#financialplanning

Financial Spring Cleaning

This is one of our favorite times of the year. We are approaching spring, so the days are longer, air is warmer, and the final snow is melting away. This is also the time of year people begin spring cleaning and getting their house or other affairs in order. Since finances are on people’s minds since we are in tax season, we thought it would be a good time to do some spring cleaning for your finances as well. Below should be a helpful checklist to help with some spring cleaning:

Taxes

  • Prepare and file your taxes (*note the new deadline of May 17th)
  • Review withholding if you owe or receive large refund. Use this IRS tool.
  • Discuss tax strategies for this year with your tax advisor or financial planner
    • Charitable gifting strategies
    • Strategies for business owners
    • Strategies for those with executive benefits
    • Roth conversions

Personal

  • Develop and/or review your budget
    • Contact insurance providers to try and reduce rates
    • Contact internet, cable and cell phone providers to make sure you are getting the best rates
  • Review you credit reports from Experian, Equifax and Transunion. Click here to do it for free.
    • Dispute any wrong information
  • Review your credit score. This can be done with any credit card provider for free or use a site like CreditKarma.com.
  • Develop a plan to pay off your debt

Other Important Items

  • Review your financial plan if you have not done so in last couple of years and/or if any major life changes have occurred
  • Review your estate plan if not done in last five years due to recent changes in the law
  • Review your investment allocation
  • Rebalance your investments if not done in last twelve months

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Simplifying Your Retirement Plan

Like all things in life, retirement planning has many aspects to it and a few items we can control but most items are beyond our control. To help remove some of the stress of retirement planning, we would like to help reframe the way that you look at retirement planning. Looking at the chart below it breaks down the most important factors that impact your retirement and are broken into three buckets: 1) things you can control; 2) things you have some control over; and 3) items that you have no control over.

Too often we focus on the things in life that we cannot control and those are the items that cause us the greatest stress. Instead of wasting our time and energy on those items, we instead should put our focus on the buckets that we have control over.

Total Control Bucket

This bucket is the most important because these are the items that you explicitly control.  For most individuals, savings and spending are the two biggest factors for retirement planning and the two items you have the greatest control over! When you work with a Financial Adviser, any recommendations they make typically will try to reduce expenses or make you more money.

Some Control Bucket

This bucket includes things that you can influence but do not have total control over. Items in this bucket would be things like your health and longevity. We can do the best we can to be healthy which will reduce stress and increase life expectancy, but we have no control over diseases like cancer (i.e., heredity traits). Many times, people plan on working till a certain age, but things can change if you experience a layoff or health problems that force you into retirement. It is important to have plans for this bucket like trying to stay healthy, reducing stress, and having a plan for your career. However, we must keep in mind we do not have total control, so having proper hedges in a place like a disability policy, health insurance, emergency fund, etc. should be considered.

No Control

Humans always want to have the illusion of control. Most people do not respond well in dealing with things that they have no control over. The fear of something happening in the no control bucket (i.e. bad market returns) leads to more anxiety and sleepless nights than any other bucket. Remember that worrying is like a rocking chair, it gives you something to do but accomplishes nothing. That is not to say we do nothing with this bucket, but rather you build a retirement plan to reduce risks from this bucket. Market returns are something we have no control over but studies have shown a diversified portfolio produces the best risk-adjusted returns. No one controls what happens with taxes and government policy, but you update your retirement plan once these changes occur.

Summary

Use the above chart as a reminder to focus your time and efforts in retirement planning on the items that you have the most control over. Starting there will produce the best results and will reduce stress since it takes your attention from the items in the no control bucket that cause the most anxiety. Working with a Certified Financial Planner™ and focusing on the two buckets that you can influence, will give you a simple and lower stress approach to retirement planning.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Pandemic Relief Measures and Your 2020 Tax Return

The two emergency relief bills passed in 2020 and another in 2021 in response to the COVID-19 pandemic will make this an unusual tax season for many taxpayers. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March, a second relief package was attached to the Consolidated Appropriations Act, 2021, in December, and just recently the American Rescue Plan.

The federal government relied on the tax system to deliver financial lifelines to struggling households, boost consumer spending, and help speed the economic recovery.

The following provisions may affect many households when they file their tax returns for 2020.

Recovery Rebate Credit

Most U.S. households received two Economic Impact Payments (EIPs) from the federal government in 2020. They are not taxable because technically they are advances on a refundable credit against 2020 income taxes.

The CARES Act provided a Recovery Rebate Credit of $1,200 ($2,400 for married joint filers) plus $500 for each qualifying child under age 17. The second bill provided another $600 per eligible family member.

Any individual who has a Social Security number and is not a dependent generally qualifies for the payments, up to certain income limits. The amounts are reduced for those with adjusted gross incomes (AGIs) exceeding $75,000 ($150,000 for joint filers and $112,500 for heads of household) and phase out completely at AGIs of $99,000 ($198,000 for joint filers and $112,500 for heads of household).

