant impact on them.

As you may recall, the enactment of the American Taxpayer Relief Act of 2012 (ATRA), shifted the income tax code from two dimensional to a multi-dimensional system. The Tax Cuts and Jobs Act of 2017 (TCJA) rolled back some of these complications, nevertheless, long gone are the days when individuals, tax preparers, and wealth advisors only had to consider the regular income tax brackets. What does this mean for the everyone going forward? It means that virtually every financial decision now needs to be analyzed through the lens of multi-dimensional tax system.

Here is a short summary of questions and considerations to ask yourself that may help uncover financial and tax planning opportunities as we approach the end of 2018 and beyond:

WHAT IS THE SOURCE OF YOUR INCOME?

Understand sources of income: wages, self-employment, partnership, etc. and your entire income situation.

Review controllable and non controllable items of income (for example, wages, stock options, etc.) for use in income tax projection planning.

A Sample Tax Rate Evaluation

 

ARE THERE ANY INCOME DEFERRAL OPPORTUNITIES AVAILABLE GIVEN YOUR INCOME SOURCE?

Evaluate benefits of saving through a qualified plan for your business or self-employment income.

Are maximum 401(k) contributions being made given new annual IRS limits?

Determine benefits of 83(b) elections.

Evaluate benefits of exercising stock options in one year or another via tax projections.

Complete a thorough retirement planning cash flow analyses to determine if current deferral will suffice.

DO YOU HAVE DISTRIBUTIONS FROM MULTIPLE IRAs?

Consider consolidating multiple accounts but be mindful of the IRA rules.

The IRS allows just one rollover from an IRA per year.

WHAT ARE THE SOURCES OF YOUR INTEREST INCOME?

If taxable, does it come from bonds, CDs, savings accounts, etc.?

Understand your state impact if tax-exempt.

Consider the FDIC limits if the source is savings accounts.

If the source is municipal bonds, consider the safety of the bond.

WHAT ARE THE SOURCES OF YOUR DIVIDEND INCOME?

Understand the types of stocks or funds generating the dividend income.

Is it mostly from mutual funds or stocks?

Are there better alternatives to these investments your currently have?

HOW ARE YOUR ASSETS CUSTODIED AND TITLED?

Does the titling line up with your desires?

Evaluate the various ownership options and impact of each.

DO YOU HAVE SCHEDULE C INCOME?

Determine whether your business generates qualified business income (QBI) as defined under IRC Section 199A to be able to potentially take advantage of the 20% pass-through business deduction.

Consider the phase-out limitations ($415,000 MFJ and $207,500 for other filing statuses).

Are there changes in the business structure that could allow you to receive a larger deduction?

DO YOU HAVE CAPITAL GAINS AND LOSSES REPORTED ON YOUR SCHEDULE D?

Do you have loss carry forwards? Consider year-end rebalancing in taxable accounts where these can offset gains.

If there is substantial trading activity, you should evaluate the overall strategy and ensure you are aware of fees associated with such activity.

If you are in a 0% capital gains tax bracket, consider realizing gains to use up that tax bracket.

DO YOU HAVE ANY RETIREMENT PLAN DISTRIBUTIONS?

Consider net unrealized appreciation (NUA) election from the 401(k) if you have substantial employer stock.

Which retirement accounts you should be taking distributions form to ensure highest tax efficiency?

Determine if Roth IRA conversions make sense for you; depending on time horizon, the strategy may be for you.

Keep in mind AGI thresholds and run proper cash flow analyses to minimize tax impact.

Sample Net Investment Income Tax Analysis

Some Strategies for Reducing NIIT: Roth IRA Conversions; Charitable Remainder Trusts; Charitable Lead Trusts; Oil & Gas Investments; Installment Sales; Grouping Business Activities to Create Material Participation; Choice of Filing Status.

IS THERE INCOME FLOWING THROUGH FROM AN LLC, S CORPORATION, OR PARTNERSHIP TO SCHEDULE E?

Consider whether the activities are passive or active for purposes of deducting losses.

What is the impact of additional invest income tax of 3.8% on passive activities?

Consider whether income from LLCs should be considered self-employment income.

Discuss the impact of Section 199A 20% pass-through deduction under TCJA.

Do you have rental real estate properties being reported on Schedule E?

 

Depending on your situation, you may need to also focus on other new tax law changes. In the months ahead, we will continue to dive into more topics to help you understand where tax planning opportunities may exist for you.

We appreciate our relationship with you and we are here to help.

