Month: December 2018

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

DECEMBER 29 , 2018

 

Contact Richard Power with comments or questions.  IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We have devoted the December issues of  IntelDigest  to 2018 Year-End matters and planning, closing the most recent issue with an outline of the basic strategy behind donating cash or assets directly from retirement plans to charities.  A more detailed discussion follows.

The calendar is about to flip to the New Year, and this approach can be an important element in your financial, tax, and estate planning going forward.  It can be implemented at any time of year … after due deliberation … and can afford a taxpayer the benefit of a donation to charity without actually itemizing deductions.

 

Donations – Giving RMD to Charity – The Basics

A taxpayer who has attained age 70½ is required … according to the Internal Revenue Code … to take a minimum annual distribution from his/her retirement funds.  This is referred to as the Required Minimum Distribution (RMD), and includes all Qualified Retirement Plans and all Individual Retirement Accounts (IRAs).

The RMD is based on the account balances from all such accounts, but the actual distribution of cash or assets may be taken from one of the accounts or from several, in whatever percentage works for each taxpayer.

The distribution is includible in gross income for income tax purposes.

Planning Point – By making a charitable donation directly from an RMD, a taxpayer can satisfy the RMD requirement AND avoid income taxes on the distribution.

 

Qualified Charitable Distribution (QCD)

A taxpayer can direct the distribution of up to $100,000 each year from employer-sponsored retirement plans or IRAs to one or more qualified charitable organizations;  this is called a Qualified Charitable Distribution (QCD).

Such a distribution satisfies the RMD, avoids taxation, and accomplishes a charitable gift without having to choose between Standard and Itemized Deductions.

The charity must be approved by the Internal Revenue Service (IRS) as a 501(c)(3) organization, which allows donors to take tax deductions for their donations. The IRS website, irs.gov, contains a search function allowing taxpayers to confirm that a prospective charity has 501(c)(3) status.  Other entities, such as private foundations and donor-advised funds, are not eligible for this tax benefit.

When you have determined that the prospective charity is an eligible 501(c)(3) organization, it’s easy to make a QCD.  You can direct the retirement plan (or IRA) administrator to send a check or wire transfer directly to the charity.  Or, you may specify that the administrator send the check, made payable to the charity, to you so that you can deliver it to the charity.

Report the full amount of your retirement plan distributions on Line 4 of the new (2018) Form 1040.  On the same line, report the “taxable” amount as Zero if the total distribution was composed of the QCD.  Enter “QCD” next to the entry.

You may have to also file IRS Form 8606, Nondeductible IRAs, if:

you made the qualified charitable distribution from a Traditional IRA in which you had basis, and you received a distribution from the IRA during the same year other than the qualified charitable distribution;  or

the qualified charitable distribution was made from a Roth IRA … coming from a Roth IRA, the amount does not count as an individual’s RMD for the year … only the taxable earnings, if any, can be part of a QCD.

 

The advantages of turning your RMD into a Qualified Charitable Distribution include:

earning the tax benefit of a charitable donation, even when taking the Standard Deduction

eliminating taxation of the RMD, which lowers Adjusted Gross Income (AGI) on the tax return

lowering AGI could also lower or eliminate the 3.8% tax on net investment income

lowering AGI also results in lower Medicare premiums for the taxpayer

lowering AGI can also lead to greater Medical Expense deductions for those who itemize deductions

lowering AGI will also result in lower state income taxes in most states, because the state income tax calculation starts with the Federal AGI

 

Appreciated Capital Gain Property

There are two scenarios where a QCD may not be advisable;  both pertain to Appreciated Capital Gain Property.

In some circumstances, a taxpayer can save more tax by making a charitable gift of substantially-appreciated long-term capital gain property.  This gift would NOT come from a retirement plan or IRA.  By donating such property (instead of selling it and making a separate charitable contribution), the taxpayer will avoid capital gain taxes AND enjoy a large itemized deduction.

Avoiding tax on the sale of a capital gain is a significant saving.  Taxpayers in the highest marginal bracket for their long-term capital gains can be taxed at a rate as high as 37%, including state income tax.  There is an additional 3.8% federal surtax on net investment income.

In the second scenario, a taxpayer with substantially-appreciated assets may wish to save the assets for his/her heirs to inherit.  An heir can benefit from a “step-up” in basis, meaning that the heir’s cost for the asset is set as of the taxpayer’s date of death.  So, all the taxable capital gain during the taxpayer’s life is wiped out.

However, while holding stock until death may result in tax savings, it may also result in greater risk of investment loss and lower eventual investment return.  A prudent investor reviews his/her portfolio regularly, rebalances the investment mix, and disposes of assets which have met their full potential.

 

Achieving a tax benefit along with a charitable donation … either through a qualified donation of an RMD or a donation of appreciated assets … is an optimum form of investment and tax management.

