Proactive Retirement Planning Using the New SECURE Act

Setting Every Community Up for Retirement Enhancement

An Overview of Some Key SECURE Act Changes That May Affect Your Retirement Strategy
Law enacted on December 20, 2019

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. This new legislation made major changes to a number of tax rules that govern retirement savings. Many of these changes started in 2020 and some of the details are still being finalized.

Making retirement plans more available to Americans and encouraging retirement savings was the driving force behind the creation and enactment of the SECURE Act. It includes significant changes that all retirement savers should be aware of for retirement and tax planning purposes.

Familiarizing yourself with how the SECURE Act may impact your current retirement plan and discussing it with a knowledgeable financial professional can help you proactively and properly amend your strategy to adjust to the SECURE Act changes.

Proactive Tax Planning with the SECURE Act

Here are some of the changes that may affect retirement savers and their tax strategies:

• The Required Minimum Distribution (RMD) age was raised from 70 ½ to 72.
• The age limit for traditional IRA contributions was eliminated.
• A new 10-year rule essentially requires (there are some exceptions) all inherited IRAs, Roth IRAs, and qualified plans to be distributed within 10-years of death.
• There are new 529 Education Fund Rules.
• There is a 10% retirement account penalty exception for both births and adoptions.

For informational purposes only: this information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or tax professional.

The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

Qualified Charitable Distributions (QCDS) are a potential strategy for retirement savers.

While they are not new or changed by the SECURE Act, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCDs) of up to $100,000 are available to an IRA owner over 70 ½ years old. They are many times used as a proactive tax planning strategy for anyone over 72 taking a Required Minimum Distribution (RMD). An amount directly given to an eligible charity processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of calculating if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while reducing your taxes.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you do not let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

This is a specific area where a financial professional can offer some suggestions and strategies. We would be happy discuss with you whether or not this tax saving strategy may beneficial to your specific situation.

Potential New 10-Year Rule Strategies

Potential New 10-Year Strategies: Roth IRA Conversions

The new 10–Year rule reminds us that a proactive approach could potentially reap rewards. To maximize your situation under the new 10-year rule, you may want to consider Roth conversions and possibly spreading distributions over many years and lower brackets. Unlike distributions from regular IRAs, Roth IRA qualified distributions are not taxed.

Roth IRA Conversion Considerations

Your personal critical decision factors include your:

• Tax rate differential (tax in year of conversion vs. tax rate in withdrawal years).
• Use of “outside funds” to pay the income tax liability.
• Need for IRA funds to meet annual living expenses.
• RMD considerations (remember these begin at age 72 for non-Roth IRAs).
• Time horizon (how old are you and how long can you defer taxes).
• Estate tax considerations.
• Ten-year Rule.

Potential Benefits of a Roth IRA Conversion

• They could lower overall taxable income long-term.
• ROTH IRAs enjoy tax-free compounding.
• ROTH IRAs have no RMDs (at age 72).
• ROTH IRAS allow tax-free withdrawals for beneficiaries.

Each case can present different opportunities and it is best to talk with us or your tax professional about your specific situation.

We understand this decision can be complex and these are not easy choices. We are here to help you review your personal situation and recommend the best course of action.

Family Tax Bracket Management©

A critical area to review due to the SECURE Act is what we refer to as overall Family Tax Bracket Management©. Mathematically speaking, if you are in a higher tax bracket than your beneficiaries, it might make sense to let them take distributions in their tax bracket rather than you in yours. However, if your beneficiaries are in a higher tax bracket, it might make sense to take distributions in your bracket, convert these accounts to Roth IRAs and leave them an account that still has to be taken out in 10 years, but can grow tax free.

Something to Consider: even if NO changes are made to tax rates, in 2026 current law states that tax brackets will return to the older higher rates.

One strategy we can help with is to review you and your beneficiary’s marginal tax rate(s) each year.

Should I leave my beneficiaries a Traditional or Roth IRA?

Over your lifetime, you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other complex part is withdrawing those assets while attempting to minimize taxation. A common goal is to try to proactively plan withdrawals from retirement accounts to minimize your tax liability.

The SECURE Act creates an opportunity to review your retirement plan with an eye for tax planning. Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them. We want to provide proactive tax planning ideas when possible.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Could it get worse, or will it get better? How long will this last?

We know these are many investors primary questions. A large part of the answers will depend on when the growth rate of Covid-19 cases stabilizes and how quickly a cure can be developed and distributed. It will also depend on whether or not fiscal and monetary emergency measures are enough to help ease the economic crisis. While we are not clairvoyant, we are making our best efforts to stay aware of changes that could affect your personal situation. Our objective is to try to offer the most educated guidance to help keep you on track with your financial goals. We realize that this is a very emotionally straining time and we want to make sure you know we are here for you. Call us with any questions or help with any concerns you may have.

Panic and bad choices can cause more harm for investors than a virus or market downturn!

Help us grow!

This year, one of our goals is to offer our services to several other people just like you! Many of our best relationships have come from introductions from our clients. Do you know someone who could benefit from our services?

We would be honored if you would:

  Add a name to our mailing list, Bring a guest to a workshop, or Have someone come in for a complimentary financial checkup.

  Please call Financial 1 at 410-908-9293 and we would be happy to assist you!

If you are currently not a client of Financial 1 Wealth Management Group, we would like to offer you a complimentary, one- hour, consultation with one of our professionals. Please call 410.908.9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

Diversification is used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Contents provided by the Academy of Preferred Financial Advisors, Inc.

The post SECURE Act Changes That Affect Your Retirement appeared first on Financial 1 Tax.

As we look back and reflect on what was predicted by many to be a year of worry and concern, equity markets advanced heavily in 2019 and investors were rewarded. The final month of the year brought several new highs for both the S&P 500 and the Dow Jones Industrial Average (DJIA). In the fourth quarter of 2019, the S&P 500 rose over 9% and for the year it turned in its best annual performance since 2013. The DJIA also had a strong quarter rising 6.7%. (Source: RWBaird.com 1/1/2020)

If someone had told you on January 1st of 2019 that the year would start off with talk of a global economic recession that might take the U.S. economy down with it, add to that, that the U.S. would be in a trade war with China, and the President would get impeached, you might have wondered how much equity markets would retreat. Some feared that 2019 was going to be a challenging year for stocks with volatility taking center stage.