Best,
Marc

Schedule a Retirement Review Today

Source:  IRS; AICPA; Bloomberg. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Tesla and Tax Law You Need to Know

Some of our readers may want to know whether Tesla is going to be taken private at $420/per share in the near future. While this has been all the rage over the past week in the media, some other rather important news was announced last week that will impact many of us. Related to recent tax law changes, the IRS issued additional guidance and proposed regulations on the Section 199A  deduction.

By now most of us know that the Tax Cuts and Jobs Act of 2017 (TCJA) went into effect beginning in 2018. As a result, there have been significant changes to some tax laws that many people should know.

While we outlined some tax arbitrage strategies in our May 2018 post, arguably the hottest topic of the Tax Cuts and Jobs Act is the new qualified business income (QBI) deduction under Section 199A. Individuals who own interests in pass-through businesses (a sole proprietorship, partnership, LLC, or S corporation) may be able to deduct up to 20 percent of their qualified business income. Unfortunately, the guidance is still somewhat complicated and the deduction is subject to various rules and limitations. However, here are a few things you need to know:

Maximum deduction: 20% of net business income (after expenses), or 20% of taxable income (less capital gains), whichever is lower

If your taxable income (after deductions) is < $315,000 (married) / $157,500 (single) anyone with a small business can participate

If your taxable income (after deductions) is > $415,000 (married) / $207,500 (single), you cannot participate if your business is engaged in:

1) Accounting
2) Actuarial
3) Athletics
4) Appearance and Endorsement Compensation
5) Consulting
6) Financial Services (securities, investment management, trading)
7) Health
8) Law
9) Performing Arts

If you feel any of this may apply to you (or you're uncertain), you should contact your financial advisor and/or tax preparer. This is because the new 199A tax law dives into other areas that relate to real estate deductions, how to manage multiple businesses, and how to treat other qualified business income just to name a few.

In addition to Section 199A, here are a some other areas of TCJA that we have been discussing with our audience:

SALT

Under TCJA, the state & local income tax ("S.A.L.T") is capped at $10,000, which also includes sales and property taxes. If you live in one of the following states, you are likely to be most affected: California, Illinois, New Jersey, New York, and Texas.

Personal Real Estate

Home equity loan interest is no longer deductible unless it was for substantial improvements. This is then treated as "acquisition debt" and still subject to limits. Another change is that the mortgage interest deduction is now limited to the first $750k of debt on your home.

Qualified Tuition Plans

While some may have been hesitant to use 529 plans in their college planning, the Tax Cuts and Jobs Act has made the 529 vehicle much more attractive. It can now be used to pay for tuition at an elementary or secondary private, public or religious school, up to a maximum of $10,000 per year. For anyone paying tuition for their children or grandchildren to attend elementary or secondary schools, you may want to revisit 529 plan options.

Charitable Contributions

The doubling of the standard deduction and other changes will prevent some tax payers from itemizing in 2018 as well as benefiting from this increased limit. However, one way individuals can address this is to bunch two years of charitable contributions into one year. It may also be best to set up donor-advised funds. This will allow a tax payer to claim a charitable tax deduction in the funding year and schedule gifts over the next two years or other multiyear periods. By taking advantage of the deduction when tax payers are at a higher marginal tax rate, they can defer actual payouts from the fund until later.

These are just a few common areas where some tax payers may want to focus on. Over the next few months, we will continue to discuss more topics to help you understand where tax planning opportunities may exist for you.

We appreciate our relationship with you and we are here to help.

Best,
Marc

Schedule a Retirement Review Today

Source:  IRS; Forbes; Bloomberg. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Tax Planning Arbitrage for 2018

2018 has provided new financial planning opportunities for many of us. As we highlighted in our recent January blog entry, Financial Planning and Tax Reform, recent tax law changes have required many of us to review the impact on our own situation. If you throw in a decade-long bull market for stocks, many investors need to review tax planning opportunities to potentially reduce their current tax liability while also allowing for a greater level of asset accumulation. This will help create sustainable lifetime income in the future. Here are a few strategies that may be of benefit to you:

TAX PLANNING - BUNDLING AND TIMING OF DEDUCTIONS

Some taxpayers are close to the threshold where itemized deductions exceed the standard deduction.  Depending on the type of deduction, one can apply a timing strategy in order to bundle two years’ into one tax year and take the standard deduction the following year. These types might include estimated state income tax payments, property tax payments, or charitable gifting.

By bundling two years of deductions into one and taking the standard deduction the following year, a taxpayer is able to reduce taxable income over the two-year period, thus reducing the total tax liability. This strategy tends to work best for those charitably inclined who can front-load contributions to a Donor Advised Fund or directly to the charity.

