12 Smart Planning Moves to Consider as Tax Reform Looms

It’s hard to believe, but another year is almost behind us. With January just around the corner, now is a great time to review various items you may want to consider as you get set to enter 2018. Many of the IRS publications referenced below are for tax year 2016. Changes are not anticipated when 2017 guides are published.

Before we get started, let me stress that it is my job to assist and help you! I can’t overemphasize this, and I would be happy to review the options that are best suited to your situation. When it comes to tax matters, I recommend you check with your tax advisor.

Right off the bat, let’s talk about what’s on everyone’s mind–tax reform.

  1. Sweeping changes in the tax code were supposed to be enacted much earlier in the year, but Congress has been preoccupied with health care. Instead, changes appear to be in the pipeline for 2018.

Both the House and Senate have passed their respective versions of tax reform. The House and Senate will now convene a conference–a give-and-take session that is designed to craft a single bill that must then be approved by each chamber. Only then can the President sign the legislation, which will usher in a new tax code.

 That said, how we file for tax year 2018 may differ from how we file for tax year 2017.

 For example, will the alternative minimum tax (the AMT) be wiped from the tax code? Will Congress kill the estate tax?

Both the Senate and House proposals make few, if any, changes to retirement accounts, but we could see tweaks in a final bill.

Personally, I’m encouraged that the House and Senate have yet to materially alter the tax treatment for retirement accounts and the favorable treatment dividends and capital gains receive.

However, I should point out that the Senate bill changes the way we would account for capital gains, i.e., a first-in, first-out method to calculate gains when a stock is sold. That said, I’m reluctant to speculate how these key categories may emerge if tax reform is signed into law.

Investment and financial planning

  • Is it time to rebalance your portfolio? Changes in the market can cause your asset allocation to shift. As we head into the homestretch, we’ve witnessed strong gains in stocks this year, both domestic and international. Year-end is a great time to review your portfolio and make any necessary adjustments.

Typically, I would counsel that profits should be taken next year, pushing the tax burden into tax year 2018.

But I must caution that there is an outside possibility the final version that may land on the President’s desk could produce changes in how capital gains are treated.

  • Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.

However, let me caution about making changes based simply on market performance.

One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring and to sell when stocks have taken a beating.

We know that markets rise and fall. I get that declines can be unnerving, I really do. Yet over the long term, markets rise much more than they fall.

While stocks have been on a record run, it’s a good time for me to once again remind you that a disciplined approach that avoids emotional decisions has historically been the shortest path to reaching one’s financial goals.

I know I’ve said this before, but it is a key principle for successful investing.

  • Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.

Tax planning in the context of possible changes in the tax code

  • Tax loss deadline. You have until December 31, 2017 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.
  • This brings us to mutual funds and taxable distributions. This is a topic best discussed by using an example: If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 20, you will be responsible for paying taxes on the entire distribution, even if the capital gains and dividends collected by the fund occurred throughout the entire year.

Yet, following the distribution, the net asset value of the fund will fall by the amount of the payout. Put another way, your investment in the fund remains the same. It’s a tax sting that’s best avoided. Therefore, it is usually a good idea to wait until after the annual distribution to make the purchase.

  • Required minimum distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70½, regardless of whether he or she is retired (IRS Retirement Plan and IRA Required Minimum Distributions FAQs).

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of that year.

The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans as well as SEP IRAs and Simple IRAs.

Don’t miss the deadline or you could be subject to steep penalties!

  • Contribute to a Roth IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal tax-free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older (IRS Retirement Topics–IRA Contribution Limits).

If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70½ and there are no requirements to take mandatory distributions.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.

You can make 2017 IRA contributions until April 17, 2018 (Note: statewide holidays can impact final date).

  • Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform, but if the situation is right, it can be advantageous to convert to a Roth IRA.
  • College savings. Tax reform looms large over college savings accounts. A limited option, called the Coverdell Savings account (IRS Publication 970) gets the ax in the House bill. The Senate bill maintains the status quo, according to the Senate Finance Committee document, “Tax Cut and Jobs Act and College Access.”

Currently, total contributions for a beneficiary cannot exceed $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000. Contribution limits get phased out after hitting the respective limits.

If reform passes, the House proposes that Coverdell Savings Accounts be converted into 529 plans. A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.

  • Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. For 2017, you can contribute up to $14,000. Distributions are tax free if used to pay the beneficiary’s qualified disability expenses, which may include some education expenses (IRS Publication 907, Fidelity—ABLE).
  • Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.  Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)?”  A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity (“Rules to Do an IRA Qualified Charitable Distribution”–www.kitces.com). The IRA owner must be at least 70½ when the distribution is made.

You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.

 

Active Duty Military Pension

If you are currently serving or active reserve you have a decision to make as of January 1, 2018 that will affect your retirement pay.  Please contact our office we will be happy to answer any questions you may have concerning your choices.

Schwartz Financial Weekly Commentary 9/5/17

The Markets

When it comes to economic growth, the government doesn’t measure twice. It measures three times.

Last week, the Bureau of Economic Analysis revised its initial estimate that the gross domestic product (GDP), which is the value of all goods and services produced by a country or region, grew by 2.6 percent during the second quarter of 2017. The second estimate indicated the economy grew by 3.0 percent from April through June. The third and final GDP estimate for the second quarter will become available near the end of September.