For the money to be delivered quickly, eligibility was based on 2019 income tax returns (or 2018 if a 2019 return had not been filed). Eligible taxpayers who did not receive two full payments, possibly due to errors or processing delays, may claim the money as a Recovery Rebate Credit on their 2020 tax return. Households that reported a lower AGI in 2020 (or added a dependent) might be eligible for additional funds. To calculate the credit, filers will need to know the amounts of any payments they already received. The credit amount will increase the refund or decrease the tax owed, dollar for dollar.

Taxpayers who received two full payments don’t need to fill out any additional information on their tax returns. Filing electronically usually results in a faster refund.

Coronavirus-related Distributions

Another measure in the CARES Act allowed IRA owners and employer-plan participants who were adversely affected by COVID-19 to withdraw up to $100,000 of their vested account balance in 2020 without having to pay the 10% tax penalty (25% for SIMPLE IRAs) that normally applies before age 59½.

Still, withdrawals from tax-deferred retirement accounts are typically taxed as ordinary income in the year of the distribution. To help manage the tax liability, qualified individuals can choose to spread the income from a coronavirus-related distribution (CRD) equally over three years or report it in full for the 2020 tax year, with up to three years to reinvest the money in an eligible employer plan or an IRA.

Taxpayers who elect to report income over three years and then re-contribute amounts greater than the amount reported in a given year may “carry forward” the excess contributions to next year’s tax return. Taxpayers who recontribute amounts after paying taxes on reported CRD income can file amended returns to recoup the payments.

Qualified individuals whose plans did not adopt CRD provisions may choose to categorize other types of distributions — including those normally considered required minimum distributions — as CRDs on their tax returns (up to the $100,000 limit).

Other Notable Changes

For those who itemize deductions, the limit on the charitable gift deduction increased to 100% of AGI for direct cash gifts to public charities. For nonitemizers, a new $300 charitable deduction for direct cash gifts to public charities was available.

The floor for deducting medical expenses has been permanently lowered to 7.5% of AGI (it was scheduled to increase to 10% in 2021).

Unemployment Aid is Taxable

Unemployment benefits, which sustained many families impacted by the pandemic, are considered taxable income, and many recipients may not have correctly withheld taxes from their 2020 payments. Avoiding a surprise tax bill typically requires opting into a 10% withholding rate and, in some cases, paying additional quarterly taxes during the year.

However, with the recent passage of the American Rescue Plan, the bill made the first $10,200 in benefits received to be tax free for households under $150,000. This applies to 2020 only. If you already filed, you may have to amend your return.

Looking Ahead to 2021

The special rules for charitable gift deductions enacted for 2020 as discussed above have been extended through 2021. For nonitemizers, a $300 charitable deduction for 2021 direct cash gifts to public charities is available. For joint filers, this deduction increases to $600 for 2021 cash gifts to charitable organizations.

Starting in 2021, there is no deduction for qualified tuition and related expenses. Instead, the modified adjusted gross income (MAGI) phaseout range for the Lifetime Learning credit was increased to be the same as the phaseout range for the American Opportunity credit ($80,000 to $90,000 for single filers; $160,000 to 180,000 for joint filers).

A temporary provision that allows taxpayers to exclude discharged debt for a qualified principal residence from gross income was extended through 2025, though the limit has been reduced from $2 million to $750,000. Also, through 2025, employers can pay up to $5,250 annually toward employees’ student loans as a tax-free employee benefit.

For 2021 only, the American Rescue Plan will increase the amount of the Child Tax Credit to $3,000 per child ($3,600 for children under 5) for children 17 and younger. For 2021 this credit is fully refundable even if you have no taxes due. To qualify your modified adjusted gross income (MAGI) depending on how you file must be less than $75,000 for Single, $150,000 Married or $112,500 Head of Household. After that amount, the excess credit ($1,000 or $1,600 for children under 5) is reduced by $50 for every $1,000 above the MAGI limits.

We recommend you consult a tax professional who can further explain the relevant changes and recommend strategies to help reduce your tax liability for 2021.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Edited by BFSG.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

American Rescue Plan

How will the American Rescue Plan impact you? Read more here.

Medicare Part B Premium

If you have just recently enrolled in Medicare, you may be wondering how your premiums are calculated. Although Medicare eligibility is not income-based, the income you report on your tax return does play a role on your monthly premiums. As with everything else when it comes to IRS and taxes, things can get complicated and confusing!

As a refresher, Part A (hospital) generally has no premium, but Part B (doctors) has a base premium. To put it simply, the standard Part B premium amount for 2021 is $148.50. Most people end up paying that amount. However, if your modified adjusted gross income1 (MAGI) as reported on your IRS tax return from 2 years ago is above certain thresholds, listed in the below table, the monthly premiums will end up higher.

Keep in mind that if you are already receiving social security benefits, your Part B premium is automatically deducted from your benefit payments.

The rules are not set-in-stone though, so Social Security is able to adjust your premiums if you have experienced a “life-changing event” that caused a significant income reduction. For example, if your marital status changed, or you lost your job or income-producing business or property. You would need to file Form SSA-44 to request a reduction in your income-related monthly adjustment amount.

If you want to learn more, check out our Medicare webinar we recorded last year. If you have any questions or need clarification regarding your Medicare or Social Security benefits, feel free to reach out to us.

  1. Income based on Modified Adjusted Gross Income (MAGI) includes tax-exempt interest income.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.