 

 

 

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

DECEMBER 22 , 2018

 

Contact Richard Power with comments or questions.  IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We have devoted the December issues of  IntelDigest  to Year-End matters and planning, with relation to both investments and taxes.  Please feel free to review the earlier discussions in the December 8 and 15 issues.

Major tax changes were introduced by the legislation pushed through one year ago by the Republican-controlled Congress.  It is more important than ever to understand how the new tax law affects you;  a misstep in the timing of taking income or deductions can cost thousands of dollars in extra taxes.

Here are more moves to consider before 2018 comes to an end:

 

Harvest Investment Losses

NOW is your last chance to sell securities and have the gain or loss counted in 2018.  It takes several days for such sales to settle, and the settlement date controls whether the sale will pertain to your 2018 or 2019 taxes.  Harvesting losses now can offset your capital gains for the year, and save on taxes.

 

Benefit Plans – Use It or Lose It

Before the year ends, make maximum use of your company benefit plans, such as 401(k) plans and flexible spending accounts (FSA).  Contributions to 401(k) plans, by deferral or check, provide a tax deduction and allow you tax-deferred growth in the account.  Where an employer makes an additional “matching” contribution to your account, it would be imprudent to “leave money on the table.”  See the December 8 issue of  IntelDigest  for the contribution limits.

With respect to funds in flexible spending accounts, plan to use them (or lose them) immediately. Any funds not used by the end of the year may be lost.

 

Donations – Charitable Contributions

As discussed last week, you should make an estimate of your Itemized Deductions to determine if it would be better to make more charitable contributions in this year, or delay them until 2019.  Because of the new, higher Standard Deduction, and new restrictions on some Itemized Deductions, many taxpayers may want to alternate Standard and Itemized Deductions from year to year.  In that case, it is best to “bunch” charitable contributions in the years when total Itemized Deductions will exceed the Standard Deduction.

 

Donations – Give Appreciated Stock to Charity

Consider donating some appreciated stock to charity.  This has the dual benefit of providing a charitable deduction for the full market value and avoiding taxes on the realized capital gain.

 

Donations – Gifts to Heirs & Family

Taxpayers can reduce future estate taxes through a regular strategy of gifting assets to their children or grandchildren (or others).  An annual estate/gift tax exclusion of gifts up to $15,000 per person is available to all taxpayers.  Before the year ends, be sure that you have taken full advantage of your annual exclusion.

In addition to direct gifts of cash or other assets, you can set up an educational savings account under Internal Revenue Code Section 529 (see below) or pay college tuition or medical expenses for another, as long as such payments go directly to the educational institution or medical facility.

 

Expanded 529 Plans for Education

The new tax law expands 529 plans to include primary and secondary schools, although there’s a limit to the amount that can be paid out every year for lower education.  Taxpayers can now use such savings plans on behalf of their beneficiaries from kindergarten through college!

The original purpose of education savings plans was facilitating funding for college education.  The assets in the special account grow on a tax-free basis. Then, the student/beneficiary can draw out money to pay for tuition, supplies, computer equipment, and, in many cases, room and board.

The new tax law has expanded the accepted use for these plans to include attendance in both primary and secondary schools.  Qualified expenses at these levels include tuition and books, but not uniforms, transportation, or room and board.

The expanded coverage makes such tax-advantaged plans more useful to investors of all ages.  Many have grandchildren and other beneficiaries who are in pre-school or primary school.  For the expenses of primary and secondary education (K-12), funds in a 529 account can be used to pay for up to $10,000 each year per student.

Note that the treatment of such plans differs among the states.  Each state has its own income tax rules regarding deductibility of contributions to 529 plans.  And, some put restrictions on the amount which can be paid out for education expenses.

Most states have established 529 investment programs.  Some programs require the student beneficiaries to use the funds only for public colleges in the state, while others allow the funds to be spent at any university in any state.  Expansion of the federal 529 provisions to lower education introduces further complications to the matter.

 

Donations – Give RMD to Charity

We have previously discussed the possibility of making a charitable contribution from one’s RMD, the annual Required Minimum Distribution from Qualified Retirement Plans, including IRAs.  And, we will analyze the advantages and disadvantages of such a strategy in the next issue of  IntelDigest.

To wind up this issue, however, we will outline the basic strategy:

Taxpayers who have attained age 70½ are required to take an annual distribution from their retirement funds.  The distribution is includible in gross income for income tax purposes.  The rationale behind this requirement is allowing the government to collect some taxes from taxpayers who benefitted from tax deductions when plan contributions were deferred from salary or deposited by employers in past years.

By making a charitable donation directly from one’s RMD, a taxpayer can satisfy the RMD requirement AND avoid income taxes on the distribution.