Well, there was no Bear Market in 2019, and for that matter, there wasn’t even a correction. A correction or 10% drawdown isn’t uncommon for the stock market. In a year that had no shortage of headwinds, the maximum pullback was less than 7%. The continual advancement of equities has kept the longest bull market of all-time intact. Both the S&P 500 and the DJIA posted many new highs in 2019 and all throughout the fourth quarter. Optimism about the U.S. economy improved and investors saw potential trade developments. During the fourth quarter, the U.S. reported that the economy grew just above 2% in the previous quarter, driven by healthy consumer spending.

Employment numbers continued to impress analysts with an average addition of 205,000 jobs per month in the quarter. Unemployment closed the year under 3.5% with limited wage pressure. On a negative note, businesses were reluctant to invest in 2019 and manufacturing contracted in December to its lowest level since 2009.

2019 ended on a high note for investors, unlike 2018, where just about everybody was questioning the stability and the possible end of the Bull Market. After this year of strong returns, analysts are still mostly bullish, but they are predicting modest gains for 2020.  Schedule an Appointment

Global Economic Fears

While the U.S. economy did not experience a recession in 2019, the global economy showed signs of weakness. Global growth for the year recorded its weakest pace since the global financial crisis a decade ago, reflecting common influences across countries and country-specific factors.

According to the International Money Fund (IMF), rising trade barriers and associated uncertainty weighed on business sentiment and activity globally. In some cases (advanced economies and China), these developments magnified the cyclical and structural slowdowns that were already under way. Further pressures came from country-specific weakness in large emerging market economies such as Brazil, India, Mexico, and Russia. Worsening macroeconomic stress related to tighter financial conditions (Argentina), geopolitical tensions (Iran), and social unrest (Venezuela, Libya, Yemen) rounded out the difficult picture. (Source: IMF.org 1/1/2020)

One of the more talked about international topics of quarter four was Brexit. After Boris Johnson was elected Prime Minister, on December 20th, the United Kingdom’s parliament voted 358 to 234 in favor of his plan to leave the European Union on January 31. Brexit clarity is hopeful to have a positive effect on the UK economy, where investment expenditures in particular have been weak due to muted business confidence levels.

Central European banks have reacted aggressively to the weaker economic activity. To end the year, several banks, including the European Central Bank (ECB), cut interest rates and the ECB also restarted asset purchases. A lackluster global economy and further slowdown can affect investors. In 2020, this is an area that needs to be monitored.

Interest Rates are Still Crucial

In 2019, many types of bonds have delivered some of their best returns in more than a decade. Bond prices rose because the Federal Reserve cut interest rates three times, after raising them in 2018 (bond prices rise when rates fall).

The fourth quarter saw a third rate cut in October and then the Federal Reserve held interest rates steady at 1.50% – 1.75% during its December meeting. In its statement explaining the decision, the committee indicated that monetary policy is likely to stay where it is for an unspecified time, though officials will continue to monitor conditions as they develop. (Source: CNBC.com 12/11/2019)

There was much talk earlier in the year about an inverted yield curve (which meant that short-term rates were higher than long-term ones). Headlines pointed to the fact that before the last 7 recessions, the 3-month to 10-year yield curve inverted and then the recession followed 4 to 21 months later. Currently, the yield curve is no longer inverted. Historians also remind us that this inversion also happened in 1966 and 1998 without a recession afterward.

Interest rates are still near all-time lows, but clarity with the direction of interest rates can be a positive for investors. For 2020, interest rates will continue to be on the forefront of our “watch” list.

Trade Wars and Political Concerns

The Trump administration continued the trade dispute with China during 2019, in an attempt to address practices they said put U.S. companies at a disadvantage. After a year of struggle, in December 2019, the two sides agreed to pause and work on a trade agreement. As of the writing of this report, the two sides are on track to sign a “phase one” deal in early 2020. (Source: BusinessInsider.com 12/30/2019)

The new year also brings a Presidential election in the United States. In December, Donald J. Trump became the third President to be impeached as the House of Representatives approved two articles of impeachment. The uncertainty around the timing of a Senate hearing and the U. S. political scene is concerning for investors. While the impeachment should not have any negative impacts on fiscal or monetary policy, any disruption of this magnitude can affect emotions and behaviors.

Also, as of the writing of this report, tensions with Iran were flaring. Politically speaking, there are still a lot of unknowns in the market. For 2020, we will continue to watch how political and geopolitical events unfold.

Where are Markets Headed?

Investors are still enjoying the longest bull market ever, but there are two directions of thought to consider. One is the fact that based on historical numbers, like price earnings, that equities continue to be overvalued and overpriced. The other thought process insists that we are still in a “TINA” market, meaning, There Is No Alternative to stocks. There are investors that look for growth and others that look for yield. With low to limited yield from fixed rates, some investors feel that there could be more upside in the current market. Equities are not cheap and even the savviest of investors need to have a watchful eye on risk. As financial professionals, we assist clients by providing ideas and suggestions based on their personal circumstances.

As seen on the chart of the S&P 500 performance from 1997 to 2019, in 16 of the 23 years the market ended the year with a positive return. However, those who took on significant equity exposure in 2007 or 1999 might not have fared well the following year. On the other side, if an investor was scared after 2008 or 2002 and avoided equities, they might have missed a great opportunity to grow their portfolio. Currently, short-term interest rates and cash equivalent yields are still historically low. Investors seeking returns need to consider owning equities. That could lead to volatility in 2020.

When creating a long-term plan, it can require you to avoid emotional decisions that may trigger you to make impulsive moves. Our goal is to focus on each client’s timeframes and goals.

2020 Outlook

What a difference a year makes. In December of 2018, for 2019, analysts feared rising interest rates, an aging bull market, recession fears and trade wars. Equity markets proved these fears to be wrong, as they delivered record breaking highs and very positive results. Many analyst are being cautious with their 2020 forecasts. As we have already noted, they too feel interest rates are very low. They also acknowledge that there are old and new risks for investors on the horizon. They maintain that stock valuations are currently challenging and are looking for a “more muted outlook for 2020”, according to the 10 strategists Barron’s surveyed. They forecasted, “an average rise of 4% for the S&P 500 in 2020. Add to that a roughly 2% dividend yield, and stocks could deliver a total return of about 6% next year.” (Source: Barron’s 12/19/2019)

“The stock market still has room to run,” says Stephen Auth, Chief Investment Officer of Federated Investors. He adds that, “much of the uncertainty that has been problematic for the economy has dropped away.” He shares that with low interest rates and high corporate earnings, the S&P 500 still has room to advance. (Source: Seeking Alpha 1/9/2020)

Geopolitical uncertainties, headlines from the upcoming U.S. elections and trade tensions between the U.S. and China might continue to grab an investors attention. Once again in 2020, we are suggesting that when you experience confusing times it is usually best to proceed with caution.

Questions for Investors

With the start of a new year we think it could be helpful to repeat some questions for investors to consider annually.

• Is there a change in your financial goals or objectives?
• Has your risk tolerance changed?
• Are any of your time frames different?

Investors should always put their primary focus on their own personal goals and objectives. If you have a change in your answer to any of these questions then contact us and we will be happy to discuss this with you.

We are here for you!

Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance, please call our office or bring it up at our next scheduled meeting. If you ever have any concerns or questions, please contact us!

We pride ourselves in offering:

• consistent and strong communication,
• a schedule of regular client meetings, and
• continuing education for every member of our team on the issues that affect our clients.

A skilled financial advisor can help make your journey easier. Our goal is to understand our clients’ needs and then try to create a plan to address those needs.

Call our office today to discuss your unique situation: (410) 908-9293

Need a help with your portfolio or retirement account?  Visit here for Financial 1 Wealth Management

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. The views expressed are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell securities mentioned herein. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. This article is for informational purposes only. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Past performance is no guarantee of future results. Sources: Barron’s, Businessinsider.com, IMF.org, CNBC.com, RWBaird.com, SeekingAlpha.com. Contents provided by the Academy of Preferred Financial Advisors, 2020.

The post Quarterly Economic Update: Fourth Quarter 2019 appeared first on Financial 1 Tax.

One of our main goals as holistic financial advisors is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component necessary to help our clients benefit from potential tax reduction strategies.

This report focuses on what individual taxpayers can potentially do to save money on their 2019 taxes. The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent, but the individual tax changes are mostly set to expire after the 2025 tax year. Unless indicated otherwise, TCJA provisions discussed here took effect in 2018 and are currently set to expire after 2025.

The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2019

For 2019 there are seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Under current laws this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2019

Last year ushered in many new tax laws and new tax forms stemming from the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients optimize their tax positions. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique, but it is wise for every taxpayer to begin their final year-end planning now!

Choosing the appropriate strategies will depend on your income as well as a number of other personal circumstances. As you read through this report you it could be helpful to note those strategies that you feel may apply to your situation, so you can discuss them with your tax preparer.

Some items to consider include:

— Evaluate the use of itemized deductions versus the standard deduction

For 2019, the standard deductions are $12,200 for singles and $24,400 for married filing jointly. This is up $200 and $400 respectively from 2018.

As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease many taxpayers bills in 2018 who typically claim this standard deduction. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take standard deductions. Depending on your results, you may even need to adjust your estimated quarterly tax payments or think about turning in a new Form W-4 to your employer.

The TCJA also eliminated or limited many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Additionally, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2% floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.

— Consider bunching charitable contributions or using a donor-advised fund

For many taxpayers, the doubling of the standard deduction and changes to key itemized deductions resulted in them not itemizing in 2018. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. (wsj.com 2/15/2019)

One way to still be able to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation.

Actions to Consider

— Review your home equity debt interest

Homeowners can deduct mortgage-related interest on up to $750,000 worth of qualified loans (married filing jointly) or $375,000 (single filers) on homes purchased after December 15, 2017.

The changes under the TCJA law apply to all tax years between 2018 and 2025. Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible, even if the payoff occurred prior to 2019.

— Revisit the use of qualified tuition plans

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying for college. Earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount. If you are paying tuition for children or grandchildren to attend elementary or secondary schools, it might be advantageous to set up or revisit a 529 plan. This is also a strategy that can reduce your estate. If you want to explore setting up a 529 plan, call us.

— Maximize your qualified business income deduction (if applicable)

One of the most talked about changes from the Tax Cuts and Jobs Act was the new qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful, because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2019

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2019 and start thinking about your strategy for 2020. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000, up from $18,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at an additional $6,000 ($24,500 total). As a reminder, these contributions must be made in 2019.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) is $6,000, up from $5,500. This is the first adjustment to IRA contribution limits since 2013. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2019 can be made all the way up to the April 15, 2020 filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $64,000 and $74,000 for 2019. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $103,000 to $123,000 for 2019. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2019 as the couple’s income reaches $193,000 and completely at $203,000 for 2019. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 – $203,000 for married couples filing jointly (up from $189,000 to $199,000 in 2018). For singles and heads of household, the income phase-out range is $122,000 – $137,000 (up from $120,000 to $135,000 in 2018). For a married individual filing a separate return, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly in 2019, $48,000 for heads of household and $32,000 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any one-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on this, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Sell worthless investments. If you own an investment that you believe is worthless, ask your tax preparer if you can sell it to someone other than a related party for a minimal amount, say $1, to show that it is, in fact, worthless. The IRS often disallows a loss of 100% because they will usually argue that the investment has to have at least some value.

Always double-check brokerage firm reports. If you sold a security in 2019, the brokerage firm reports the basis on an IRS Form 1099-B in early 2020. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Zero Percent Tax on Long-term Capital Gains

You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2019. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

NOTE: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and is taxed at ordinary income tax rates.

Some Notable Tax Changes for 2019

Some itemized deductions are affected in 2019 under the new tax laws. They include:

The floor for deductible medical expenses is increased to 10%. The Tax Cuts and Jobs Act lowered the threshold for medical expense deductions to 7.5% of AGI from the prior threshold of 10%, however, this change only was made for the 2017 and 2018 tax years. As of October 2019, the threshold is set to increase to 10% again unless Congress acts to extend it. The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

No more Obamacare penalties, starting in 2019. While Congress have thus far been unsuccessful in repealing the Affordable Care Act, the Tax Cuts and Jobs Act did eliminate the individual insurance mandate — aka the “Obamacare penalty.” This is the penalty you pay for not having health insurance. This penalty was repealed starting in tax years 2019 and beyond.

Some Notable Tax Changes That Continue in 2019

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

Although existing mortgages are grandfathered in subject to the prior $1 million cap, interest expense on acquisition indebtedness for up to two homes is capped at $750,000 total for loans incurred after December 15, 2017 through 2025. Interest on home equity loans is not deductible after 2017 through 2025.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Miscellaneous itemized deductions disallowed after 2017 include: tax preparation fees, investment expenses, and unreimbursed employee expenses. Individuals with significant unreimbursed employee expenses, including mileage, internet/phone charges, and education costs should consider setting up an excludable working condition fringe benefit arrangement or accountable plan from their employers.

Alimony deduction changes. Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse. These changes will profoundly affect the structure of divorce settlements.

Alternative Minimum Tax (AMT) Changes

The AMT exemption amount for 2019 is $71,700 for singles and $111,700 for married couples filing jointly. The 28% AMT rate applies to excess AMTI of $194,800 for all taxpayers ($97,400 for married couples filing separate returns).

The AMT calculation can be complicated and you should discuss your situation with your tax professional, but here are some basic facts. AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. For 2019, the exemption will start phasing out at $510,300 in AMTI for single filers and $1,020,600 for married taxpayers filing jointly.

Other Family and Education Planning Changes

Child and family credit. The Child Tax Credit is $2,000 per qualifying child, with $1,400 of this amount being refundable. The TCJA of 2018 also adds a $500 nonrefundable credit for qualifying dependents other than children. More importantly, the act increases the phaseout for the child tax credit to $400,000 from $110,000 for married taxpayers filing a joint return and to $200,000 from $75,000 for other taxpayers.

Education benefits. The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit remain the same in 2019.

ABLE accounts. Contributions to ABLE accounts are now eligible for the retirement saver’s credit and a child’s 529 account can be rolled over to an ABLE account for the child.

Charitable Giving

This is a great time of year to clean out your garage and give your items to charity. Please remember that you can only write off these donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill at https://goodwillnne.org/donate/donation-value-guide/

Send cash donations to your favorite charity by December 31, 2019 and be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a qualified charitable distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, satisfying all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by your RMD deadline (i.e. December 31, 2019).

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2019. These “annual exclusion gifts” do not reduce your $11,400,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly-held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 at www.irs.gov.

Contribute to a Qualified Tuition Plan (529 Plan) on behalf of a beneficiary. The effective annual contribution limit to 529 Plans for 2019 is $15,000. Transfers to 529 Plans count as annual exclusion gifts. Withdrawals (including earnings) used for qualified education expenses (tuition, fees, books and other related expenses) are income tax free. The tax law even allows you to give the equivalent of five years’ worth of contributions up front ($15,000 x 5 = $75,000) with no gift tax consequences. Earnings on non-qualifying distributions are subject to income tax and a 10% penalty. Overall contribution limits vary by state. Many states also provide contribution incentives such as tax deductions, tax credits or matching grants. If you’d like to learn more about what your state’s parameters are for 529 plans, please call us and we can assist you.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($15,000 in 2019) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

RMDs for those over 70 ½. One thing to watch closely by year-end is the RMD requirement. Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70½. While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year. If you have questions about your RMD, please call us.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes for 2019 is $11.4 million, up from $11.18 million in 2018 ($22.8 million for couples), and the income tax basis step up/down to fair market value at death continues. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, the exemption amounts will revert in 2026 to 2017 levels (although the exemption amount has never decreased before), claiming the portable exemption will remain an important discussion topic for decedents with more than $3 million in assets.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. Also, there are some pending legislative proposals like the SECURE ACT which could change your tax planning direction. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

We are here for you!

Our advice is not one-size-fits-all. Make an appointment to prepare for 2020! You can reserve your appointment online, or message us directly right here. Or, call our offices: 410-908-9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. The views stated in this letter are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2019. 

The post Year-end Tax Moves for 2019 appeared first on Financial 1 Tax.

After some concerns and declines during the summer, major equity markets showed advances in the month of September and finished positive for the third quarter of 2019. The S&P 500 ended the month about 1.7% higher, and up by 1.2% for the quarter. The Dow ended 1.9% and 1.2% higher for the month and quarter, respectively. (Source: Yahoo Finance 9/30/2019)

Some prominent investment themes from earlier in the year continued to surface in the third quarter producing volatile trading, but at the quarter’s end had no real impact. The U.S.-China trade conflict continued to capture investors’ attentions and fluctuated equity markets. The quarter also included the Federal Reserve’s lowering of rates in September for the second time this year. The combination of these events with slowing global economic growth and interest rates produced an inverted yield curve, which is a sign for some of economic downturns. Despite all of this, equity markets still rewarded patient investors. (Source: Morningstar.com 9/30/2019)

In a quarter ending news release, the NASDAQ stated that, “As investors prepare for U.S. corporations to report financial results next month, they could look past recent sluggish growth and find comfort as earnings look set to rebound after the third quarter.” Some strategists argue that just a small amount of economic growth should be enough to support better profit growth, which could help justify high market valuations. “People are overestimating the negative from trade and underestimating the lagged response from a lot of policy easing,” said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis. “It could affect what corporations say when they look ahead,” he said. Recent economic data has been mixed, with reports on U.S. labor and housing upbeat, but others disappointing. (Source: NASDAQ.com 9/30/2019)

Investors are still enjoying the longest bull market ever, but two camps of thought still continue to exist. One camp points to the fact that based on historical numbers, like price earnings, that equities are highly overvalued and overpriced. The other camp insists that we are still in a “TINA” market, meaning, There Is No Alternative to stocks. This group feels that until rates rise significantly, this will remain true and that means there could be significant upside in the current market. Equities are not cheap and even the savviest of investors need to have a watchful eye on risk. As financial professionals, we assist clients by providing ideas and suggestions based on their personal circumstances. Short-term interest rates and cash equivalent yields are still historically low. Our goal is to focus on each client’s timeframes and goals.

Key Points

1. Volatility continued to be elevated in Q3 and looks to remain for Q4.

2. Interest rates are still in the spotlight as Fed cuts rates twice in Q3.

3. Consumer confidence remains strong but tariffs bring caution and concern.

4. Trade war and tariffs between China and the U.S. bring market anxieties.

5. U.S. and global political uncertainty remain a key item to watch.

6. Now is the ideal time to revisit your personal objectives and the strategies to achieve them.

Interest Rates Are Still in the Spotlight

On Wednesday, September 18, the Federal Reserve lowered interest rates for the second time in the third quarter by 25 basis points down to a range of 1.75-2%. This reduction was after a similar rate cut as a result of their July session. Prior to July, the Fed had raised rates over nine times since December 2015. The reasoning for this most recent rate cut was weakening exports and low inflation. This quarter’s two rate cuts were the first time in over a decade that the Fed lowered interest rates.

Despite low unemployment rates, robust job gains and strong household spending, the central bank’s monetary policy committee stated, “…business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.” (foxbusiness.com 9.18.2019)

Fed Chairman Jerome Powell reaffirmed that the Fed will, “act as appropriate to ensure that the expansion remains on track.” It appears that the Fed made this recent rate cut as a proactive move toward ensuring the economy remains on the road to recovery.

Interest rates will continue to be on the forefront of our “watch” list.

Consumer Confidence

A notable point for the third quarter is that in September, U.S. consumer confidence fell to 125.1, down from 134.2 in August. This drop was the biggest in nine months. Lynn Franco, Senior Director of Economic Indicators at the Conference Board stated, “The escalation in trade and tariff tensions in late August appears to have rattled consumers.” He continued, “However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing.” Franco continued, “Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.” (CNBC.com; 9/24/19; Bloomberg.com 9/24/19)

Despite the dip in consumer confidence, the trend still appears to be that the consumer will support the current U.S. expansion, although spending may be more moderate.

Media Magnification and The Inverted Yield Curve

A quick way to spook many investors is to utter these three words, “inverted yield curve.” The third quarter of 2019 experienced the demonized inverted yield curve, sparking fears of a recession.

In brief, a “normal” yield curve has an upward arc. An inverted yield curve is just that, a curve that slopes downward. This shows that interest rates on short-term bonds is higher than some longer-term bonds.

In August, for the first since 2007, the spread between the 2-year and 10-year treasury yields turned negative. The 30-year treasury bond yield dropped below 2%. Historically, this has transpired prior to every U.S. recession in the last 50 years. (foxbusiness.com 9.18.2019)

This inverted yield curve lasted briefly but the theory behind what it potentially hails has resonated in the minds of many investors. The media is doing an excellent part in keeping the fear of a recession at the forefront of many investor’s thoughts. With talks of economic slowdowns and future concerns, investors need to prepare and proceed with caution.

Global Economy and Political Concerns

The third quarter of 2019 opened with the yuan, China’s currency, falling below 7 yuan to the U.S. dollar. This was the first time since 2008. This drop was as a result of President Trump threatening to add an additional 10% tariff on over $300 billion worth of Chinese imports. This set the stock market into a fast plunge of over 950 points on August 5, the steepest drop yet in 2019. This dive also marked the sixth biggest point drop in the DJIA’s 123-year history. (nypost.com, 8/2019)

Then in September, the President excluded hundreds of items from the 25% duty imposed on Chinese imported goods. This brought a calmer response from traders. (Bloomberg.com 9/30/19)

Tariffs and trade issues could affect equities, so investors should continue to monitor them. The U.S. and China are the world’s largest economies and a disruption in their symbiotic relationship could affect economies globally.

In addition to the ongoing trade wars, the United Kingdom is set to leave the European Union (EU) on October 31. How Brexit may affect global markets is still of concern and an item that needs to be carefully watched.

Political uncertainty, including the 2020 elections, also need to be watched. As financial professionals, our primary focus is on how the political landscape affects investment markets. We will be keeping an eye on global activities and how it may affect you.

Corporate Earnings

Corporate earnings are still a key factor in stock market performance. Stock prices typically rise when quarterly earnings reports meet or exceed market expectations and conversely, tends to lower prices when reports show unrealized expectations in earnings.

Weak corporate profits could be what finally convince investors to start pulling back on stocks, especially if companies start to lower their outlooks for the fourth quarter and 2020. The ripple effect of the trade war and tariffs is seeping into U.S. corporate earnings and therefore they need to be watched carefully. (CNN Business 9/30/2019)

Market Outlook for Q4

The month of October has seen five of the stock market’s worst 10 days, including 1987’s more-than 20% single day drop. However, overall, October typically ends as an average month for the market.

What will the last quarter of 2019 bring?

As shown in the chart of monthly market volatility, which tracks the standard deviation of daily returns of the S&P 500 dating back to 1928, October has historically been the most volatile month for U.S. equity markets. November is also one of the most volatile months. Seasoned investors understand that volatility is a part of the investment experience. They also understand that more important than the volatility is an investor’s response to that volatility. Sometimes volatility is a sign of heightened risk, but at other times volatility is just a normal part of investing. Market volatility is possibly one of the most misunderstood concepts in investing. Simply put, market volatility is a statistical measure of when the equity markets rise or fall sharper than usual within a short period of time.

Once again, we are suggesting that in these confusing times it is best to proceed with caution.

Strategies for Investors During Market Volatility

With fall being a historically volatile time period, we think it could be helpful to continue our theme of sharing strategies to consider during volatile times.

Revisit your financial goals and objectives.

Always allocate your investments to match your risk tolerance.

• If possible, add money to your investments regularly and try to increase your additions during downfalls.
• It’s nearly impossible to time the market right (sell when you think the markets at its peak), so have a strategy.
• Accept that volatility is inherent to investing.
• Consider avoiding or ignoring daily financial news.
• Always try not to make any emotional decisions.
• Don’t obsessively check your investments. Much like opening the refrigerator over and over again isn’t going to change what’s inside it, checking your investments obsessively isn’t going to alter whether or not your stocks are going up or down.

During volatile times, it is always wise to have realistic time horizons and return expectations for your own personal situation and to adjust your investments accordingly.

Now is the time to make sure you are confident, comfortable and consistent with your plan.

A financial plan is only as good as your ability to consistently follow it.

We are here for you!

Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance, please call our office or bring it up at our next scheduled meeting. If you ever have any concerns or questions, please contact us!

Call 410-908-9293.

Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is general considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Past performance is no guarantee of future results. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Sources: yahoofinance.com; Morningstar.com; Barron’s; bigcharts.com; marketwatch.com; foxbusiness.com; Bloomberg.com; cnbc.com; CNNBusiness.com. Contents provided by the Academy of Preferred Financial Advisors, 2019©

The post Quarterly Economic Update: Third Quarter 2019 appeared first on Financial 1 Tax.

Our team is especially grateful and appreciative of your continued trust.  Let’s have another amazing year together!

Our Wonderful Clients * click to enlarge photos

The post Client Appreciation Evening 2019 appeared first on Financial 1 Tax.

During the first three months of 2019, investors had a lot to cheer about as U.S. equity markets turned in their best quarterly gains in nearly a decade. This helped many of the major indexes to recoup a good portion of the losses that they suffered in the final months of 2018.

For the quarter, the S&P index rose slightly over 13%, marking its best start to a year since 1998. The Dow Jones Industrial Average (DJIA) advanced an equally impressive higher than 11% for the quarter. Gains for the quarter were broad, and all eleven S&P 500 sectors ended higher for the quarter for the first time since 2004. (Sources: Barron’s 4/11/2019, Wall Street Journal 3/30-31/2019)

While many factors contribute to strong equity gains, analysts feel that much of the first quarter’s rally was fueled by investors reacting to central banks backing off their previous plan of interest rate hikes in favor of announcing they will not raise interest rates this year. Another major factor sighted as a reason behind the increase was the fact that many investors had stepped back into equities after the late 2018 selloff.

On Friday March 29th, the last business day of the quarter, the yield on a 10-year Treasury U. S. Note finished the day at 2.416%. This was well below its 2018 year-end 2.684% yield. The Wall Street Journal reported that for the quarter, yields, which fall as bond prices rise, had retreated around the world in the quarter’s last weeks. While some analysts are saying that the first quarter’s gain puts equity markets above their 2019 year-end projections, others are quick to point out that indexes are still below the all-time highs reached in 2018. (Source: Wall Street Journal 3/30-31/ 2019)

Global Economics

The new year brought investors a different result than the end of 2018, with equities and credit rallying strongly across the world. Analysts felt the sell-off in equities and credit in the final quarter of last year was triggered predominantly by concerns about; the potential for a heightening of the trade war between the US and China, worries that higher interest rates could hurt the US economy, and broader uncertainties about a slowdown in global growth.

For the first quarter and also moving forward, global worries kept many analysts in a state of concern. China, one of the world’s largest economies continues to slow. China is in the midst of a recession and according to the National Bureau of Statistics (NBS), Gross Domestic Product (GDP) grew by 6.4% compared to a year earlier, the weakest increase since Q1 2009. “Growth in China could plummet to 2 percent over the next decade — from the expected 6.0 to 6.5 percent target this year”, predicted Capital’s Chief Asia Economist Mark Williams at a conference in Singapore on March 5th. Williams added, “China’s time as an emerging markets outperformer is ending.” (Source: CNBC 3/6/2019)

Brexit, the United Kingdom (UK) leaving the European Union (EU), is another major concern for investors. The original vote to do this was in June of 2016 and it had a deadline of March 2019. A delay has pushed this deadline into the second quarter, so at the end of the first quarter (which is when this report was written) Brexit is another source of uncertainty.

Is the global slowdown a problem or only a pause? Global economies are important to equity markets and so they are something that investors will have to watch carefully in the months ahead.

Interest Rates are Still Critical

During the Federal Reserve’s March two-day meeting, after evaluating the health of the U.S. economy, as expected, interest rates remained unchanged. After Chairman Jerome Powell and other senior Fed officials reexamined old assumptions for inflation, they cited, “stubbornly low inflation” as the chief reason for shifting its direction from its earlier plans to raise the key interest rate that influences the cost of borrowing for businesses and consumers.

“We are almost 10 years deep into this expansion and inflation is still not clearly meeting our target,” Powell said in a press conference following the March meeting. He added, “we are being patient” and, “if your models are not working, take a wait-and-see approach.” (Source: MarketWatch 3/20/ 2019)

Investors now know that the central bank wants to see more evidence — clear and overwhelming evidence — that inflation is really heating up before it raises interest rates again. The Fed’s current benchmark interest rate is at a range of 2.25% to 2.5%, which is up from near zero as recently as 2015. To help put that in perspective, the current rate is still quite low by historical standards.

U.S. Economic Outlook

One of the most critical data points for the U.S. economy is Gross Domestic Product, or GDP. This rate, which measures the growth of the U. S. economy is expected to stay between 2% and 3% for 2019. The Federal Open Market Committee at their March 21st meeting forecasted that the U.S. GDP’s growth will slow down from 3% in 2018 to 2.1% in 2019. They also indicated that it is predicted to be 1.9% in 2020 and 1.8% in 2021. (Source: The Balance 3/29/ 2019)

The Bureau of Labor Statistics has projected that the U.S. unemployment rate will be 3.7% in 2019. They feel that it will increase to 3.9% in 2021. (Source: The Balance 3/29/ 2019)

A weaker housing market and rising oil prices can put further pressure on the overall U.S. economy. Although it is facing some challenges, the U.S. economy is still the largest and most important in the world. The U.S. economy represents about 20% of total global output and it is still larger than China’s economy. (Source: Focus Economics 3/26/ 2019)

Bloomberg reports that, “concerns that a recession is coming are rising, with a quarter of all economists saying that a slump is possible in the next 12 months.” Are we headed for a recession? If so, what does that really mean. (Source: Bloomberg 4/4/ 2019)

Recession

After several years of growth, analysts and reporters on nightly news and television stations are now cautioning that the United States might be headed for a recession within the next year. “The global economy is highly likely” to go into a recession if the U.S. and China don’t reach a trade deal within three months, Moody’s Analytics Chief Economist Mark Zandi said on CNBC on April 2nd. (Source: CNBC 4/2/ 2019)

For many, the word recession sounds scary and we defined what a recession is in the following box. Recessions can be mild, moderate or severe. The fact that the business cycle is receding does not necessarily mean it will reduce to dangerous levels. However, investors still need to prepare.

Even though recessions can be short-term events, there can be longer term consequences from a period of economic downturn. For example, higher unemployment can mean that those people concerned or effected might be forced to delay or stop saving for buying a home, pursuing educational opportunities, or taking vacations. Businesses also can be affected by recessions, because as consumers reduce or cut their spending, small business profits start to decline and large companies may put off investing in new ventures or expansion.

Recessions can affect large companies by reducing their revenues and earnings which in return could cause their stock prices to go down. While recessions are a normal part of the business cycle, there is no perfect way to predict how and when a recession will occur or how long it will last. Whether we are headed for a slowdown or a recession, one thing that can be helpful to investors is to talk with their advisors about their investment timeframes and risk tolerances to make sure they are aligned with their investments.

Conclusion: What should an investor consider?

With the recent rise in financial markets, the slowdown in global growth, and Federal Reserve Chair Jerome Powell now stressing a much more patient approach to monetary policy, investors need to once again proceed with caution. Completely avoiding market risk may not be appropriate for most investors because today’s traditional fixed rates might not help you achieve your desired goals. Most investors are still attempting to build a plan that includes risk awareness. Often, this can lead to safer but lower returns. Traditionally, bonds have been a nice hedge against market risk, but with interest rates still low, investors must continue to be extremely cautious. With rates still historically low, fixed rates may not be the best solution for investors that want returns. Looking at your entire picture can be a helpful exercise in determining your strategy.

We focus on your personal objectives and strategy.

During confusing times, it is always wise to create realistic time horizons and return expectations for your own personal situation and to adjust your investments accordingly. We try to understand your personal commitments, so we can categorize your investments into near- term, short- term and longer-term.

Make sure you understand your risk/reward level.

Many investors use a risk/reward ratio to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. In economics, you operate with the assumption that the greater the risk an investor takes, the greater the reward they will receive, if and only if the investment makes money. On the other hand, if an investor only takes a small risk, they are more likely to earn a small reward.

If you have concerns about your portfolio, then call us or bring them up at our next meeting.

Discuss any concerns with us.

Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance, please call our office or bring it up at our next scheduled meeting.

We pride ourselves in offering:

A skilled financial advisor can help make your journey easier.

Our goal is to understand your needs and then try to create a plan to address those needs. We continually monitor your portfolio. While we cannot control financial markets or interest rates, we keep a watchful eye on them. No one can predict the future with complete accuracy, so we keep the lines of communication open with you. Our primary objective is to take the emotions out of investing. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you with your financial matters.

Help us grow!

This year, one of our goals is to offer our services to several other people just like you! Many of our best relationships have come from introductions from our clients. Do you know someone who could benefit from our services?

We would be honored if you would:

Add a name to our mailing list, bring a guest to a workshop, or have someone come in for a complimentary financial checkup.

Please call Financial 1 Wealth Management Group at 410-908-9293 and we would be happy to assist you!

If you are currently not a client of Financial 1 Wealth Management Group, we would like to offer you a complimentary, one- hour, consultation with one of our professionals. Please call 410.908.9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Past performance is no guarantee of future results. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s

The post Quarterly Economic Update 2019 appeared first on Financial 1 Tax.

One of our main goals as holistic financial advisors is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component necessary to help our clients benefit from potential tax reduction strategies.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The act is complex and impacts numerous tax specializations, including individual, corporate, and international planning. This report focuses on what individual taxpayers can do to save money in 2018. Unless indicated otherwise, the act provisions discussed here take effect in 2018 and expire after 2025.

The objective of this report is to share strategies that could be effective if considered and implemented before year-end.  Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

New Income Tax Rates for 2018

The seven new tax rates for 2018 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. They will phase out in eight years.

Tax Reform Update

As we enter into year-end tax planning, our main goal shifts to helping clients understand the impact of the Tax Cuts and Jobs Act and optimizing their tax positions. That is no small task given that there are over 130 new tax provisions. This report offers many suggestions and reviews strategies like loss and gain harvesting that have been useful even before the current round of tax law changes.

The Tax Cuts and Jobs Act created some changes with regards to tax planning opportunities for individuals in 2018.

Some things to consider include:

 — Evaluating the use of itemized deductions versus the standard deduction

The Tax Cuts and Jobs Act roughly doubles the standard deduction. For single and married filing separately filers the standard deduction is increase from $6,350 to $12,000, while married filing jointly has gone from $12,700 to $24,000. The new laws also eliminate or limit many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Additionally, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2% floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.

So, what should a taxpayer consider?

For those who typically claim the standard deduction, it is more than likely that their tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, could now result in less tax. According to Accounting Today, some taxpayers who itemized last year won’t itemize this year, or they may be able to itemize for state income tax purposes but not for federal. You should consider running the numbers to assess the impact on your situation before deciding. Depending on the results, you may even need to adjust your estimated quarterly tax payments or think about turning in a new Form W-4 to your employer.

— Considering bunching charitable contributions or using a donor-advised fund

The Tax Cuts and Jobs Act temporarily increases the limit on cash contributions to public charities and certain private foundations from 50 to 60 percent of adjusted gross income. For many taxpayers, the doubling of the standard deduction and changes to key itemized deductions will result in them not itemizing in 2018, therefore benefiting from this increased limit. One way to combat this is to bunch or increase your charitable contributions in alternating years. Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It’s a win-win situation.

— Reviewing your home equity debt interest

Under the Tax Cuts and Jobs Act, home equity debt interest is no longer deductible. Or so it was originally proposed.  According to the IRS, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it can be treated as home acquisition debt subject to the new $750,000/$375,000 limit. This is good news for homeowners, if they used the funds for the home.  Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible, even if the payoff occurred prior to 2018.

— Revisiting the use of qualified tuition plans

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying for college. Earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year.  Unlike IRAs, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $520,000. Some states even offer a state tax credit or deduction up to a certain amount.  If you are paying tuition for children or grandchildren to attend elementary or secondary schools, it might be advantageous to set up or revisit a 529 plan. This is also a strategy that can reduce your estate. If you want to explore setting up a 529 plan, call us.

— Maximizing your qualified business income deduction (if applicable)

One of the most talked about changes from the Tax Cuts and Jobs Act is the new qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful, because this deduction is subject to various rules and limitations.

There are some planning strategies that should be considered for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses.  This new piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2018

If you have earned income or are working, you should consider contributing to retirement plans.

This is an ideal time to make sure you maximize your intended use of retirement plans for 2018 and start thinking about your strategy for 2019.  For many investors, retirement contributions represent one of the smarter tax moves that they can make.

Here are some retirement plan strategies we’d like to highlight:

401(k) contribution limits increased.  The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,500, up from $18,000. (On November 1, 2018, the IRS announced an increase to $19,000 for 2019.)  The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at an additional $6,000 ($24,500 total).  As a reminder, these contributions must be made in 2018.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) remains unchanged at $5,500. (On November 1, 2018, the IRS announced an increase to $6,000, the first adjustment since 2013). The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $6,500). IRA contributions for 2018 can be made all the way up to the April 15, 2019 filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $63,000 and $73,000 for 2018.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $101,000 to $121,000 for 2018.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2018 as the couple’s income reaches $189,000 and completely at $199,000 for 2018. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is $0 to $10,000 for 2018. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $189,000 to $199,000 for married couples filing jointly in 2018. For singles and heads of household, the income phase-out range is $120,000 to $135,000 in 2018.  For a married individual filing a separate return, the phase-out range is $0 to $10,000 for 2018. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly in 2018, $47,250 for heads of household and $31,500 for all other filers.

Be careful of the IRA one rollover rule. IRA investors were always limited to one rollover per year, per IRA. Investors are still limited to make only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any one-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on this, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 if married filing jointly ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale.  However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Sell worthless investments. If you own an investment that you believe is worthless, ask your tax preparer if you can sell it to someone other than a related party for a minimal amount, say $1, to show that it is, in fact, worthless. The IRS often disallows a loss of 100% because they will usually argue that the investment has to have at least some value.

Always double-check brokerage firm reports. If you sold a security in 2018, the brokerage firm reports the basis on an IRS Form 1099-B in early 2019. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Zero Percent Tax on Long-term Capital Gains

You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2018.  If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

NOTE:  The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and is taxed at ordinary income tax rates.