The New York Times reported:

“If the economy were to sustain the current pace of expansion, it would be a significant uptick from the 2 percent annual growth rate that has mostly prevailed since the recovery began. A difference of a single percentage point may not sound like much, but the stakes are huge in a $19 trillion economy. The acceleration could also help lift wage growth, which has been frustratingly slow for years despite steady hiring, a surging stock market, and rising home prices.”

While second quarter’s growth spurt was welcome news, it was overshadowed by the devastation wrought by Hurricane Harvey in Texas and across a swath of the Gulf Coast. Initial estimates of the property damage inflicted by the storm stand between $30 and $40 billion, reported Yahoo! Finance.

Historically, hurricanes have impacted U.S. economic growth and Harvey is likely to be no different. An economist from Goldman Sachs explained the usual progression of economic consequences to Yahoo! Finance:

“…major hurricanes in the past have been associated with a temporary slowdown in retail sales, construction spending, and industrial production, as well as a pickup in jobless claims…However, GDP effects are ambiguous, as the level of economic activity typically returns to its previous trend – or even somewhat above – reflecting a boost from rebuilding efforts and a catch-up in economic activity displaced during the hurricane.”

We send our thoughts and prayers to all of those affected by Hurricane Harvey.

Data as of 9/1/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.4% 10.6% 14.1% 7.3% 12.0% 5.2%
Dow Jones Global ex-U.S. 0.7 17.4 16.0 0.6 5.5 -0.5
10-year Treasury Note (Yield Only) 2.2 NA 1.6 2.4 1.6 4.6
Gold (per ounce) 2.7 13.9 0.8 0.9 -4.8 7.0
Bloomberg Commodity Index 2.0 -2.9 3.5 -12.1 -10.3 -6.5
DJ Equity All REIT Total Return Index 0.7 7.0 2.2 8.5 9.7 6.5
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

If you don’t live near your parents and older family members, you may want to learn more about Social Security’s Representative Payment Program (RPP). The Center for Retirement Research at Boston College (CRRBC) published a brief in August that provided some insight into the need for the program:

“Many older individuals with cognitive impairment, including the vast majority of people with dementia, need help managing their finances. For retirees receiving Social Security benefits, the Representative Payee Program can serve as one source of this help. In the Representative Payee Program, a retiree’s benefit is sent to another person (often a relative) who spends it on the retiree’s behalf and submits records to Social Security documenting that the expenditures were in the beneficiary’s best interest.”

Currently, not many people take advantage of the program. More than 10 percent of people who are age 65 or older have dementia, but just 9 percent of that group has a payee.

That doesn’t mean retirees aren’t getting the help they need. Most are, according to CRRBC. Ninety-five percent of people with dementia have someone to help – an unimpaired spouse, nursing home staff, or adult children. Two-thirds have assigned power of attorney to a trusted party.

If your parents are older and you haven’t talked with them about how to handle issues related to finances and aging, it may be a good time to open a dialogue. Daily Caring suggests you, “Approach the conversation around the most important considerations for older adults: safety, freedom, peace of mind, social connection, and being able to make choices.”

Weekly Focus – Think About It

“Best thing about being in your 90s is you’re spoiled rotten. Everybody spoils you like mad and they treat you with such respect because you’re old. Little do they know, you haven’t changed. You haven’t changed in [the brain]. You’re just 90 every place else…Now that I’m 91, as opposed to being 90, I’m much wiser. I’m much more aware and I’m much sexier.”

–Betty White, American actor and comedienne

Value vs. Growth Investing (9/1/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 1.56 11.80 0.23 2.34 16.36 9.26 14.31
US Core 1.48 12.36 0.85 1.87 17.01 10.37 15.38
US Growth 2.23 19.58 0.59 3.09 19.40 10.04 14.42
US Large Cap 1.48 13.15 0.56 2.87 17.45 9.84 14.29
US Large Core 1.45 14.36 1.51 2.54 19.34 11.48 15.88
US Large Growth 2.12 21.15 0.65 3.32 20.77 10.88 14.85
US Large Val 0.79 4.63 -0.50 2.63 12.36 7.12 12.22
US Mid Cap 1.56 9.50 -0.48 0.89 13.79 7.91 14.74
US Mid Core 1.44 9.37 -0.45 0.37 11.66 7.86 14.53
US Mid Growth 2.28 16.04 0.51 2.39 15.86 7.57 13.22
US Mid Val 0.87 3.25 -1.64 -0.21 13.75 8.21 16.50
US Small Cap 2.41 5.05 -1.08 1.02 12.72 7.04 13.20
US Small Core 1.89 2.89 -1.71 -0.23 11.12 6.94 13.30
US Small Growth 3.40 13.46 0.10 2.65 15.29 8.14 13.10
US Small Val 1.91 -0.86 -1.68 0.58 11.42 5.97 13.10
US Value 0.88 3.97 -0.81 1.92 12.62 7.28 13.16
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

  Office Happenings:

Have we seen the beginning?

For the first time in all the months I have been forwarding our monthly 401k breakouts to clients and prospects, I have called for a new equity/non-equity allocation for 401k positions.  Is this the beginning of the pull back from market highs, we will not know that answer for some time.  It could be a short term event or not.  If you had contacted our office asking for this free information, over the holiday weekend you would have received the below customized for your 401k at work.  It is not too late to maximize what could and should be the largest asset you own besides your home.  Contact our office and let us help you get the most out of your 401k plan.

Neil Andersen Sept 403b_Page_1

 

Regards,

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

 

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

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