March 4, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 4, 2024

CLICK HERE TO WATCH THE UPDATE

Retirement Tips For Gifting and Loaning Money to Children

There are tax and financial implications when it comes to gifting, but you can do it right when you understand all the legalities. Listen in to learn the importance of understanding the purpose of gifting money to your kids to help you structure it and think of the implications. You will also learn how to navigate the legalities of loaning money or co-signing a house with your kids.
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CLICK HERE TO WATCH ON YOUTUBE

Retirement Tips For Gifting and Loaning Money to Children

You’ve done well in retirement planning and you’re living a good life.  You may have plans to leave money to your heirs, and many of our clients want to learn about providing gift donations, too. Why? Gift donations may be used more immediately, so clients get to see how their gift donation plays out while they’re still alive. If your gift is used to buy your grandchild…..
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Tips For Gifting and Loaning Money to Children

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You’ve done well in retirement planning and you’re living a good life.  You may have plans to leave money to your heirs, and many of our clients want to learn about providing gift donations, too.

Why? Gift donations may be used more immediately, so clients get to see how their gift donation plays out while they’re still alive.

If your gift is used to buy your grandchild their first car or for a downpayment on a house, you might want to join in on the celebration. You may want to loan money to your child at a nominal interest rate or even co-sign on a house for them.

We’re going to tackle a lot of these things that you might be thinking of after you secure your retirement and want to help others in your life.

What is the Purpose of the Gift?

There are a million reasons to consider a gift donation. Sometimes, you want to help a child who needs some financial assistance. You might want to give them money every month, or you give them money outright.

Do you want your child to pay this money back?

Keep in mind that you need to maintain your own financial stability, too. Your financial plan may look great, and you run the numbers and you find that you have funds to consider a gift donation.  In one scenario, let’s say the need for a gift donation is not urgent and you decide not to make a gift donation. Keeping those funds would give you and your financial plan an opportunity to have higher earning potential and possibly greater financial stability down the road.

Another scenario to consider is you give your children money right now and without the prerequisite that they’ll be able to give it back if you need it. If you’ve reviewed your financial plan and gifting money with this prerequisite is not something you are comfortable with, it may be best to wait. Most folks want to avoid a situation where a gift donation now puts them in a hard financial position that would affect their children in the future.

Carefully reviewing your financial plan before making a gift donation will help secure your retirement.

Potential Tax Implications of Your Gift

Gift donations may have a tax implication, which is something you really want to consider, too. Consider asking:

  • Will there be taxes due from this gift donation?
  • Will the money exceed the annual gifting amount?

In 2024, you can make a $18,000 gift donation without any tax implications per donee. For example, if you have three kids, you can gift $18,000 to each child. If you exceed this amount, you need to fill out an extra document and attach it to your tax return to document how much you are gifting over your lifetime.

If you leave behind more than the current estate tax limit of $13 million, documentation will be more important.

For most people, you can gift $18,000 without issue. You:

  • Will NOT owe estate tax on the gifted amount
  • Will NOT owe federal tax on cash gift donations
  • May be subject to federal and state tax if you sell stock to gift the proceeds of that sale
  • Will owe federal and state tax if you withdraw from your IRA to gift money

Be strategic and be aware of the gift’s source of funds, because you might be hit with a Medicare surcharge (IRMAA) or move into unfavorable tax brackets. Another good reason to review your financial plan before gifting money.

When it comes to the donee, there are no tax implications for receiving a gift donation.

Family Dynamics and Your Legacy

For a family example, we’ll discuss a family with 2 children. Child 1 needs some financial help now. Child 2 doesn’t currently need financial help, so they will not receive a gift donation now. If Child 2 finds out that you’ve been giving Child 1 $18,000 a year, Child 2 may not feel like this is fair at the time of inheritance.

One option to address this is to document the gifts that you’ve been giving and reduce it from the Child 1’s inheritance to balance things out a bit.

Let’s look at some example numbers for this family:

  • $1 million estate (pre-gifting)
  • $200,000 gifted to Child 1
  • $800,000 estate (post-gifting)

In this case, for a “fair” inheritance, Child 1 would receive $300,000 and Child 2 would receive $500,000. Reviewing your financial plan and your estate plan documents on a regular basis is important to keep these numbers up to date.

How Can You Help a Child Buy a Home?

Co-signing is something that we don’t recommend. If you co-sign for your child to get the home, you’re still financially tied to the home. If the child defaults on the home, you may have to step in and buy it or deal with the credit ramifications of it all.

If you have reviewed your financial plan and don’t mind paying for the home if your child defaults, this is obviously something that you can opt to do.

Co-signing comes with a lot of risks and is the least desirable option.

Some other options for helping a child to buy a home are loaning or gifting the child money. We had a client who wanted to loan their child $10,000 for a downpayment, and this was the easiest option. If your gift remains under the current $18,000 gift limit, you can write a check to the child and your spouse can do the same.

But if the gift is higher than the exclusion, then you need to do some planning.

If you loan $100,000 (not a gift), you will need to:

  • Structure the loan properly
  • Keep legal documents on the loan
  • Require monthly payments

Loans are a way to avoid potential tax implications tied to gifting. However, you do need to meet a minimum interest rate, which your tax professional can help you determine.

If you charge 0% interest, the government will view it as a gift, and require additional documentation to file with your tax return.

You can charge an interest-only payment, or you can amortize it. In your loan agreement or estate planning documents, you can have a stipulation that upon your death, the loan is forgiven. Loaning money offers you:

  • Potential source of income from interest
  • Easier loan option for your child over banks or credit unions

You might be able to give your child a loan without closing costs and at a favorable interest rate compared to today’s market. But, as with a mortgage or other loan, you do want to keep an interest in the home if your child doesn’t repay the money to maintain the legitimacy of the loan agreement.

Step-up in basis is something to consider, too. Let’s say that you have your own house and a beach house. If you gift your beach house while alive, you need to think about the potential capital gains tax on the property for the donee.

If you would like to chat with us about gift donations further, feel free to reach out to us.

Click here to schedule a free consultation with us to discuss gifting in your unique situation.

10 Tax Tips for The Beginning of 2023

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With 2023 here, one thing that you want to consider when retirement planning is taxes. You never want to spend more money on taxes than necessary, and that’s why we’re starting this year off by walking you through tax tips. 

10 Tax Tips to Start 2023 Off Great

1. Take Advantage of Tax-free Income

Tax-free income is ideal, and you likely have:

You may have to pay taxes on all of these sources of income. However, you may have tax-free income that you can begin to take:

  • Roth IRA distribution (not the ideal source of income to start off retirement)
  • Savings 

Using savings for your source of income this year can help you with Roth conversions, avoiding capital gains or Social Security payments, too.

If you consider where your income is coming from, it will allow you to at least leverage tax-free income to your advantage this coming year.

2. Consider Traditional to Roth IRA Conversions

Converting a traditional IRA account to a Roth account may be in your best interest. First, you can allow your money to grow tax-free. Second, if someone inherits these accounts, they benefit from the tax-free account, too.

You will need to pay taxes during the conversion, and this hits on point 1, too.

If you can use tax-free income during the year of your conversion, you may be able to stay in a lower tax bracket and save money on taxes.

3. Review Your Tax Withholding

If you’re early in retirement, you might find yourself:

  • Under-withheld
  • Overpaid 

In both cases, it’s better to be right on the mark with your taxes. If you overpay, there’s no penalty, but you also can’t grow this money if it’s in the government’s hands. We can review these withholdings with you to ensure that you’re not paying too much or too little to the government.

4. Track Medical Expense Deductions

Medical expenses may or may not be deductible, but you need to have these expenses outlined in either case. You can deduct some of these expenses, and your accountant will need this information to know if itemizing and medical expenses can reduce your tax burden.

5. Take Advantage of Charitable Contribution Deductions

If you don’t itemize your taxes, you may still be able to leverage charitable contributions. You may be able to use:

  • Qualified charitable distributions, which will take money from your IRA directly and gives it to charity without the money ever hitting your bank account.
  • Donor-advised funds. You can stack your contributions over a multi-year period into a single year to reduce your taxes if you use one of these funds.

Anyone who is charity inclined can take advantage of their charitable contributions to reduce their taxes.

6. Don’t Forget About Quarterly Payments

Quarterly payments are foreign to a lot of people who are just transitioning to retirement. You may have gains throughout the year that are realized, and the government can assess a penalty because they expect to be paid on this gain as it happens.

For example, if you sell a stock or a house, you may need to make a quarterly payment.

Sitting down with your accountant or tax advisor can help you better understand if you need to make quarterly payments or not.

7. Don’t Forget About State Taxes

State taxes must be considered, too. It’s easy to focus on your federal taxes and forget that the state wants their money, too. If you do live in a state that collects income tax, keep this in the back of your mind throughout the year.

