Planning Topics to Consider as we prepare for a new (and hopefully much better) year
I’m guessing the fond old adage “A Year to Remember” will never, ever be uttered when one reflects on 2020. In fact, the sooner we can usher in a new, and hopefully much improved year, the better. However, in between face timing our parents, teaching our children from home, checking to see if our outdoor heaters have enough propane, and counting down the days until our Peleton arrives...let’s not forget that there are still some thoughtful planning moves to consider. So go ahead and grab that bottle of wine or micro-brew, send the kids to the basement, and give this list a quick read to see if any of these thoughts apply to you!!
For married couples, the 24% bracket extends up to $326,600 ($163,300 for singles) in 2020. As such, we strongly believe that families need to take advantage of these HISTORICALLY LOW federal tax rates. Additionally, if you live in a state that currently does NOT TAX RETIREMENT INCOME (Illinois for instance), one must think long and hard about harvesting IRA assets into Roth IRA’s. We would challenge every family to consider "filling up" their current tax bracket by converting IRA dollars into a Roth IRA. While a conversion means you have to pay the tax now, remember the current rates are very attractive. We, like many Americans, believe these incredibly effective tax brackets coupled with the state’s "hands off" approach will not be around forever, so take advantage of it now if it makes sense for your family.
If your 2020 Modified Adjusted Gross Income (MAGI) is less than $124,000 for single tax payers or $196,000 for married filers, you can (and likely should) make a direct contribution into a Roth IRA of $6,000 if you’re under age 50 or $7,000 if you’re above age 50. If your income is too high, there may still be a way to fund your Roth IRA via an annual conversion strategy typically referred to as a "Backdoor Roth". Call us to review your personal situation to determine if this may be a good option for your family.
Additionally, if your child has picked up a few bucks babysitting for a neighbor or working for a friend...CLAIM THAT INCOME! Then, consider funding a Roth IRA on their behalf or challenge them to do so. This can be a great teaching tool, and an incredibly powerful investment strategy for the next generation. See our video about the 5 Year and 10 Year Challenge for additional information on this topic.
Although nobody likes paying taxes, capital gains tax rates are still among the lowest ever. For joint filers in 2020, the 15% (plus 3.8% Obama Care surcharge) capital gains rate extends up to $496,600. If you ever plan on spending your own money, take advantage of these low capital gains rates.
Check out our recent article Step Up…Or Get Out for additional insights on this topic.
The tax reform that went into effect in 2018 nearly doubled the Standard Deduction, leading many families to file with the Standard Deduction as opposed to Itemized Deductions. As such, the tax benefits of "normal" charitable giving have been greatly diminished. However, if you’re charitably inclined, there is still a way to "get the best of both worlds".
Over Age 70½
For those over 70½, all charitable giving should be done from existing IRA balances (up to $100,000 per year). By doing so, not only do you avoid paying ANY federal or state income taxes on IRA distributions, but these gifts ALSO satisfy any Required Minimum Distribution (RMD) requirements for that tax year. As we like to say, this is the "Mack Daddy" method to charitable giving!
Under Age 70½
For those under 70½, rather than giving annual amounts directly to charities, we encourage families to "stack" their charitable gifts for many years into one year. This can be done in various ways, but one common and easy way is through the use of a Donor Advised Fund. "Stacking" your gifts will create a large tax deduction in a single tax year, and then the actual Donor Advised Fund can be disbursed to the desired charities over many many years to come. "Donating" highly appreciated assets in lieu of cash to fund your Donor Advised Fund may be an even better strategy. By doing so, the donor receives a tax deduction based on the appreciated value of the asset AND avoids paying Capital Gains Tax on the appreciation – WIN WIN!!
Take a quick look at your current 401k. Oftentimes employer plans allow after-tax dollars to be added to the plan. These after-tax assets can be rolled directly into a Roth IRA. This can be magical if your employer's plan allows for this!
If you’re charitably inclined, live in the state of Illinois, and are not a huge fan of paying state taxes, here’s something to consider. In 2017, Illinois enacted the Invest in Kids Scholarship Tax Credit Program. This program offers a 75% state tax credit and is used to provide scholarships to families who meet the income requirements to attend qualified, non-public schools in Illinois.
Here's how it works... Let's assume your family makes $250,000, your state tax bill would approximate $12,375 ($250,000 X 4.95% = $12,375). You could either pay state taxes of $12,375, or donate $16,500 ($16,500 X 75% = $12,375 state tax liability) to the Invest in Kids program. Also note that this program accepts appreciated stock as well as cash!! Call us if you’re interested in learning more about this program and how you can participate.
If you have a high deductible health plan in 2020 ($1,400+ for single, $2,800+ for family), make sure you fully fund your HSA ($3,550 for single, $7,000 for married) and try NOT TO SPEND IT! Instead, invest these dollars, get the tax deduction, AND allow for tax-free growth!
Check out our article HSA Euphoria for additional detail on this topic.
Everyone ages 65 and over with Medicare should evaluate their prescription coverage. Annually between October 15 – December 7 you can join or switch Medicare Drug plans, with an effective date of January 1. You can compare coverage options and costs online using the Medicare Plan Finder at www.medicare.gov/plan-compare.
There are two ways to determine how much your family really spends:
Option 1 - Tally every single expense that your family incurs over the course of a year...all 2,200+ of them (on average)
Option 2 - Leave your desired "Cash Zero" in your checking account – we recommend at least 6 months of living expenses. Then, periodically check your cash balance against your "Cash Zero" amount.
To track your spending, all you need to know is how much your family saves per month. By subtracting your savings and the difference between your current cash balance and your "Cash Zero" from your income, you get your Spend Rate. This math of subtraction is much easier than adding up spending (and it’s typically a lot more accurate)!! Watch our video How to Calculate Your Annual Spend Rate for a step-by-step guide on how to do the math.
2020 is definitely a year for the history books in so many ways...a global pandemic infecting millions, an economic recession with the steepest decline since the Great Depression followed by one of the sharpest recoveries on record, unprecedented levels of monetary support and policy from the federal government, civil unrest the likes of which we haven't seen since the 60's, the longest "election season" we've ever experienced, remarkable medical innovation in the form of new vaccine technology, continued shutdowns of various businesses, and we could go on!
Through all this craziness, it's no wonder we're all a little "on-edge", especially when it comes to our investment portfolios. But we must strive to maintain our investing discipline in the face of such fear and anxiety. The trick is to be pragmatic and logical (not emotional) about small changes we can implement to dial down risk without taking a "hard left" and veering off course.
We believe the best approach to combat such fear is open and frequent communication around your personalized strategy and long-term plan. We must always remain steadfastly committed to our long-term goals of building real financial independence and continuing to invest into properly risk-aligned portfolios. If you feel that we should dial down the risk in your portfolios, call us to schedule a review of your Dashboard so we can discuss your family’s personal circumstances.
Below you will find our annual Tax Reference Guide with information for 2021 as it stands right now...
These are the current tax rates and they are, as of now, LAW. Depending on the outcome of two run-off elections in the state of Georgia which could give the Democrats control of the Senate, there may be some updates to this tax table next year including:
As we all know, the only thing that doesn’t change, is change itself. Once we know the results of the run-off election in early January and we’ve had some time to digest the direction of the new administration, we can continue to adapt and adopt new and different planning techniques to help each of your families achieve your best and most desired outcomes!!
Any opinions are those of Dashboard Wealth Advisors, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us. 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 may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.