Above is a hypothetical example comparing the two approaches. You can see that by doubling up itemized expenses into one year and taking the standard deduction in the next year can reduce taxes due over the two-year time frame. This is not only due to the increased deduction amount, but also because the taxpayer is able to remain in the 12% tax bracket in 2018 (versus 22% for both years when only taking the standard deduction).

 

TAX PLANNING - QUALIFIED CHARITABLE DISTRIBUTIONS (QCD) 

This rule allows for up to $100,000 to be given directly to an eligible charitable organization without impacting your taxes. When executed properly, the distribution is not taxable to the IRA owner.  Although this can also be accomplished by receiving the distribution personally and then gifting the money to said organization, it will have an impact on your tax return.  When completed using the latter method, the withdrawal becomes a taxable IRA distribution, which increases your Adjusted Gross Income (AGI) and is then reduced through your itemized deductions.  Your AGI affects many other areas of your tax return, including your Medicare premium calculations, taxation of Social Security benefits, and phase-outs for itemized medical deductions to name a few.

Above is a simple example where a single taxpayer wants to gift $100,000 from his IRA to his favorite charity. The column on the left assumes he takes a distribution and then turns around and sends the money to the charity. The column on the right assumes he completes a QCD directly from his IRA.  You can see that although the total federal income tax due is the same, his Medicare premiums were almost $3,000 less by doing the QCD because premiums are calculated off modified Adjusted Gross Income, not Taxable Income. In both cases, the charity gets the full $100,000 gift.

 

TAX PLANNING - ROTH CONVERSIONS

Many taxpayers fall into a lower tax bracket at retirement due to lack of earned income.  For those that own retirement accounts (excluding Roth IRAs), the IRS requires taxable distributions beginning at age 70 ½ (RMDs).  These distributions can cause a detrimental tax impact.  This may include being pushed into higher brackets and becoming subjected to additional levels of tax, such as Net Investment Income Tax (NIIT) or increased Medicare premiums due to Income Related Monthly Adjustment Amounts (IRMAA).  To reduce the amount of future RMDs, one strategy is withdraw additional funds from these accounts while the taxpayers are in a lower bracket, and convert them to a Roth IRA. Taxes are paid on the distribution (at the lower bracket percentage) and all future appreciation grows tax-free. RMDs are not required from Roth IRAs during the taxpayer’s lifetime and all distributions are tax-free (after a 5-year holding period from the initial conversion). Here is an example of the lifetime benefit. This generally works best for taxpayers over 70 1/2.

During the years between retirement (62 in this example above) and 70 ½, you can see your tax bracket is very low.  Its important to understand the potential benefit of converting tax-deferred retirement account to Roth accounts. Once you reach age 70, your taxable income increases to the 22% bracket (green area). Should you choose to complete Roth Conversions prior to age 70 ½, maximizing distributions to keep you within the 12% bracket (blue area), you have the ability to reduce the future RMDs, thus reducing your taxable income for the remainder of retirement.  In this example, the taxpayer’s portfolio increases by almost $240,000 over the life of the plan.

 

TAX PLANNING - HEDGING CONCENTRATED STOCK POSITIONS

Some investors who accumulate large amounts of company stock over time often have a low cost basis. As a result, it may not be in their best interest to realize excess capital gains for tax purposes. However, this also can leave the investor under diversified with too much firm-specific risk. Using advanced planning strategies that hedge concentrated stock positions can:

Manage Downside Concentration Risk

Allow For Participation in Stock Gains

Reduce Portfolio Volatility

Create Potential Income

Avoid Increased Tax Liability

TAX AWARE HEDGING STRATEGY USING OPTION CONTRACTS

Above is a hypothetical tax aware strategy that illustrates an advanced planning solution for hedging a large concentrated stock position with option contracts. In addition to helping manage firm-specific downside risk,  this can also provide greater flexibility in reducing investor exposure while keeping in mind capital gains in the event a low cost basis exists.

 

We understand that everyone's circumstances can be vastly different which is also why we recommend that investors take the time to ensure they are on track with their own tax planning needs. These are just a small sample of tax planning opportunities that may exist for you. As the new tax law changes continue to be implemented, it will be critical for investors to optimize their approach. At CAM, our firm will continue to work with our strategic partners to analyze and monitor tax planning strategies in order to best serve our clients.

We appreciate our relationship with you and we are here to help.