8. Consider Part-time Work

When you’re planning for retirement, you may or may not consider part-time work. A lot of our clients become consultants and others will take on a part-time job to stay busy, cover medical insurance or just generate some additional income.

Working part-time may also open the doors for other things, such as:

  • Eligibility to contribute to retirement plans
  • Taking advantage of benefits
  • Traveling more during retirement

9. Don’t Forget About Required Minimum Distributions

Folks who are 72 or older will need to take their required minimum distributions (RMDs). You can take a monthly payment or a full payment upfront, too. In all cases, you need to make sure that you’re meeting the RMD thresholds every year.

If you’re just turning 72, we highly recommend giving us a call at (919) 787-8866 to discuss RMDs and to better understand how much you need to take out of these accounts each year.

10. Keep Track of Your Tax Documents

You’ll begin receiving mail in February that you need to compile together and give to your accountant. If you don’t keep track of these documents, you’ll need to scour for them rapidly, which is never fun.

A few of the documents that you’ll receive include:

  • 1099s from investment accounts
  • 1099s from Social Security
  • W-2s

Organizing all of these documents is a great way to start the year, whether you’re working with a CPA or doing taxes yourself. It’s good practice to have a system in place to manage all of your taxes, receipts and similar documents throughout the year.

Being fully prepared when going to your CPA will make taxes a lot less stressful in 2023.

We hope that these tax tips will help you go into the year with confidence, knowing that you have everything in order to meet your tax obligations but never pay more than necessary.

If you have any questions, please feel free to schedule a call with us today.

2022 End of Year Tax Strategies

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Taxes should be on everyone’s mind at this point in the year. Retirement planning and end-of-year tax strategies should be interlinked to help you secure your retirement and pay as little as possible in the process.

We’re happy to have CPA Steven Jarvis of Retirement Tax Services (RTS) to explain to us that with one month left in 2022, there are a lot of tax strategies we can put in place that can make a big difference this coming year. In fact, he recommends that we think about tax planning every month of the year.

However, there’s a lot to do before the calendar year flips over.

What to Ensure Gets Done Before the End of 2022

A few things that Steven explains that we need to think about, and they may not apply to everyone, include:

  • Required minimum distributions (RMDs): You need to begin taking care of your RMDs. RMDs are required when you hit 72, and if you don’t take them, you will face a major penalty from the IRS. The penalty is up to 50%.
  • Qualified charitable distributions (QCDs): At 70-½, you can begin using QCDs if you’re charitably inclined. You can use QCDs during the filing year and it allows you to give to charity with some tax benefits attached.
  • Retirees still working: Some retirees are still working and accumulating income, and they should check in with their CPAs to ensure that their taxes are in order. The filing deadline may be in April, but the IRS is anxious to get your money and will apply interest if the money isn’t received in January. You also go into 2023 knowing if you need to set up your tax withholdings.

There’s a lot to consider, and an accountant can help you navigate these complex tax considerations.

For example, let’s assume that someone at age 72 has an RMD of $30,000 and doesn’t need the money. In this case, you may want to consider a QCD if you’re charitably inclined. If you’re not charitably inclined, you’re better off just paying the taxes on the money and keeping it.

However, if being charitable is important to you, a QCD fits into your tax planning perfectly. The logistics here are very important:

  • Don’t take the RMD. Put it into your bank account and then transfer it to the charity of your choosing.
  • Do use a QCD, which allows a direct contribution to the charity without the money ever entering your possession and having to pay taxes on it.

Your IRA will allow you to write a check to the charity of your choosing. You can take the QCD and benefit from the tax deduction without needing to add it as a line item. Since most people take the standard deduction (more on that soon), this is a tax strategy that is perfect for you.

QCDs are very important tools that you can use before the end of the year to help reduce your tax burden while maximizing the amount of money the charity receives.

Standard Deductions

A standard deduction is available for:

  • Married and filing jointly: $25,900
  • Heads of household: $19,400
  • Single filers: $12,950

The standard deduction allows you to remove the amounts above from your income. So, in this case, the $25,900 is not taxable for someone filing jointly.

For many people, a standard deduction is a win because it allows you to reduce taxable income drastically.

However, it doesn’t make sense for some people to use a standard deduction. If you do not have deductions that surpass the figures above, it’s better to use a standard deduction. Otherwise, you can reduce taxes more by using line items and taking these additional deductions.

