Tag: Taxes

6 Charitable Tax Moves to Consider Before Year-End

The recently passed Tax Cuts and Jobs Act is the most extensive and far-reaching change to the tax code in more than thirty years.  In addition to altering the existing tax brackets, the standard deduction has also been nearly doubled, which means that going forward taxpayers will need to provide more itemizable deductions in order to exceed the standard deduction.  If you plan to give to charity before year-end, here are six planning moves to consider.

1. Donate Highly Appreciated Stocks or Mutual Funds.

The stock market has been on a terrific run, and you may have highly appreciated stocks or mutual funds that you are holding on to because you do not want to pay capital gains taxes.  By donating appreciated investments, you avoid paying the capital gains tax and can receive a deduction for the fair market value of the investments.

If you are considering gifting mutual funds, do so before they declare their year-end dividends and capital gains and you will save on taxes by avoiding that income as well.  While a deduction for appreciated securities is now limited to 30% of your Adjusted Gross Income (AGI), you can still carry the unused portion to future tax years.  When making a gift of appreciated securities, you should notify the charity that you are doing so in order for them to know who to send the record of receipt to (so that you can have that on hand when filing your taxes).

2. Combine Giving from Multiple Years Into One Year

Because the standard deduction has now been nearly doubled, consider lumping several years’ worth of contributions into one year to occasionally exceed the standard deduction. The strategy here would be to “lump” our charitable giving in one calendar year so that our itemized deductions exceed the standard deduction, and then simply claim the standard deduction in the following year(s).  The following graphic attempts to illustrate what this might look like for an individual taxpayer:

3. Use a Community Foundation or a Donor Advised Fund

If you want to create a legacy, are unsure of where to contribute right now, or want to consider “lump” giving, use a Community Foundation or Donor Advised Fund (DAF) to max out your contributions. A DAF is a unique type of account that is maintained an operated by a qualifying charitable organization, including most Community Foundations.  Once you create a DAF and contribute to it, your contribution qualifies for a charitable deduction on your tax return.

However, even though you can deduct the entire amount in the year that you make the contribution, you can make distributions from the DAF in future years to the charities of your choice.  In other words, you aren’t required to distribute all the DAF’s funds in the year that you make your contribution to it.  So, you could “lump” several years’ worth of charitable giving into your DAF and then make annual distributions to your favorite charities over the course of the next several years until your next “lump” contribution.

Additionally, the money in your DAF can be invested, creating the potential for even greater giving in the future via the power of compounding interest.

4. Create a Charitable Lead or Remainder Trust

If you are considering an even larger donation, or are interested in asset-protection, you may want to consider creating either a charitable lead or remainder trust. With a charitable remainder trust, you get a deduction for your gift now; generate an income stream for yourself for a determined period of time; and at the expiration of that term, the remainder of the donated assets is distributed to your favorite charity or charities.  A charitable lead trust is essentially the inverse of the remainder trust: you get a deduction for your gift now; generate an income stream for one or more charities of your choice for a determined period of time; and at the expiration of that term, you or your chosen beneficiaries receive the remaining principle.  The deduction you receive is based on an interest rate, and the low current rates makes the contribution value high.

5. Donate Unused Belongings

Donate your extra property, clothes, and household items to charity. Make time to clean out your closets, spare bedroom and garage, and donate those items to one of the many charitable organizations in our area.  CHKD, Salvation Army, Purple Heart, ForKids, Hope House are just a few organizations that will take old clothes, appliances, household items and furniture.  Some of them will even come to you to pick up items.  Make sure to ask the charity for a receipt and keep a thorough list of what you donated.  You can use garage sale or thrift store prices to assign fair market values to the donated items, or you can use online programs (such as itsdeductible.com) to figure out values.

6. Qualified Charitable Distributions (QCD’s)

If you are over age 70 ½, regardless of whether you itemize or not, make a qualified charitable distribution (QCD). We discussed this charitable donation method in detail in an earlier post, which can be found here.  Essentially a QCD allows you to donate all or a portion of your IRA Required Minimum Distribution to a qualifying charity.  The donated amount is not included in your taxable income and also helps to lower your income for certain “floors” like social security benefit taxation and Medicare Part B and Part D premiums.  QCDs are very tax-efficient ways to make charitable donations.

 

Disclaimer:  This material has been prepared for general information purposes only, and is not intended to provide, and should not be relied on for, personal tax, legal, investment, financial planning or accounting advice.  You should consult your own tax, legal, investment, financial planning and accounting advisors before engaging in any transaction.