Best,
Marc

Schedule a Second Opinion Meeting

Source:  Delegated Planning, LLC.; TD Ameritrade Institutional; Bloomberg; RightCapital; BNA. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Financial Planning and Tax Reform

The 2018 TAX CUTS AND JOBS ACT

As most of us know, on January 1st, 2018 a not so "simple" tax reform went into effect. We recommend in order to get the most benefit from the changes, while avoiding mistakes under them, you may need to update your tax and financial strategies right away. Here are some FAQs to help navigate these recent changes:

What is CAM's philosophy regarding this fundamental tax reform?

The broad range of new income tax provisions since the 1986 tax reform effort has led to compliance hurdles for taxpayers, administrative complexity, and enforcement challenges for the IRS.  We encourage Congress to examine all aspects of the tax code to continue to improve the current rules. We stand for a code that is simple, practical, and administrable (AICPA Guiding Principles of Good Tax Policy). While we are not accountants or tax preparers, we support tax reform simplification efforts because we are convinced such actions can significantly reduce taxpayers’ compliance costs and encourage voluntary compliance through an understanding of the rules.

Some of us own pass-through entities, but I hear there are big changes in the C corporation area. Should I convert these entities to C Corporations even though there will be a second layer of tax?

Now that the legislation has been passed by Congress and signed by the President, you may want to consider changes to your taxes. The legislation as passed has the corporate tax rate at 21%, effective in 2018.  The legislation repeals the corporate alternative minimum tax (AMT) and provides for pass-throughs, a 20% income deduction.

I am someone who is close to being subject to estate taxes. Did the estate tax go away?

Eliminating the estate tax was high up on the Republican tax agenda and was part of the Republican Blueprint and the House November 16, 2017 version of the Tax Cuts and Jobs Act. However, the legislation, as passed by Congress and signed by the President (enacted on December 22, 2017), does not eliminate the estate tax.  Rather, the tax exemption amount is doubled from $5.6 million to $11.2 million per person for 2018 through 2025.

How will tax reform impact individual tax payers?

The impact of the bill from 2018 through 2025 on individual taxpayers include:

the top individual rate is 37%

the individual AMT remains but with increased exemption amounts and increased phase-out levels

the mortgage interest deduction limit is reduced to $750,000 on new mortgages and no home equity loan interest deductibility

individuals are allowed to deduct up to $10,000 in total state and local taxes, which include income or sales tax plus property taxes

the child tax credit is increased to $2,000, with up to $1,400 refundable

medical expenses in excess of 7.5% of AGI are deductible in 2017 and 2018 and then 10% of AGI thereafter

no personal exemptions deductible

no moving expenses deductible

no alimony taxable or deductible starting in 2019

no miscellaneous itemized deductions

no PEASE phase-out of itemized deductions

As a result of tax reform, we expect this will have some impact on many of you. Our goal is to identify tax strategies and planning opportunities as we help our clients navigate these changes.

We appreciate our relationship with you and as always we are here to help.

Best,

Marc

Schedule a Second Opinion Meeting

 

Source:  Bloomberg, AICPA. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance.

2017 Income and Capital Gain Distributions

Unfortunately for many, 2017 will not be as tax-friendly of a year with several widely held funds already reporting estimates far north of our numbers.

As we know from different economic cycles across both bull and bear markets, the tax implications from capital gains can vary dramatically and its important to position yourself in the best possibly manner. The following illustration provides some interesting figures for open end mutual funds as well as realized capital gains.

We know that the expected year-end capital gain and remaining income distributions may vary. However, at our portfolio level, the expected capital gain distributions will range from approximately .25% to 1.50% with remaining income ranging between .30% to .70%.  These distribution rates are surprisingly small given the performance of the equity markets over the past year. Out of our most commonly held positions, only a few funds are expected to make modest distributions between 2-4%. Its also likely for most clients, we have positioned these less tax-friendly funds in a tax-deferred qualified account therefore having no impact on our clients. Last but not least, more than half our clients' fund holdings are not expected to be making any capital gain distributions at all. This is significantly different compared to many of the most widely held investor funds listed below.

The good news is that for the fund strategies we utilize, our numbers are expected to be much lower than many of the widely held funds by investors. If you happen to be an investor in a retail fund or perhaps a high turnover strategy, you should keep an eye on your 1099s as they may indicate an increase in your tax liability. This information may also present a great opportunity to implement changes by selecting a more tax-efficient alternative.

We appreciate our relationship with you and as always we are here to help

Best,
Marc

Schedule a Second Opinion Meeting

Source:  Dimensional Fund Advisors, Kwanti Analytics, Morningstar Direct, Capital Directions, LLC. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance.