Tax Changes to Know

Here are just a few of the biggest changes as we understand them:

1. Lower Tax Rates Made Permanent and a Higher Standard Deduction

The bill makes permanent the individual tax rate percentages first introduced by the 2017 Tax Cuts and Jobs Act (TCJA) for the tax year 2025 and beyond; thereafter income brackets will be indexed for inflation annually. The tax rates, as well as brackets for 2025, are as follows:

The top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).

35% for incomes over $250,525 ($501,050 for married couples filing jointly).

32% for incomes over $197,300 ($394,600 for married couples filing jointly).

24% for incomes over $103,350 ($206,700 for married couples filing jointly).

22% for incomes over $48,475 ($96,950 for married couples filing jointly).

12% for incomes over $11,925 ($23,850 for married couples filing jointly).

10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

Along with this, the standard deduction has been increased slightly to $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers for 2025—adjusted annually for inflation going forward.

2. Temporary Deductions (For Tax Years 2025–2028 Only)

• Tips: Up to $25,000 of tips may be deducted from federal taxable income for those who work in industries where tips are customary. The deduction amount phases out by $100 for each $1000 when adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. While the deduction applies to “cash” tips only, the OBBBA broadly defines “cash” tips to include tips paid in cash or charged.
• Overtime Pay Deduction: Up to $25,000 of overtime compensation for married filers and $12,500 for single filers may be deducted from federal taxable income. The deduction phases out when adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers.
• Senior Deduction: Mistakenly referred to as a Social Security tax cut, the OBBBA established a temporary income tax deduction of $6,000 per eligible filer for people age 65 or older—provided their modified adjusted gross income does not exceed $75,000 for single filers, or $150,000 for those married filing jointly.
• Auto Loan Interest: Auto loan interest is made income tax deductible for new autos with final assembly in the United States. The deduction is limited to $10,000 and phases out when income exceeds $100,000 for single filers and $200,000 for joint filers.

These deductions can help reduce taxable income to support some middle-income earners but will sunset after 2028 unless renewed.

3. Child and Family Benefits

The child tax credit was permanently raised by another $200 to $2,200 per qualifying child for 2025. Beginning in 2026, this will be indexed for inflation. (Earned income must be at least $2,500 in order to claim any child credit.) The OBBBA also makes permanent the $500 nonrefundable credit for other dependents who do not qualify for the child tax credit, including those over the age of 16, and makes permanent a requirement that the child and at least one parent have a Social Security number.

New Trump Accounts: A tax-deferred savings account is meant for American children born between 2025 and 2028. There is a one-time government deposit of $1,000 and families can contribute up to $5,000 per year with investment growth tax-deferred. Employers can also contribute $2,500 to the employee’s eligible dependent child.

4. Permanently Higher Estate and Lifetime Gift Tax Exemption Amounts

The higher federal Estate and Lifetime Gift Tax exemption amounts will no longer sunset in 2026. Instead of reverting to pre-TCJA levels, the OBBB permanently increases the exemption to $15 million per person, or $30 million for joint filers starting in 2026, with the new exemption amount indexed for inflation going forward. The Generation-Skipping Transfer (GST) exemption will match this amount. (For the 2025 tax year, the exemption amount is $13.99 million or $28.98 million per couple.)

5. SALT Deduction Expands Until 2030 and Current Mortgage Interest Deduction Amount Made Permanent

The deduction cap for State and Local Taxes (SALT) has been increased to $40,000 starting in 2025 and will then climb by 1% annually through 2029 before reverting back to $10,000 in 2030 (phases out for taxpayers with an income over $500,000).

Qualified residence interest deduction: Originally set to increase to $1 million, the OBBBA modified the limit on the deduction for qualified residence interest to a maximum of $750,000 of home acquisition debt permanently. The disallowance of interest on home equity loans has been made permanent unless loan proceeds are used to buy, build, or substantially improve the home securing the loan.

6. Charitable Deduction Increase for Nonitemizers

The OBBB expands the ability of nonitemizers to take a bigger charitable deduction permanently. The preexisting limit of $300 ($600 for married individuals filing jointly) is increased to $1,000 ($2,000 for joint returns). This above-the-line deduction is available only for cash gifts made to public charities.

