Tax Tips and Planning

wealth management tax tips

By Jeff Supple, CFP | Vice President & Trust Officer

According to the Pew Research Center, approximately one-third of Americans do their own taxes. Whether you prepare your taxes yourself or get help from an accountant, nobody wants to miss a beneficial deduction or tax credit. The following are often overlooked opportunities:

Backdoor ROTH IRA

The details of the backdoor ROTH IRA strategy need to be examined, but it is viable for those with incomes that don’t allow for regular ROTH IRA contributions. The basic premise is that a non-deductible traditional IRA contribution is made and then those dollars are converted into a ROTH IRA. There is no taxable event on the conversion up to the contributed amount. If there are earnings made after the contribution and before the conversion, those earnings (but not the contribution) would be subject to tax if converted.

This strategy was made possible when the income restrictions on converting to a ROTH IRA were removed starting in tax year 2010.

Saver’s Credit

Many people know there are tax advantages to saving money in an IRA or employer-sponsored retirement plan like a 401(k). However, some don’t realize you may qualify for an additional tax credit based on your income level. The code rewards the act of saving for those who have the most difficulty finding extra money to set aside (the lower your adjusted gross income, the higher the tax credit).

The value of a tax credit cannot be understated.  While a deduction simply lowers your taxable income, a credit actually reduces the amount of your tax bill dollar for dollar. The credit specifics can be found on the IRS website.

0% Capital Gains

A long-term capital gain tax is applied to the appreciation of an investment held longer than 12 months.  The federal tax rate on long-term capital gains is 15 percent or 20 percent if you are in the 39.6 percent tax bracket. For people in the 10 percent and 15 percent tax brackets, the capital gains rate is 0 percent.

This may be a smart consideration for those who control their taxable income more easily in a given year (e.g. retirees) and are looking to sell an appreciated investment.

Planning Ahead for 2017

In addition to being aware of opportunities for deductions and tax credits, it’s important to be aware of the changes made to the IRS tax code annually. Below is a brief summary of the updates for 2017 to help you plan for taxes next year:

Standard Deduction

The standard deduction for married couples filing jointly is $12,700 for tax year 2017 (up from $12,600 in 2016). Single tax filers have standard deduction of $6,350 (up from $6,300 in 2016). Note that the personal exemption amount is $4,050 for tax year 2017, which is unchanged from 2016.

Tax Brackets

While the actual tax brackets have not changed, the income thresholds have. For example, the 25 percent tax bracket for a married couple filing jointly starts at $75,901 in tax year 2017 (up from $75,301 in 2016).

During this time of year, it’s always a good idea to be educated on the changes and look to the future as well, so you can easily plan for next year. We strongly suggest that you please consult your tax advisor for more information.


Investing in Bonds: Should Your Strategy Change in a Rising Rate Environment?

By Dan Savage, Senior Vice President and Senior Trust Officer

The wait is finally over! Just a few short weeks ago, the Fed increased the Fed Funds Rate for the first time in a year and only the second time since the onset of the financial crisis. That may leave you with a few questions:

  1. Why did the Fed raise rates by 25 basis points? The short answer is that the Fed now believes that U. S. economic growth and employment characteristics are sufficiently strong to warrant a rate increase.
  1. When will the Fed again raise rates and by how much? No one knows for sure, but most economists and financial analysts believe that it will be a gradual process over three or more years. One popular view is that 2017 will see two or three modest increases leading to a Fed Funds rate range of 1 to 1.25 percent by year-end. More importantly for investors, however, is the 10-Year Treasury, which has recently been trading around 2.5 percent. Many analysts predict little if any change over the next year.
  1. Should bond investors be concerned? Although rising rates can depress bond valuations and disturb equity markets, it’s not all bad news. The plus side is that rising rates are beneficial to long-term investors and savers over time. More importantly, as stated above, we believe that rate increases will be gradual. If true, this will help manage price volatility while offering slowly improving yields.
  1. What strategies might help make the best of this environment? First, remember why people typically include bonds in a portfolio: bonds provide stability when stock market volatility increases. Said differently, successful portfolio construction isn’t only about returns; rather, it’s also about diversification and downside protection. Second, don’t chase yield by excessively extending maturities. You can benefit by including short- and intermediate-term maturity exposure. Finally, laddering individual bonds (staggering their maturities) can be very beneficial when rates are still near historic lows. Yield-to-maturity is knowable and locked in at the time of purchase…provided the investor does not sell the bond prior to the maturity date.

In summary, focus on your overall investment goals and risk tolerance rather than on interest rates alone. Your exposure to bonds should be tailored to your personal financial goals in relation to your other investments. A seasoned Wealth Manager can help design your portfolio to accommodate changing economic circumstances.

Investment Products:

Are Not FDIC Insured | Are Not Bank Guaranteed | May Lose Value


The Power of Trusts

Mention trusts and most people automatically think of support for surviving spouses and education funding for children.  Good things to be sure, but a thoughtfully designed trust can do much more!  It can help ensure that money left for heirs will be constructively used…according to your wishes. 

Are your children mature?  All too often the answer is ‘not yet.’  One solution is to authorize your trustee to distribute income in its discretion and to couple that with principal distributions over a certain period of time…say ten or fifteen years.  This approach allows children to learn (and recover) from mistakes and gain sufficient maturity to handle larger sums at a future date. 

Are your children financially responsible?  Some adult children are destined to have debt and other financial issues throughout their lives.  Fortunately, spendthrift clauses can be put in place in order to protect them against creditors and wayward spouses.  A similar approach can be taken when substance abuse issues are present. 

Are there home ownership, charitable giving, or other important priorities?  Whether one or more of these apply to your situation, your trust can be crafted in a way to provide specific direction and guidance about when and why funds can be used. 

Is your child interested in mission or other types of humanitarian work?   Some adult children are strongly committed to these callings but find it challenging to adequately self-support.  Financial and family circumstances permitting, a well-written trust can be an excellent source of supplemental income.  

Are your children too well off for their own good?  Some parents fear that a looming inheritance may be a disincentive for children to become productive, responsible members of society.  Enter the incentive trust!  These are designed to permit distributions only when a beneficiary attains a certain income threshold.  Naturally, language can be included that makes exceptions for bona fide illness and disability. 

Is your child entrepreneurial?  If so, you can earmark money and authorize your trustee to make distributions to start a business once certain conditions or parameters are met.  

As you can see, a trust is a powerful, flexible estate-planning tool.  When well written, your trustee can act as a surrogate financial parent, thus able to care for your loved ones much as you might if still around. 

By conferring with a trust specialist and legal advisor, your wishes and objectives can be incorporated into your trust document.

What Is Your Game Plan?

If you are a business owner you have spent years accumulating knowledge about your market and how to tailor your business model to that ever changing demand.  It is certainly a consuming feat.

For years, as a small business owner, I am sure your goal was maintaining positive cash flow and a stable balance sheet.  Retirement probably seems like a distant speck on the horizon, maybe it hasn’t even been considered.  However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.  Is it for you?  When will it be time to sell?

We’ve all heard timing is everything, but often we become victims of time.  In fact, I would imagine one of the hardest aspects of owning a business is determining when the time is right…to get out.  Kin to selling any asset you are always better off selling at a high point of demand.

Have a game plan in place so you aren’t forced to execute a fire sale because you neglected to have a sound succession plan in place.

Here are some simple tips from a Madison area attorney on Business Succession Planning:

  •  Start Early – This allows you time to train successors and evaluate them, there is always the possibility things don’t work out as planned.  The goal in starting early is to obtain a gradual transition without notice.
  •  Define goals and objectives – This includes all goals including retirement and financial planning.  Goals for family and beneficiaries should be taken into consideration as well as other interested parties such as co-owners and key employees.
  •  Get input from outside advisors – By gathering input from outside advisors one gains objectivity, experience, and expertise including but not limited to legal, taxation, valuation and financial planning.
  • Identify desired successors – Whether it is a family member, key employee(s), or an investor group; identify the individual(s) who will be most likely to succeed.  Unless you are one of the few that will have the luxury of a cash buyout, it is important that your business continues to succeed after you relinquish management and ownership of the business.

One other thing I would like to make note of; I recently attended a seminar hosted by the Madison Estate Council and the speaker that evening touched on an all too often overlooked aspect of Succession Planning when it comes in the form of Family Business; and that is the emotional aspect of the transfer. 

The speaker, Shipra Seefeldt, the owner of Strategic Solutions Consulting; stressed conflicting values – “…values of the family are often in conflict with values of the business.  It is always important to consider the emotional transfers of wealth as well as the physical transfers of wealth.”

Family businesses add an additional challenge to the succession plan and as a business owner in the Dane County area, you have some excellent resources at your fingertips to build your multidisciplinary team including;

  •  Attorneys,
  • Financial Planners,
  • CPAs,
  • Family Business Consultants, etc.

 Tapping into some of these resources will help you tremendously during the development stage of your business succession plan.

Let us know if we can help guide you through the process.

Living Probate and You

Mention probate and most people automatically think of the court-supervised process of transferring property upon someone’s death.  Unfortunately, there’s another type of probate, known as living probate, that needs to be planned for and…avoided! 

Let’s take a few minutes to explore the fundamentals.

What is living probate?  Living probate is a court proceeding commonly known as a guardianship or conservatorship.   It occurs when a person becomes legally unable to manage his or her own affairs.  

How does it work?  As a general rule, a family member initiates the proceedings by formally petitioning the court, claiming that a parent or loved one is no longer competent and requesting the appointment of a guardian and conservator.  The court receives testimony and other evidence, often in a public forum, and makes a determination.  Typically, a conservator manages assets and handles financial matters while a guardian handles personal matters.  