Questioner asks: "Should I roll my SEP IRA into a regular IRA or a Roth IRA?"

There are two issues to consider in answering this question.

  1. If you roll a SEP IRA into a regular or rollover IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.  At that point you will pay income tax on the withdrawals.
  2. If you decide to roll it into a Roth IRA you will owe income tax on the amount rolled over.  However, the money will then grow tax free since there will be no taxes to pay when you begin taking withdrawals.

If you roll your SEP into a Roth, be sure to know ahead of time how much you will have to pay in taxes and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – if you are under 59 1/2 .

It’s up to you to decide which option works best for you.  If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.

As always, check with a financial professional who specializes in retirement planning before making a move and check with your accountant or tax advisor to make sure that you know the tax consequences of your decision.

Getting Financial Help

When people have financial questions, what do they look for?  According to a recent survey most people are looking for someone with experience.  We want to take advice from people who are familiar with the issues we face and know what to do about them.  We all know people with experience, but financial problems, like medical problems, are personal.  Most people we know would rather not go into detail about their personal finances with family or friends.  They are more comfortable sitting down with a financial professional to discuss their finances, their debts, their financial concerns, and their financial goals in both the short and long term. Professionals will provide advice without being judgmental and are required by their code of ethics to keep your information confidential.

Once people find someone who has a track record of giving good, professional advice, they want personalized advice and “holistic” planning.

No two people have exactly the same problems.  A good financial advisor listens attentively to learn the goals, the concerns and personal history of the people who come to him for advice.

People have specific issues and questions.  For example: a couple, aged 39, is seeking advice about their path to retirement.  They give their financial advisor a laundry list of their assets, their investments, their savings rate, their debts, and the ages of their children and ask if they should be doing something different or are they on the right path.  That’s a very specific question and the advisor’s response is going to be personalized for them.

The plan that the advisor comes up with is going to involve much more than money.  It’s going to take their personal characteristics into account.  This includes personal experience with investing, their risk tolerance, and their closely held beliefs and ethical values.  This is what is referred to as “holistic” planning; taking personal characteristics into consideration.

There is a fairly big difference in the advice sought by

  • “Millennials” (those born after 1980 and the first generation to come of age in the current century),
  • “Generation X” (the children of the Baby Boomers) and the
  • “Baby Boomers” (children of the soldiers returning from World War 2)

“Millenials” say that among their top three concerns are saving for a large expense such as a car or a wedding.  Too many are saddled by debt acquired to pay for higher education and are finding that their degrees are not necessarily an entry into high paying professional jobs.  Their next largest concerns are saving for their kids’ education and putting money aside for retirement.

“Generation X” is primarily focused on saving for retirement.  They are married, own their own home and may have children in college.  Concerns two and three are tax reduction and paying for their children’s education.

“Baby Boomers” have finally reached retirement age.  More than a quarter million turn 65 each month.  As a group they are a large and wealthy generation, but a vast number have not saved enough for a comfortable retirement.  Many are forced to continue to work to supplement Social Security income.  Their number one concern is the cost of health care.  Concerns two and three are protecting their assets and having enough income for retirement.  The three concerns for Baby Boomers are inter-connected.  For many Boomers, Medicare helps them with the costs associated with most medical issues.  However, as people live longer, there comes a time when they are unable to care for themselves and live independently.  Long-term-care insurance was once believed to be the answer but insurance companies found that costs were much greater than anticipated.  The result is that many insurers have stopped offering the policies and those remaining have hiked premiums beyond the ability of many to pay.  The cost of long term care is so high that many Boomers are afraid that their savings will soon be exhausted if they are forced into assisted living facilities or nursing homes.

Each generation has its own problems and at a time when the world has gotten much more complicated.  Getting experienced, personalized and holistic financial advice is more important than ever.

A Client Asks: What’s the Benefit of Inflation?

One of our retired clients sent us the following question recently:

“I can’t understand the FED condoning and promoting any inflation rate. To me inflation means that the value of money is simply depreciating at the inflation rate. Further, any investment paying less than the inflation rate is losing money. A quick review of CD rates and government bonds show it is a rare one that even approaches the promoted 2.25% rate. It seems to me to be a de-facto admission of wanting to screw conservative investors and forcing them into riskier investments… Where is there any benefit to the financial well-being of the ordinary citizens?”

I suspect that there are a lot of people who feel the same way. It’s a good question. Who wants ever rising prices?

Here’s how I addressed his question:

Let me answer your inflation question first. My personal opinion is that 0% inflation is ideal, and I suspect that you agree. However, lots of people see “modest” rates of inflation (say 2%) as healthy because it indicates a growing economy. Here’s a quote from an article you may want to read:

Rising prices reflect a growing economy. Prices typically rise for one of two reasons: either there’s a sudden shortage of supply, or demand goes up. Supply shocks—like a disruption in the flow of oil from Libya—are usually bad news, because prices rise with no corresponding increase in economic activity. That’s like a tax that takes money out of people’s pockets without providing any benefit in return. But when prices rise because demand increases, that means consumers are spending more money, economic activity is picking up, and hiring is likely to increase.

A case can be made that in a dynamic economy you can never get perfect stability (e.g. perfectly stable prices), so it’s better for there to be more demand than supply – driving prices up – rather than less demand than supply – causing prices to fall (deflation). Of course we have to realize that “prices” here includes the price of labor as well as goods and services. That’s why people can command raises in a growing economy – because employers have to bid up for a limited supply of labor. On the other hand, wages grow stagnant or even decline when there are more workers available than jobs available.

But for retirees on a fixed income, inflation is mostly a negative. Your pension is fixed. Social Security is indexed for inflation, but those “official” inflation numbers don’t take food and fuel costs into consideration, and those tend to go up faster than the “official” rate. The stock market also benefits from modest inflation.

Which gets us to the Federal Reserve, which has kept interest rates near zero for quite a while. It’s doing this to encourage business borrowing, which in turn is supposed to lead to economic expansion.  However, the actual effect has been muted because other government policies have been detrimental to private enterprise. In effect you have seen the results of two government policies in conflict. It’s really a testimony to the resilience of private industry that the economy is doing as well as it is.

The effect on conservative investors (the ones who prefer CDs or government bonds to stocks) has been negative. It’s absolutely true that after inflation and taxes the saver is losing purchasing power in today’s low interest rate environment. The FED is not doing this to intentionally hurt conservative investors, but that’s been part of the collateral damage. The artificially low rates will not last forever and the Fed has indicated they want to raise rates. They key question is when, and by how much?

Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

Don’t let college costs destroy your retirement

A recent headline in Financial Advisor magazine read: Parents Say Retirement Imperiled By College Costs. The cost of raising children can be daunting. Recent reports tell us that the total cost of raising a child until they become an adult will be about $245,340. According to the USDA the biggest expense was housing, the second largest was education and child care.

Fifty-four percent of surveyed parents said they fear their retirement would be jeopardized by helping their children pay for college, according to a study by Citizens Financial Group.

About the same percentage are worried college costs will harm their overall financial stability.

The average cost of college currently ranges from $25,000 to over $50,000 per year and is rising rapidly. The cost has caused an explosion in the amount of student loans, with negative consequences for the graduates and the many who don’t graduate but still have to pay off the loans. It has also given rise to innovation in the delivery of education, including online courses that can be taken for college credit without having to move into a residential college.

Given the need for the credentials that college provides, it’s wise to use time to your advantage and begin when your child is young. The most versatile way of putting money aside for education is the “529” plan. The “529” allows the parent (or grandparent) to put money aside in a tax-deferred account and allow it to grow. When used for legitimate educational expenses the money can be taken free of tax.

For more information, contact us.

Adding to Your Returns Four Ways

There are at least four things you can do to get better returns on your money.

  1. Create an asset allocation program and stick to it.  Don’t chase the market up and don’t sell at the bottom.  If you have created an asset allocation that is right for you, it should be robust enough to take advantage of rising markets and allow you to sleep well at night in declining markets.
  2. Be tax aware.  Don’t buy mutual funds in taxable accounts at the end of the year just before they make their capital gains distributions.  Take tax losses to offset capital gains.
  3. Keep an eye on costs.  Investment firms are increasingly turning to fees for services they once provided for free.  Your investment manager should be aware of the fees you are paying and keep them under control.
  4. Re-balance your portfolio regularly.  It may be tough to sell some of your winners and add to the losers, but it works.  It’s really tough to sell on euphoria and buy on fear, but some of our biggest winners were bought when nobody wanted them and they could be bought for pennies on the dollar.

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Korving & Company, Investment Management, Suffolk, VA

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