7. What’s Ending

While some incentives were expanded or made permanent, others are being phased out. For instance, tax credits for electric vehicles (EVs) end September 30, 2025. Other homeowner tax credits for home energy improvements, such as solar panels, doors and windows, and heat pumps, will end December 31, 2025.

While we’ve only highlighted a few key changes, this bill spans over 800 pages, making it important to stay informed and regularly review your plan. Planning ahead remains foundational, as future shifts or challenges could bring additional changes. More guidance is expected from the IRS in the months ahead, but in the meantime, contact us with any questions or concerns.

Schedule an Appointment — This overview is compiled from information believed to be true. This article should not be relied upon for tax or financial advice. Please check with your tax and financial professionals before making any changes to your plan.

Sources:

Article 1 | Article 2 | Article 3 | Article 4 | Article 5 | Article 6 | Article 7 | Article 8

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Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

Income tax is a large revenue source for the United States government. While tax rates have changed many times, since the 1860’s, the United States has used a “progressive” tax code. A progressive tax code means that people who make more money are taxed at a higher rate than those who make less money. Our progressive tax system works by placing earners through different brackets according to how much money they make. The dollar amounts define your tax brackets and there are differing tables depending on your filing status (single, married, etc.). This matters in determining your marginal tax rate.

Filing 2019 Income Taxes

Understanding Marginal Tax Rates

Determining your tax bracket is not as simple as just adding up your total income and checking a tax table. Taxpayers need to calculate their taxable income (which can be sometimes referred to as their “adjusted gross income”) and then adjust their income for any deductions, adjustments and exemptions they are allowed to find their final taxable amount.

Once you determine your final taxable income amount, it’s critical to know that not all of your income was taxed at the same rate. So, for example if you are married filing jointly, your first $19,400 is taxed at 10%. If these same tax filers have a final taxable income of $95,000, then these taxpayers are in a “marginal tax bracket” of 22%. The key thing to note is that in this example, the last dollar earned is taxed at that 22% tax rate.

2019 Tax Law Updates

For 2019, Form 1040 has been slightly redesigned. There is time to look into tax planning ideas for your 2020 taxes, but here are some things that 2019 tax filers should review. They include:

• Tax brackets have been slightly adjusted.
• The standard deductions have risen from 2018.
• There are still caps to state and local tax (SALT) deductions.
• There are new deduction rates for medical expenses.
• Capital gains will still impact your income.
• There is still a 3.8% Medicare Investment Tax.
• Charitable donations are still deductible.
• You might still be able to contribute to retirement plans (or take an RMD) if appropriate.

2019 Tax Tables and Tax Rates

There are still seven federal income tax brackets for 2019. The lowest of the seven tax rates is 10% and the top tax rate is still 37%. The income that falls into each is scheduled to be adjusted in 2020 for inflation. For 2019, use the chart in this report to see what bracket your final income falls into.

TAX TIP: If you are not sure how best to file, ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2019 Standard Deduction Amounts

Most taxpayers claim the standard deduction. For 2019, the standard deduction has slightly increased. The amounts are now $12,200 for single filers and $24,400 for those filing jointly ($18,350 for head of household filers). If you are filing as a married couple, an additional $1,300 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,650 can be made.

Increased Child Tax Credit

For 2019, the maximum child tax credit is $2,000 per qualifying child. Up to $1,400 of the Child Tax Credit is refundable; that is, it can reduce your tax bill to zero and you might be able to get a refund on anything left over.

There is also a non-refundable credit of $500 for dependents other than children. The modified adjusted gross income threshold at which the credit begins to phase out is $200,000 and $400,000 if married filing jointly.

State and Local Tax (SALT) Deduction

2019 also continues the changes to state and local tax deductions that cap a taxpayer’s state and local tax (SALT) deduction at $10,000. This includes both state income and property taxes. This change affected a large number of taxpayers who live in states with high property taxes and those who pay larger state income tax bills.

Medical Expense Deduction

In late December 2019, legislation retroactively made the 7.5% threshold available to taxpayers in 2019 and 2020. The 10% threshold amount was postponed until 2021.

Investment Income

Long-term capital gains are taxed at more favorable rates compared to ordinary income. For qualified dividends, investors will continue to be taxed at 0, 15 or 20%.

One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce long-term capital gains. You do not have to wait 30 days before you buy back this investment—the 30-day rule only applies to losses, not gains.

Note: This non-taxable capital gain for federal income taxes might not apply to your state.

TAX TIP: Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for single filers with income from $200,000 to $434,550 and 23.8% for single filers with income above $434,550. It can raise the effective rate to 18.8% for married taxpayers filing jointly with income from $250,000 to $488,850 and to 23.8% for married taxpayers filing jointly with income above $488,850.

Calculating Capital Gains and Losses

With all of these different tax rates for different types of gains and losses in your marketable securities portfolio, it’s probably a good idea to familiarize yourself with some of the rules:

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used to offset net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
• Any remaining unused capital losses can be carried forward and used in the same manner as described above.

TAX TIP: Please remember to look at your 2018 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2019. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2019, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2019 is the seventh year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

A helpful strategy has been to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages

If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, plan for this tax when you calculate your estimated taxes.

If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help—they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Charitable Gifts and Donations

When preparing your list of charitable gifts, remember to review your checkbook register so you don’t leave any out. Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count noncash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. Remember that you’ll have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.
You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2019, the IRS will let you deduct that travel at .14 cents per mile.

Child and Dependent Care Credit

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school daycare while working. Some parents overlook claiming the tax credit for childcare costs during the summer. This tax break can also apply to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp. So, If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35% of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.

Contribute to Retirement Accounts

If you haven’t already funded your retirement account for 2019, consider doing so by April 15, 2020. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2020, you can wait until then to put 2019 contributions into those accounts. To start tax-advantaged growth potential as quickly as possible, however, try not to delay in making contributions. If eligible, a deductible contribution will help you lower your tax bill for 2019 and your contributions can grow tax deferred.

To qualify for the full annual IRA deduction in 2019, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phase-out from $64,000 to $74,000 for singles and from $103,000 to $123,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $193,000. For 2019, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2019 is $56,000.

Although contributing to a Roth IRA instead of a traditional IRA will not reduce your 2019 tax bill (Roth contributions are not deductible), it could be the better choice because all qualified withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2019) to a Roth IRA, you must earn $122,000 or less a year if you are single or $193,000 if you’re married and file a joint return.

If you have any questions on retirement contributions, please call us.

Roth IRA Conversions

A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and qualified withdrawals are tax-free in the future, a time when tax rates might be higher.

Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Required Minimum Distributions (RMD)

If you turned age 70½ during 2019, you still have until April 1, 2020, to take out your first RMD. This is a one-time opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31 of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out. Starting in 2020 the SECURE Act changed the starting RMD age to 72. If you have any questions on your Required Minimum Distributions please call us.

Other Overlooked Tax Items and Deductions

Reinvested Dividends – This isn’t a tax deduction, but it is an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will, in turn, reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

If you’re not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.

Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Charitable Gift Directly made from IRA – Individuals at least 70½ years of age can still exclude from gross income qualified charitable distributions (QCD) from IRAs of up to $100,000 per year. Please remember to double check on what counts as a qualified charity and distribution before using this tax strategy.

Helpful Tax Time Strategies

Although many deductions were eliminated under the new laws, it might still be helpful to write down or keep all receipts you think are even possibly tax-deductible. Sometimes, taxpayers assume that various expenses are not deductible and do not even mention them to their tax preparer. Don’t assume anything—give your tax preparer the chance to tell you whether something is or is not deductible.

Be careful not to overpay Social Security taxes. If you received a paycheck from two or more employers and earned more than $132,900 in 2019 you may be able to file a claim on your return for the excess Social Security tax withholding.

Don’t forget items carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.

Check your 2018 tax return to see if there was a refund from 2018 applied to 2019 estimated taxes.

Calculate your estimated tax payments for 2020 very carefully. Many computer tax programs will automatically assume that your income tax liability for the current year is the same as the prior year. This is done to avoid paying penalties for underpayment of estimated income taxes. However, in some cases this might not be a correct assumption, especially if 2019 was an unusual income tax year due to the sale of a business, unusual capital gains, the exercise of stock options, or even winning the lottery! A qualified tax preparer could be able to help you with a tax projection for 2020.

Remember that IRS.gov is a valuable online resource for tax information.

Always double check your math where possible and remember it is always wise to consult a tax preparer before filing.

Proactive Tax Planning for 2020

As you know, with the passage of the Tax Cuts and Jobs Act (TCJA), tax brackets, thresholds, and tax rates changed for many filers in 2018. In 2019, taxpayers are still adjusting to some of these changes. For 2020, we will continue to keep our clients updated on any new tax law changes and strategies that could potentially be helpful. For now, please review the 2020 tax tables and it’s never too early to start thinking ahead.

Click tables to view larger

Items Taxpayers Should Consider to Proactively Tax Plan for 2020

1. Prepare a 2020 tax projection – Taxpayers already know the 2020 rates and by reviewing their 2019 situation and all 2020 expectations of income, a qualified tax preparer could be able to help you with a tax projection for 2020.

2. New contribution limits for retirement savings – For 2020, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The limit on annual contributions to an IRA remains $6,000 ($7,000 for those 50 or older). The catch-up contribution limits for those 50 and over remain unchanged at $1,000.

3. Explore if a potential Roth IRA conversion is helpful for your situation – A Roth IRA can be beneficial in your overall retirement planning. Investments in a Roth IRA have the potential to grow tax-free and they don’t have required minimum distributions during the lifetime of the original owner. Also, Roth IRA assets may pass to your heirs tax-free. Roth conversions include complex details and are not right for everyone, so please call us to see if this makes sense for you.

4. Take advantage of annual exclusion gifts – For 2020, the maximum amount of gift tax exemption is $15,000. This means you can give up to that amount to a family member without having to pay a gift tax. Ideas for gifting can include, contributing to a working child (or grandchild’s) IRA, or gifting to a 529 plan, which is a tax-sheltered plan for college expenses.

5. Consider bunching your charitable donations into a Donor Advised Fund (DAF) – Now is the time to explore if it is helpful for your tax situation to deposit cash, appreciated securities or other assets in a Donor Advised Fund, and then distributing the money to charities over time. Up to 60% of your adjusted gross income can be deductible if given as donations to typical charities.

6. Look into Health Savings Accounts (HSAs) – In general, to qualify to contribute to a health savings account in 2020, you must have a health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage. You can contribute up to $3,550 to an HSA if you have single coverage or up to $7,100 for family coverage in 2020, which is slightly more than the 2019 limits. If you’re 55 or older anytime in 2020, you’ll continue to be able to contribute an extra $1,000. HSA’s include complex details and are not right for everyone, so please call us to see if this makes sense for you.

The New SECURE Act and Proactive Tax Planning for 2020

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, was passed by the Senate on December 19, 2019. This bill increased access to retirement plans and also includes some reforms to Defined Contribution (DC) Plans, Defined Benefit (DB) plans, Investment Retirement accounts (IRAs) and 529 plans. Open Multiple Employer Provisions (MEP’s) will be effective January 1, 2021, but many of the other provisions in the law become effective January 1, 2020. The SECURE Act also brought changes for retirement plan holders. We will try to help you with updates as your situation requires this year.

Among the many changes the SECURE Act included, we feel there are three major areas that could affect many client’s retirement planning strategy. These are:

1. One of the most impactful provisions of the SECURE Act is the “death” of the stretch IRA as an estate planning tool for most non-spousal beneficiaries.

If the original owner of an IRA passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. Please note that this new rule will only apply to IRAs inherited after the January 1st, 2020 effective date. All existing inherited IRAs are grandfathered in under the old rules. This NEW change will result in us taking a look at all clients that have accumulated retirement assets to discuss potential strategies that could be best for their situation.