What are the disadvantages of living probate?  Here are several: 

  • Living probate is public which often means that anyone can attend court and examine personal records.  This can be a significant source of embarrassment for the subject of the hearing and the family as a whole. 
  • Living probate is emotionally painful and difficult.  As noted above, a family member usually initiates a guardianship proceeding.  That, in and of itself, can be extremely difficult for the initiator;  moreover, it can lead to considerable resentment and conflict within the family. 
  • Living probate is expensive, since it’s a court procedure.  It should be noted that annual reports to the court are required, thus often necessitating accountant’s fees and so forth. 
  • Living probate is often frustrating and time consuming.  Although a conservator may have broad discretion in managing the ward’s assets, it may be necessary to secure court approval for certain actions or when dealing with other family members who strongly disagree and threaten litigation.  
  • Living probate can be very uncertain.  As a general rule, the court, after hearing considerable testimony and in its infinite wisdom, generally selects the family member it believes best suited to the task.  Unfortunately, that individual may be the LAST person on your list.  In other words, you will have zero control in determining who cares for you.  

How can one plan to avoid living probate?  Very simply, an individual can significantly reduce the odds of living probate by preparing a comprehensive estate plan.  It should contain the following documents: 

  • A funded revocable living trust:  This document normally defines what constitutes disability and allows your physician and a trusted family member to make that determination in private…without court intervention.  That same document identifies your ‘disability trustee’ who becomes responsible for managing your property.  If your property is in trust and managed by your disability trustee, there is no longer any need for a court proceeding.  
  • Financial power of attorney:  This individual is authorized by you to manage property held outside of your living trust (i.e. 401(k) account, IRA, annuities, etc.) or…to transfer property to the trust on your behalf when appropriate. 
  • Health care power of attorney:  Through this document you select and appoint a trusted individual to make medical decisions on your behalf when you are no longer able to do so. 

Disability and long-term-care insurances can and should be an important part of your ‘disability plan’.  In effect, they augment your planning documents and help ensure a more comfortable environment in the event of your disability. 

Remember…estate planning is an opportunity for you to take better control of your life by making important decisions in advance of any disability.  Take a few minutes to chat with your estate-planning attorney in order to ensure that your personal disability plan is adequate.

Off to a Great Start

The markets have treated investors well so far in 2012. Entering Friday, the Dow has increased over three percent, and the S&P 500 is up nearly five percent. Even the foreign markets are up so far, despite being the worst performer in 2011.

So why has January been so positive thus far? There are continued signs of a strengthening economy here in the United States. While we’re certainly not back to running on all cylinders yet, economic indicators are trending in the right direction. Even the long-battered housing markets are showing signs of life. Along with these positive trends domestically, we haven’t seen significant negative news out of Europe so far this year. Much of the market volatility at the end of 2011 was driven by declining economic situations abroad. While this is still one of the primary reasons for concern in 2012, there has yet to be a significant issue or problem that has rattled investors.

It is obviously too early to draw any conclusions from January’s performance, but the consistent upward movement this month is certainly a welcome respite from the volatility of 2011, even if only temporary. There are still serious issues in the European zone that will be a concern going forward, and we certainly would like to see the positive economic news continue in the U.S. before drawing any long-term conclusions about our domestic situation.

January is also a great time to review your financial situation and plan for the New Year if you have yet to do so. As always, your Wealth Manager/Financial Advisor will be happy to assist.

Can You Afford to Retire? Check Your Numbers…Again!

Plan for the worst…hope for the best!  These are wise words indeed, especially when it comes to planning for retirement. 

Many people do a reasonably good job preparing.  They engage the services of an advisor…analyze non-financial considerations as mentioned in our November 15th Blog…consider long-term care and disability issues…and work through a variety of financial projections.  Sounds good so far! 

Here’s the problem.  Many advisors (and their clients) rely on long-term investment performance assumptions that may no longer hold true.  Let’s take a closer look. 

According to Morningstar, the S&P 500 provided an average annual return of 9.9% between 1926 and 2010.  Bonds, as represented by the 5-year U. S. government bond, averaged 5.4% for the same period.  

Based on those numbers, here are compound annual returns for five different representative portfolios between 1926 and 2010: 

  • Portfolio 1 (100% stocks): 9.9%
  • Portfolio 2 (75% stocks/25% bonds): 9.1%
  • Portfolio 3 (50% stocks/50% bonds): 8.1%
  • Portfolio 4 (25% stocks/75% bonds): 6.8%
  • Portfolio 5 (100% bonds): 5.4%

For decades, these numbers appeared to be reasonable for long-term planning purposes. 

But…what happens to your plans if our reality has changed to one of lower returns and greater volatility?  Will you still be able to comfortably retire? 

To help address these questions, let’s examine the growth of a $200,000 IRA over the next ten years.  To keep the illustration simple, we’ll assume no additions or distributions during that time. 

Average Return                       Ending Balance

        2%                                         $243,799 

       4%                                         $296,049 

       6%                                         $358,170 

       8%                                         $431,785 

      10%                                        $518,748 

Again, this is a simplified example, but it clearly illustrates the impact of unfavorable average annual returns. 

Has our reality changed?  Will we experience lower returns over the longer-term?  Nobody knows.  That’s why…just in case…plan for the worst…hope for the best!  Call your advisor today. 

As Robert Burns wrote, “The best laid schemes of mice and men/Go oft awry.”