Example of Not Taking a Standard Deduction

Let’s assume that for the next three years, you plan on giving a charity $15,000 annually for a total of $45,000. Donor-advised funds (DAF) will be used in this case, allowing you to put $45,000 in the fund now and take a deduction this year.

A DAF allows you full control of when and how the funds are distributed.

The $45,000 is above the standard deduction, so you can itemize your taxes this year and reduce taxes by $45,000. In net savings, you’ll save $4,000 – $5,000 by itemizing deductions. And next year, when you don’t have a DAF deduction, you can go right back to taking the standard deduction.

Why is this important?

You can save money while giving more money to the charities that you care about.

Deadlines for End of Year Tax Strategies 

Roth conversions and contributions are going to be very important. The IRS doesn’t do us favors with their deadlines. You can carefully put money into an IRA for the previous year up until the tax deadline, but this must be done with precision.

If you have a traditional IRA, you must convert to a Roth IRA before the end of the calendar year.

There are two main things to consider if you’re unsure whether a Roth conversion is good for you:

  1. Bob and Sue will need a lot of money one day, maybe for an RV or roof repair. The IRS will take part of the money you take out for taxes, depending on the income buckets you have in place. A Roth account allows you to pay taxes now and not be concerned about paying taxes on the money in the future.
  2. You think tax rates may go up in the future. Roth buckets require you to pay taxes now and at today’s tax rates. The money that builds in the account is 100% tax-free.

You should proactively decide when you want to pay taxes using the information above.

In our business, a lot of clients ask if there’s a rate of tax on their Roth conversion. Understanding how the Roth conversion is taxed is important and is based on your marginal tax rate.

Roth conversions increase your taxable income, depending on your other income sources. You may have a 0% conversion or one that is 22% or higher. An accountant will need to look through your finances to really shed light on your situation and the taxes you’ll owe.

However, below is a good example to review.

Example of Roth Conversion Strategies

We have an individual who is under 72, so they do not have to take their RMDS. Additionally, this individual also has money in the bank that has already been taxed. When this person retires, they’ve set themselves up to have zero taxable income the first year in retirement because they’ll live on their cash.

The person has 0 income and still has a standard deduction of $25,900 they can take.

In this case, you can convert $25,900 and pay $0 in taxes on it because of the standard deduction that you have. You can also choose to convert $40,000, and in this case, the person would pay 10% in taxes on the $14,100 left.

You can also consider leveraging long-term capital gains to pay as little taxes as possible.

Everyone reading this will want to sit down with an advisor or CPA to find things that you can do to benefit your retirement.

Bonus: Inflation Reduction Act

While talking to Steven, we asked him about the Inflation Reduction Act and what it would mean for our average listeners. The media has made this Act seem very impactful, but Steven explains that the average person will not experience a direct impact.

Yes, 87,000 IRS agents were hired, but the agency has been grossly understaffed and has funding to improve customer service and other aspects of the IRS. The chances of being audited still remain low. Steven states that nothing will change for his clients: he’ll pay every dime in taxes that you owe, but never leave a tip.

Steven provided a lot of great information and ideas on what anyone heading into retirement should be doing before 2023 to help their tax situation.

Please subscribe to our podcast for other, great informative podcasts if you haven’t done so already.

November 14, 2022 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for November 14, 2022 

CLICK HERE TO WATCH THE UPDATE

This Weeks Podcast – Tax Planning Should Be a Part of Your Retirement Plan

Who wants to pay taxes? It’s impossible to avoid paying taxes altogether; what we can do is be more efficient with them.

Tax planning is an essential part of your retirement plan. To plan tax efficiently in your retirement, you have to understand all the different investments you’ve accumulated and the different types of tax structures to them.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Weeks Blog -Tax Planning Should Be a Part of Your Retirement Plan

Retirement planning is on every worker’s mind, but there’s one area that people often overlook: tax planning for retirement. You work hard for your money, and if you take the time to plan out your taxes before retirement, it can keep more money in your pocket.

So, Why Should Tax Planning Be a Part of Your Retirement Planning?….
CLICK HERE TO READ THE BLOG

Mid-Year Tax Strategies You Should Consider

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We recently sat down with one of our good friends Steven Jarvis CPA to discuss tax strategies everyone should be considering whether they’re currently in the middle of retirement planning or trying to secure their retirement.

In one of our previous podcasts, we also sat down with Steven to discuss taxes.

In fact, many of our clients also started working with Steven, and one thing that we continue hearing is that he helps eliminate the stress of taxes. According to him, the stress comes from stressing about doing taxes in April rather than engaging in tax planning throughout the year.