Considering the complications introduced by the higher Standard Deduction and restrictions on Itemized Deductions, discussed above, this can be an effective way to get the benefit of a donation to charity without actually itemizing deductions.

 

More on this topic next week …. Happy Holidays to All!

 

 

 

 

 

 

 

 

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

DECEMBER 15 , 2018

 

Contact Richard Power with comments or questions.  IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We are discussing Year-End matters and financial planning … with relation to both investments and taxes … in the December issues of  IntelDigest.  The landscape has changed markedly since enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), which passed one year ago.

Some major changes … such as slightly lower tax brackets and a new approach to deductions (standard vs. itemized) … will affect all taxpayers.

 

Tax Brackets

There are now seven tax rates related to Form 1040 filings, from the base rate of 10% to the top rate of 37% (reduced from 39.6%). The “average” rate for middle-income filers came down from 28% to 24%.

Most taxpayers should have a lower tax liability for 2018 and later years because of the decline in rates. However, many taxpayers will have a rude surprise … for them, lower rates will be counteracted by loss of some tax deductions under the new law!

 

Standard Deduction

The Standard Deduction has nearly doubled … now $12,000 for single filers and $24,000 for joint filers.  Add an extra deduction for taxpayers age 65 or older … $1,600 for single filers, or $2,600 on a joint return.

The higher Standard Deduction, plus higher credits related to support of children and other dependents, is meant to offset the loss of Personal Exemptions.  The traditional Exemptions for taxpayers and their dependents have been eliminated.

As a result of these changes, many taxpayers who have itemized their deductions in the past will now use the Standard Deduction.  But, using the Standard Deduction disallows any separate deduction for significant household expenses, such as state and local taxes, mortgage interest expense, charitable contributions, and all the other line-item deductions which we have taken on Schedule A over many years.

Taxpayers who have been accustomed to Itemizing their deductions have some work to do NOW with respect to the timing of these expenses.

 

Planning Point:  Bunching Itemized Deductions

Taxpayers should look over their 2018 expenses BEFORE the end of the year.
If the total of Itemized Deductions is already greater than the Standard Deduction amount, then one could “pad” those Itemized Deductions for the 2018 return by making more Charitable Contributions or Student Loan Interest payments in December, or making the January mortgage payment before December ends.

One can bunch up the Charitable Contributions by opening a donor-advised fund in December and making a large contribution to the fund before the year ends. The Donor typically can take several months to then decide on the charities which would receive support under the terms of the fund.

On the other hand, if Itemized Deductions are well short of the Standard Deduction for 2018, it would be best to postpone those same moves until next year.  Take the Standard Deduction for 2018 and bunch the Itemized Deductions in 2019.

 

Planning Point: Plan Ahead for Itemizing Deductions

The new tax law requires planning ahead in order to take the best advantage of tax breaks.  Try to get the jump on assembling your 2018 tax return records in January.  Add up your 2018 expenses and estimate your expected 2019 expenses there and then.

If your expected Itemized Deductions are close to the Standard Deduction, you can maximize the tax benefit by planning to pay expenses in the year that you expect to itemize, wherever possible.  You would be planning ahead to take the Standard Deduction and Itemized Deductions in alternate years.

 

Changes to Allowable Itemized Deductions

Complicating the matter … the new tax law has placed some specific restrictions on itemized deductions.  There is now a $10,000 annual cap on allowable itemized deductions for state and local taxes (including property, sales and income taxes).

There are also new limits on Mortgage deductions.  Mortgage Interest is no longer deductible on loans above $750,000 … something to consider when buying a new home or taking out a Home Equity Line of Credit.

 

Business Tax Matters

Tax reform made major changes to business taxation.  Many American corporations have had their maximum income tax rate lowered from 35% to 21%.  This applies to C Corporations, those companies in which the business income is taxed separately from owners’ income.

Other businesses which are “pass-through” entities … sole proprietorships, limited liability companies (LLC), partnerships, and S corporations (which have fewer than 100 shareholders and are typically taxed as a partnership) … also benefit from the tax law changes.  Many of these business owners will find a new space on their 1040s to reflect a new additional deduction of 20% for qualified “pass-through” business income, also referred to as a Section 199A deduction.

 

Planning Point: Deduction for Qualified Business Income (Section 199A)

We could devote several issues to the complexities of Section 199A.  For example, the deduction is reduced if the owner’s income is more than $157,500 ($315,000 if married filing jointly).  The law places restrictions on the deduction for professionals in law, accounting, medical fields, performing arts, athletics, et al … any trade or business where the principal asset of the business is the reputation or skill of employees.

Suffice to say:  if you are a business owner of such a pass-through entity, we can discuss your eligibility for the deduction under Section 199A.

 

Planning Point: Equipment Purchases

The new tax law provides greater possibilities for depreciation deductions. Businesses should review equipment needs NOW.  It may make sense to make purchases and place the item(s) in service before December 31, 2018.  Many businesses can write off 100% of equipment purchases through bonus depreciation or Section 179 expensing.