This strategy might be helpful if in 2018 if you were temporarily unemployed, are someone whose income varies from year to year, or are under the age of 70 and may soon be transitioning into retirement or already retired.

If you’re ineligible for the 0% capital gains tax rate but you have adult children in the 0% bracket, consider gifting appreciated securities to them. Your adult children who file their own tax returns might pay less in capital gains tax than if you sold the stock yourself and gifted the cash to them.

Some Notable Tax Changes for 2018

Several itemized deductions are significantly different under the new tax laws. They include:

The floor for deductible medical expenses is reduced to 7.5 percent (from 10 percent) for 2018, and 2019. It makes sense to schedule discretionary medical procedures in 2018 and 2019 if doing so will lead to a medical expense deduction.

State and local income, sales, and real and personal property taxes (SALT) are limited to $10,000.

Although existing mortgages are grandfathered in subject to the prior $1 million cap, interest expense on acquisition indebtedness for up to two homes is capped at $750,000 total for loans incurred after December 15, 2017 through 2025. Interest on home equity loans is not deductible after 2017 through 2025.

The deduction for casualty and theft losses is allowed only for presidentially declared disaster areas.

Miscellaneous itemized deductions disallowed after 2017 include:  tax preparation fees, investment expenses, and unreimbursed employee expenses. Individuals with significant unreimbursed employee expenses, including mileage, internet/phone charges, and education costs should consider setting up an excludable working condition fringe benefit arrangement or accountable plan from their employers.

Alimony deduction changes. Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse. These changes will profoundly affect the structure of divorce settlements.

The moving expense deduction is suspended, except for the in-kind moving and storage expenses for members of the Armed Forces (or their spouse or dependents) on active duty who move pursuant to a military order and incident to a permanent change of station.

Alternative Minimum Tax (AMT) Changes

When Tax Law changes were initially discussed, there were high hopes that the dreaded individual alternative minimum tax (AMT) would be repealed. Unfortunately, it still exists under the new Tax Cuts and Jobs Act. However, the AMT rules are now more taxpayer-friendly.

The AMT calculation can be complicated and you should discuss your situation with your tax professional, but here are some basic facts. In 2017, the AMT exemption amount was $54,300 for unmarried individuals ($84,500 for married individuals filing a joint return). This exemption is phased out at a 25 percent rate when alternative minimum taxable income (AMTI) exceeds $120,700 ($160,900 for married individuals filing a joint return). In 2018, the exemptions significantly increase to $70,300 for unmarried individuals ($109,400 for married individuals filing a joint return). More importantly, the phaseout thresholds are increased to $1 million for married individuals filing a joint return and $500,000 for other individual taxpayers. High-income taxpayers, particularly those in high-tax states like California, New York, and New Jersey, are going to lose significant amounts of deductions because of the $10,000 cap on state and local taxes, but they could have some relief because of the lower tax rates and changes made to the alternative minimum tax.

Although the new tax laws reduce the odds that you will owe the AMT for 2018-2025, if your AMT bill exceeds your regular tax bill, you owe the higher AMT amount. The good news could be that if you owe the AMT under the new rules for 2018-2025, you probably owe less (maybe a lot less) than under the old rules.

Other Family and Education Planning Changes

Child and family credit. The act increases the child tax credit to $2,000 per qualifying child, with $1,400 of this amount being refundable. The act also adds a $500 nonrefundable credit for qualifying dependents other than children. More importantly, the act increases the phaseout for the child tax credit to $400,000 from $110,000 for married taxpayers filing a joint return and to $200,000 from $75,000 for other taxpayers.

The “kiddie tax.” The tax on unearned income of children is completely overhauled by the act. Parents’ income and the unearned income of siblings no longer factor into the equation. Instead, earned income of a child is taxed according to an unmarried taxpayer’s rates. Taxable income attributable to net unearned income is taxed according to the unfavorable tax rates applicable to trusts and estates.

Education benefits. Although they were in jeopardy, education benefits – the student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit – remain intact.

ABLE accounts. Contributions to ABLE accounts are now eligible for the retirement saver’s credit and a child’s 529 account can be rolled over to an ABLE account for the child.

Qualified Charitable Distribution

The law allowing taxpayers age 70½ and older to make a qualified charitable distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, satisfying all or part of the required minimum distribution (RMD) was made permanent in 2015.  If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by your RMD deadline (i.e. December 31, 2018).

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2018. These “annual exclusion gifts” do not reduce your $11,180,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly-held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 at www.irs.gov.

Contribute to a Qualified Tuition Plan (529 Plan) on behalf of a beneficiary. The effective annual contribution limit to 529 Plans for 2018 is $15,000.  Transfers to 529 Plans count as annual exclusion gifts. Withdrawals (including earnings) used for qualified education expenses (tuition, fees, books and other related expenses) are income tax free. The tax law even allows you to give the equivalent of five years’ worth of contributions up front ($15,000 x 5 = $75,000) with no gift tax consequences. Earnings on non-qualifying distributions are subject to income tax and a 10% penalty. Overall contribution limits vary by state. Many states also provide contribution incentives such as tax deductions, tax credits or matching grants. If you’d like to learn more about what your state’s parameters are for 529 plans, please call us and we can assist you.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes have almost doubled from $5.6 million to $11.18 million ($22.36 million for couples), and the income tax basis step up/down to fair market value at death continues under the act. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

Remember, as of now, the exemption amounts will revert in 2026 to 2017 levels (although the exemption amount has never decreased before), claiming the portable exemption will remain an important discussion topic for decedents with more than $3 million in assets.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you.  As always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Questions to Consider!

1. Has your current financial advisor reviewed the tax consequences of your investments?
2. Has your current financial advisor discussed tax planning and your investments?
3. Would you like a COMPLIMENTARY opinion of your situation?

If you answered NO to questions 1 or 2 and/or YES to question 3, call us at 410.908.9293 to we would like to offer you a complimentary, one-hour, Wealth Preservation Strategy Session with one of our professionals at absolutely no cost or obligation to you.

To schedule your financial check-up, please call us at 410.908.9293 and we’d be happy to assist you!

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor.  Member FINRA/SIPC.  Financial 1 Wealth Management Group and IFG are unaffiliated entities. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Past performance is no guarantee of future results. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s.

Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits such as financial aid, scholarship funds or protection from creditors that are only available if you invest in that state’s 529 plan.

The post Year-End Tax Moves for 2018 appeared first on Financial 1 Tax.