Steven and his team work intensely after-tax season to ensure that their clients follow the recommended tax strategies. So, we’re going to pick Steven’s brain to see what he recommends for your mid-year tax strategies.

First, Don’t Be Under the Impression That There’s Nothing You Can Do About Your Taxes

Before going any further, how did you feel about your taxes this year? Did you feel like you did your duty, paid your taxes and there was nothing else that you could do? If so, you’re like a lot of people that accept taxes as being a part of life.

And they are.

But you shouldn’t leave the IRS a tip because you’re not leveraging tax strategies. Taking a proactive approach to your taxes means that you’ll minimize your tax burden as much as legally possible.

Since it’s the middle of the year, it’s time to start thinking about them to lower your coming tax burden.

A few options available are:

Qualified Charitable Distributions (QCDs)

QCDs are one of the tax strategies that we often see with our clients. Steven explains that a QCD works by:

  • Taking money directly from your IRA
  • Sending the money straight to the charity
  • Meeting the QCD requirement of 70 1/2

The money cannot be made out to you or hit your bank account to benefit from a QCD. Instead, this is a process we look at in conjunction with handling your required minimum distributions (RMDs).

QCDs are powerful because when you take money from your bank account and donate it to a charity, there’s a 90% chance you’re not benefitting from it come tax season. 

Why?

Ninety percent of people do not itemize their tax returns, so they’re unable to deduct their donations.

QCDs allow you to:

  • Gift directly to charity
  • Benefit from lower income and tax rates

Another advantage of a QCD is that it lowers your adjusted gross income, too. Why is having a lower adjusted gross income important? Your Medicare benefit costs will be lower if your AGI is lower.

So, you’re:

  • Paying less in healthcare costs
  • Lowering your taxes
  • Donating to a cause you care about

QCDs are a great way to give back and receive a benefit from it, too. However, if you’re not 70-1/2 or the standard deduction is more beneficial than itemizing your taxes, what can you do?

Use a donor advised fund.

Donor Advised Funds and How They Work

A donor advised fund (DAF) is something to consider when you can’t use QCDs. DAFs allow you not to tip the IRS and still take a standard deduction. These funds will enable you to:

  • Lump multiple years of donations into a fund
  • Taxpayers still control the funds
  • Eventually use the funds for charitable purposes
  • Get your donations above the standard deduction to itemize

For example, if you donate $10,000 a year, you may not have enough to itemize and take the deduction. Instead, you may decide to put $30,000 into a DAF and immediately benefit by being able to itemize your taxes.

You don’t even need to distribute all the funds to a charity today and can simply opt to give every year to a charity of your choice. The key is to send these funds to a charity at some point.

So, this year, you put $30,000 into a DAF, itemize your taxes, and lower your tax burden.

Next year, you’ll likely go back to the standard deduction, so you’re paying less taxes this year and not paying any additional taxes for years you don’t contribute to a DAF.

However, there are also Roth conversions, which may help you with your tax strategies, too.

Roth Conversions to Lower Your Tax Burden

A Roth conversion converts a non-Roth account into a Roth. You take money out and pay taxes on it now, and let it grow tax-free in the future. You’ll pay more taxes this year, but your money grows tax-free afterward, which is great as your retirement accounts gain interest over the years.

Should you do a Roth conversion? 

We believe everyone should consider a Roth conversion, but what does Steven think? We asked him.

  • Everyone should consider a Roth conversion if they have IRA dollars.
  • Conversions aren’t the right option for everyone.
  • Roth conversions this year happen at a discount because of the markets.

In 2026, taxes are set to go up if nothing else changes, so putting money into a Roth account protects you from higher tax burdens.

If you’re in your peak earning years, it may not be in your best interest to go into a Roth conversion.

Steven states that the only way you’re worse off is if taxes go down. But are you really convinced that taxes will go down in the near future? Most people respond with no.

In this case, a Roth conversion is beneficial.

You’ll need to make your Roth conversion by 12/31 of the year.

Finally, Steven recommends having tax conversations outside of the tax season. You need to take a proactive approach to your taxes, work with a CPA and develop tax strategies to save money on your upcoming taxes.

If you wait until March or April to think about your taxes, it’s too late.

Sit down with a professional, discuss your options and determine what tax strategies you can use this year to lower your taxes – or not leave the IRS a tip.

Click here to learn more about our book: Secure Your Retirement: Achieving Peace of Mind for Your Financial Future.