 

We will discuss more Year-End plans next week, with particular emphasis on donations and gifts.

 

 

 

 

 

 

 

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

DECEMBER 8, 2018

 

Contact Richard Power with comments or questions.  IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We have changed the publication day of  IntelDigest  to Saturday …  you can expect future issues to hit your inbox at the end of the business week. 

We will devote the next few issues during this Holiday Season to Year-End matters and planning, with relation to both investments and taxes.  Today, we present a general overview of things-to-do at year-end.  Next week, we’ll cover specific decisions which are forced by the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA), which Congress and the President enacted one year ago. 

Here are a few items to keep in mind:

 

Required Minimum Distribution (RMD)

Once you reach age 70½, tax law requires you to start taking distributions from your qualified retirement plans, including Traditional, Rollover, SEP, or SIMPLE IRAs.  This is the Required Minimum Distribution (RMD), and your first one (for the tax year in which you have turned 70 ½) must be completed by the following April tax deadline. 

Your second, and all subsequent RMDs, must be taken by December 31 of the applicable tax year.  Distributions are fully includible in your gross income for income tax purposes. If you fail to take the required minimum amount in any year, you could face a hefty 50% excise tax on the missed amount, plus more complications in your tax return preparation.

 

Retirement Contributions

For those of you who have not yet retired, plan to make tax-deductible contributions to IRAs, 401(k) plans, and other qualified plans before the regular tax-filing deadline.  You have until April 15, 2019, to make these contributions.  Be sure that your investment company understands the correct tax year to which your contributions pertain, and reflects the appropriate year in your statements.

Your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 per taxpayer ($6,500 if you’re age 50 or older);  double those figures if you file a joint income tax return. 

For 401(k), 403(b) and certain government plans, the employee contribution limit is $18,500.  If you’re over 50 years old and still contributing to employee and government plans, you can add an extra “Catch Up Contribution” in the amount of $6,000 for 2018. 

If you have a SIMPLE IRA for self-employed individuals, you may deduct up to $12,500 ($15,500 if you are age 50 or older).   The deduction for contributions to a Simplified Employee Pension (SEP) account maxes at $55,000, or approximately 20% of your adjusted net earnings.  You have until your 2018 tax filing deadline, including extensions, to both open and fund a SEP.

Delaying Social Security Benefits

If you are of an age to qualify for Social Security retirement benefits, keep in mind that you have a high probability of increasing the amounts which you will receive over your lifetime …  by simply delaying commencement of benefits.

There are several strategies for maximizing your benefits, and they can be quite complex.  However, the simplest strategy is to delay starting Social Security benefits until you turn 70 years old.  Your benefit could be as much as 32% higher at age 70.  If you live to normal life expectancy, you will receive much more in benefits.  If you live a good deal longer …  into your 90s or 100s … you would receive a great deal more.

Rebalance Your Portfolio

Act soon (certainly before Christmas) to turn investment losses into tax savings for 2018.  If you have losing assets in the portfolio, they can offset capital gains or produce capital losses, which will reduce your income taxes.  Sell in the next two weeks so that the transactions will clear before the end of 2018.

This form of Tax-Loss Harvesting should be part of your normal year-end routine …  many investors will make a serious review of their portfolios only once per year, if that often.  All investors should use the year-end to reassess their portfolios and investment objectives.

 

Funding Education

The American Opportunity Tax Credit is still available through the end of 2018 for you, your spouse, or a dependent enrolled in a degree program.  You can take the credit for up to $2,500 of tuition, fees, and course materials.  The Lifelong Learning Credit is a 20% credit on the first $10,000 of qualified education expenses.  Each credit is subject to restrictions. 

Student loan interest up to $2,500 is deductible if your modified adjusted gross income does not exceed $80,000 ($160,000 if married and filing a joint return).

Because these benefits phase out at certain levels of adjusted gross income, you should see if the student in your family is eligible to file a separate return and claim the credit/deduction. 

If you have children or grandchildren, consider starting college savings programs for them.  Start now while the investment market is hot;  open a tax-advantaged plan while they’re still toddlers. 

You can create a 529 account (see the White Papers section at www.powerlaw.us for details), Coverdell education savings account, or a simple custodial account. Remember that each state has specific rules pertaining to such plans.

Donations to Charity

Make donations to charitable organizations well in advance of December 31 in order to ensure a tax deduction for 2018. 

Volunteer Work on behalf of charitable organizations can also generate tax deductions.  If you have spent a significant number of hours volunteering at a shelter or church or food pantry, or have participated in relief efforts, you can deduct actual expenses incurred plus 14 cents/mile for use of your vehicle.

More details next week in  IntelDigest.