2. Another notable change is the RMD age moved from 70½ to 72.

The Act states that this change applies beginning with IRA account owner who will attain age 70½ on or after January 1, 2020. This was in response to the fact that Americans are currently working and living longer. Congress updated RMD rules to reflect changes in life expectancies.

3. Allowing anyone with earned income the ability to contribute to an IRA after age 70½.

The SECURE Act permanently removes the age limit at which an individual can contribute to a traditional IRA. Previously, an individual could only contribute to ROTH IRAs after age 70½, as they have no age limit. Starting in 2020, the SECURE Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age.

Another notable change the SECURE Act will bring is to 529 Plans. These tax-advantaged 529 plans will be allowed to help pay off qualified student loan repayments (up to $10,000 lifetime).

Many provisions of the SECURE Act will be subject to the interpretation of the IRS or other authorities. As always, clients should consider consulting with their personal tax advisor regarding their specific situation.

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 firmly believe in proactive tax planning and we will review the SECURE Act for proactive tax planning opportunities and share our findings with our clients.

Our goal is to work with clients to explore efficient ways to drawdown retirement savings and transfer wealth. If you would like to discuss your retirement plan and withdrawal strategy, please call us. As always, we appreciate the opportunity to assist you in addressing your financial goals.

Conclusion

Filing your 2019 taxes will continue to include the new tax rates set forth with the Tax Cuts and Jobs Act (TCJA) enacted in 2018 (currently set to expire after 2025). An essential part of maintaining your overall financial health is attempting to keep your tax liability to a minimum.

When filing your 2019 taxes, the rules and laws currently in place did not vary too much from your 2018 taxes. One of our primary goals is to keep you informed of the changes that will be affecting investors like you. We believe that taking a proactive approach is better than a reactive approach — especially regarding income tax strategies!

How long should I keep my records?

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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 through Independent Financial Group, LLC (IFG), 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. Sources: www.IRS.gov, turbotax.com. Contents Provided by The Academy of Preferred Financial Advisors, Inc 2020© All rights reserved. Reviewed by Keebler & Associates

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The House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on May 23. The next step is to pass through the Senate and be signed by the President. With strong bipartisan support and the Senate already considering changes for retirement plans, industry expert Bob Keebler, CPA, MST of Keebler & Associates agrees with many reporters who are sharing that this is likely to happen. The act’s goal is to make it easier for small businesses to provide a retirement plan and increase the number of Americans with access to a plan.

Some of the provisions of the SECURE Act that could help Americans better save for retirement include;

• Significantly increasing the tax credit for new company-wide retirement plans from the current cap of $500 to $5,000;
• Allowing small employers that implement an automatic enrollment feature in their retirement plan design to become eligible for an additional $500 credit; and,
• Allowing two or more unrelated employers to join a pooled employer plan, creating an economy of scale that lowers both employer and plan participant cost.

While making retirement plans more available was the driving force behind the SECURE Act, hidden in this bill are some significant changes that all retirement savers should know for planning purposes. Here are some items that are currently part of this bill.

Increasing the RMD age from 70½ to 72

This new legislation calls for an Increase in Age for Required Beginning Date for Mandatory Distributions. Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70½. 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. The age 70½ was first applied for retirement plans in the early 1960s and has never been adjusted to consider increases in today’s life expectancy. The bill increases the required minimum distribution age from 70½ to 72.

Allowing someone over 70 with earned income to still contribute to an IRA

One key change that the SECURE Act calls for is a Repeal of Maximum Age for Traditional IRA Contributions. Specifically, this legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. As Americans live longer, an increasing number continue employment beyond traditional retirement age and this allows Americans with earned income to keep contributing to retirement plans after age 70.

A provision in this bill would force the distribution of a retirement account within 10 years for most non-spouse beneficiaries.

A new provision in the SECURE Act could remove most non-spousal beneficiary’s ability to maximize tax-savings through a strategy known as the “Stretch IRA.” The Stretch IRA allows younger beneficiaries like children or grandchildren to take required minimum distributions from the inherited account based on their own much longer life expectancy. This new bill would force a distribution of the account’s value within 10 years of the original owner’s death.

