By: Arash Navi, CFP®, CPA, Controller & Wealth Manager
Our goal is to help our clients build and grow their wealth and tax planning plays an important role in this process. We recommend that you mark your calendar to review your finances in the first week of October, annually. Take this time to review your income for the year from employment, businesses, investments, or any other sources. This will help you project your tax liability ahead of time and allow your financial advisor or tax accountant to find strategies to reduce your tax burden. Implementing this consistently and reducing your tax burden annually will have a compounding impact over the years and increase your retirement nest egg. Here are a few tax planning strategies to keep in mind:
IRAs and Retirement Plans
Take full advantage of tax-advantaged retirement accounts. By contributing to Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans, you can reduce your taxable income and lower your taxes. For 2023, you can contribute up to $22,500 to a employer-sponsored retirement plan ($30,000 if you’re age 50 or older) and up to $6,500 to a Traditional IRA ($7,500 if you’re age 50 or older).
If you are in a lower tax bracket this year and expect your income tax rate to increase in the future, you may want to consider a Roth IRA conversion. You can convert all or part of your pre-tax retirement account into a Roth IRA and pay the taxes now at a lower rate. The funds in your Roth IRA will continue to grow tax free, and you will have more income flexibility in retirement. Watch here as we make a case for Roth conversions and how they could benefit you.
If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. For those over age 70.5, you may want to consider Qualified Charitable Distribution (QCD), where you can transfer up to $100K from your IRA to a charity. This method not only reduces your Required Minimum Distribution (RMD), but the distribution is also excluded from your taxable income. Beginning in 2024, the QCD limit ($100k) will change as it will be linked to inflation. Also, with the passage of the SECURE Act 2.0, starting in 2023 taxpayers may take advantage of a one-time gift up to $50k (adjusted annually for inflation) to fund a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or a Charitable Gift Annuity. This is an expansion of the type of charity, or charities, that can receive a QCD.
Tax Bracket Management
The IRS uses a progressive tax system which means as your income grows, it is subject to a higher tax rate. Therefore, it is important to know which of the seven federal tax brackets you will fall into. In your high-income years, you may want to reduce your tax liability by increasing your retirement contribution or utilize a tax-loss harvesting strategy. On the other hand, in low-income years, you may want to consider Roth IRA conversions, accelerate income recognition, or postpone deductible expenses.
Tax planning should be part of every individual investor’s financial and retirement plan. There are many strategies available for individuals and business owners, but it requires proper planning throughout the year. If you’d like to learn more about tax planning strategies unique to your personal circumstances, feel free to Talk With Us!
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 website 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 remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
By: Michael Allbee, CFP®, Senior Portfolio Manager
Did you miss out on #GivingTuesday? You still have time to take advantage of two temporary perks for cash gifts to charities before they expire at year-end.
The first perk for those that itemize deductions, allows 100% of cash gifts (including by check, credit card or debit card) to be deductible in 2021 (this also applied for 2020). Normally the limit is 60% of adjusted gross income (AGI). So, a person with $200,000 AGI, can now deduct up to $200,000 if charitable gifting is made in cash, where normally they would be capped at $120,000 (60% limit). These charitable contributions CANNOT be used for Donor Advised Funds or 509(a)(3) supporting organizations.
For those that already maxed out your charitable gifting (up to $100,000) from your traditional and/or inherited IRAs by using Qualified Charitable Distributions (QCDs) and want to gift more to a charity, you may want to consider taking the remainder gift from your tax-deferred retirement account (if you are over age 59.5 to avoid penalties) which would increase your AGI since the distribution is treated as taxable income but simultaneously offset that income via the 100% deduction for the cash gift. This strategy would be especially effective if some of the IRA changes under consideration before Congress become law. Currently, in its Build Back Better legislation, Congress is proposing restrictions on so-called “mega IRAs” with balances over $10 million. The legislation would mandate required distributions of 50% of the amount exceeding $10 million and require distributions of 100% of the IRA balance exceeding $20 million—potentially creating major tax events for some individuals in the coming years.
The second expiring perk is the opportunity to deduct cash gifts to eligible charities of up to $300 for single tax-filers and $600 for couples against taxable income, even if you claim the standard deduction (great news for the 90% of households that take the standard deduction each year). Let’s say a married couple with an effective tax rate of 25% jointly donated $750 throughout the year. If they take the standard deduction, they’d be able to deduct the full $600, lowering their federal tax liability by $150. Keep in mind that donations made to individuals are not tax-deductible (i.e., GoFundMe campaigns).
Charitable giving provides you the opportunity to create a meaningful legacy and support the causes that are important to you. Consider speaking with your financial professional at BFSG for guidance around your philanthropic goals and assistance on the execution.
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 website 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.
As we approach the end of 2021, now is a good time to take a closer look to make sure you have satisfied your required minimum distributions (RMDs). Generally, RMDs must be taken by December 31 each year (Exception: RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company). Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.
Once you reach age 72, you are required to take minimum distributions from your traditional IRAs and most employer-sponsored retirement plans. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).
For those over age 70.5, Qualified Charitable Distributions (QCDs) can be used to satisfy all or part of your RMD (up to $100k). This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns.
The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.
Recognizing that life expectancies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period of time. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.
This year-end, more than most, will require some flexibility given the potentially material changes coming down the pike for income taxes. Consider speaking with your financial and tax professionals for additional tax planning.
Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.
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.