Proactive Tax Planning

Keebler is suggesting that IRA owners talk with their financial professional about proactive tax planning. He feels that it will help tax deferred IRA holders to examine the values of alternative strategies. He encourages these IRA owners to consider proactively planning to minimize taxes when passing on the account to a non-spouse heir, especially if the bill eventually becomes law.

Keebler shares that, “Charitable remainder trusts allow investors to leave assets to a charitable organization and to a beneficiary. In that scenario, your beneficiary would collect a stream of income from the assets for a specified time span. At the end of that period, the charity collects whatever is left.”

Some Reasons Why you might convert a traditional IRA to a Roth IRA

For the right client, Keebler likes the benefits of a Roth conversion. “A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA. This is a strategy we think about when the IRA owner is in a lower bracket than their beneficiary”.

Some reasons why you might convert a traditional IRA to a Roth IRA

  Enjoy tax-free withdrawals in retirement.
When taking withdrawals from a traditional IRA, you’d have to pay taxes on the money your investments earned—and on any contributions you originally deducted on your taxes. With a Roth IRA, as long as you meet certain requirements, all of your withdrawals are tax-free.

  Watch your money grow tax-free for longer.
Traditional IRAs force you to take required minimum distributions (RMDs) every year after you reach the RMD required age, regardless of whether you actually need the money. ROTH IRA’s have no RMD requirement, so your money can stay in the account and keep growing tax-free.

  Leave a tax-free inheritance to your heirs.
The non-spouses who eventually inherit your Roth IRA will have to eventually take the money out of a tax-free growth situation (if the SECURE Act passes, this could be within 10 years of your passing) but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.

Deciding whether to convert to a Roth IRA hinges on a variety of issues including what your tax rate is now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate. Also remember, the conversion will be permanent. Once you convert to a ROTH IRA you can’t revert the money back to a traditional IRA.

Some considerations before deciding include:

• Will you need the money in the first five years? ROTH IRA conversions have penalties if used in the first five years.
• Will you end up in a higher or lower bracket in the future?
• Where will you take the money from to pay the taxes?

This is where a financial professional can offer some help suggestions and strategies. We enjoy talking with clients about the pros and cons of both partial or full ROTH conversions.

Qualified Charitable Distributions (QCDs)

While they are not new to this law, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCD) are a proactive strategy for tax planning for anyone taking a Required Minimum Distribution (RMD). A QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity. It is only available to IRAs and individuals who have reached RMD age (Currently 70½ but may change to 72). Any amount 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 seeing 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 saving money on taxes both today and into the future.

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 don’t 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.

Once again, this is a specific area where a professional can offer some help, suggestions and strategies. We enjoy talking with clients about looking into QCDs for anyone over the age of 70.

Final Thoughts on Proactive Retirement Planning

Over your life you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. You may also have Roth accounts that compound without tax consequences. 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 more complex part is withdrawing those assets while making use of the most available tax advantages. The goal is to try to proactively plan the withdrawals from retirement accounts to minimize your tax liability.

The Act would provide some slight flexibility on the timing of some of your RMD strategies since the proposed RMD age will be lengthened to age 72. This could provide another 18 months of time before a mandatory distribution is required.

If the SECURE Act becomes law, in whatever version it becomes, one of our primary goals is to review it for opportunities and then share our observations with clients. We want to always try to provide proactive tax planning ideas when possible.

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.

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. Our primary objective is to take the emotions out of decisions for our clients. 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.

Proactive Tax Planning

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. Independent Financial Group (IFG) does not give tax advice. IFG Registered Representatives (RR) do not give tax advice while acting as an RR. These matters should be discussed with your tax professional.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Roth IRA account owners should consider the potential tax ramifications, age and contribution limits in regard to funding a Roth IRA. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. RMDs are generally subject to federal income tax and may be subject to state taxes.

The views stated in this article 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. Investing involves risk including the potential loss of principal. No investment strategy, such as rebalancing and asset allocation, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. This article provided the Academy of Preferred Financial Advisor, Inc. APFA, Inc.©

The post New Tax Changes: The SECURE Act 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.

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