Tag: Tax Planning

Year-End Charitable Giving

December 21, 2023
Charitable Giving

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help increase your gift.

Assume you want to make a charitable gift of $1,000. One way to potentially enhance the gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). Your deduction for gifts to charity is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your AGI, depending on the type of property you give and the type of organization to which you contribute. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

Make sure to retain proper substantiation of your charitable contributions. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of the year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

A word of caution

When making charitable contributions, be sure to deal with recognized charities and be wary of charities with names that sound similar to reputable charitable organizations. It is common for scam artists to impersonate reputable charities using bogus websites as well as misleading email, phone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax Exempt Organization Search tool. And remember, don’t send cash; contribute by check or credit card.

GivingTuesday, a day for charitable giving, is held annually on the Tuesday after Thanksgiving. In 2023, GivingTuesday is November 28.

To learn more about CapSouth and how we help please visit https://capsouthwm.com/what-we-do/

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Retirement Planning: Before and After

July 24, 2023
Guidance, Retirement, Retirement Planning, Wealth Management

Working with clients, I often find that retirement planning can be an ambiguous idea for many, with numerous factors and circumstances to consider, when many of us are just trying to get through the next year…or even the next week! We plan for retirement because we know that we likely do not want to have to work forever, and we know that there are steps we should be taking now when time is on our side to ready ourselves for that freedom of “making work optional”.

Once clients reach retirement, there is still often a significant change of thought process. I often get questions from clients… “What do we do now? How do we convert our accumulated assets into monthly spendable income?

With your input, we endeavor to devise a plan that puts you on the road to financial security. The result is designed to leave you with sufficient assets so you can maintain your desired lifestyle or pursue new interests that you may develop in retirement.

We can help you with the numbers. But first, let’s ask some basic open-ended questions.

What are your values?
How do you feel about money?
What goals do you have for retirement?
When would you like to retire? Full retirement or change of employment with reduced income for a time?
What would you like to do in retirement?
How would you spend your days?
Do you enjoy traveling?
What are your hobbies?
Do you want to stay in your home or are you considering a smaller place?
Would you like to live in a different location?
Would you move closer to family or kids?
Or would you choose a location based on climate or quality of life?

Your goals are your goals. They are not mine. They are not your family members’ goals, and they are not your friends’ goals. Your personal values and goals play a big role in your retirement planning picture.

BEFORE RETIREMENT (Already retired? You can skip ahead or read anyway and tell your friends!)

Retirement sounds great, but can’t we balance those savings with enjoying today as well? Yes, and we should! Here are some general retirement planning guidelines:

Set aside six months of expenses in an emergency fund. While skyrocketing interest rates have hampered stock market performance over the last year, savers can currently earn 5% or more risk-free. We’d be happy to point you in the right direction.
Save up to 15% of your income in your company’s 401k. If zero to 15 in one paycheck leaves you short of breath, start small and ratchet it up over time. You won’t miss the cash. But if it turns out that 15% is too difficult or interferes with other financial goals, at least always capture your company’s match. It’s free money! Why leave any behind?
Build a “Life Account”. Make sure your savings are not solely in your retirement account. “Life” will likely happen prior to you reaching age 59 ½. Build a comfortable level of funds in a taxable investment account that you can access without tax penalties when needed prior to retirement age.
Get out of debt. This includes student loans, credit cards, and auto debt. We can talk about whether you should try to pay down your mortgage in a timelier manner…it depends.
Max out IRA/Roth IRA and HSA. Consider fully funding an IRA or Roth IRA account and max out your health savings account if it’s offered as a part of your health coverage.
Are you 50 or older? If so, consider catch-up contributions for retirement savings. For an IRA, you may contribute up to $7,500 in tax year 2023. The 401(k) contribution limit for 2023 is $22,500 for employees. If you’re 50 or older, you’re eligible for an additional $7,500 in catch-up contributions.
Diversify within asset classes and among asset classes. When you are young, a diversified portfolio that leans heavily on the equity side of the allocation is probably your best choice. Dollar-cost averaging through regular contributions allows you to take advantage of market dips. As you near retirement, you will likely want to gradually reduce risk by shifting to fixed income investments and reducing your exposure to stocks.
Leave room for fun. It is certainly important to set goals and to make a plan to achieve those goals. It is also important to live a little! Saving everything and living on sardines alone is not fun for most of us. Retirement planning allows us to put our savings into perspective and to know where we want to go and what it will take to get there. Once we have that picture, we can evaluate the tradeoffs of saving more and retiring earlier or spending more in retirement, or retiring later and being able to spend more either now or in retirement. I believe there can be freedom in a healthy balance between saving for the future and enjoying life now. It really is all about a personal plan to challenge you to define and to live your One Best Financial Life®.

AFTER RETIREMENT

Our retirement planning work is not done just because we reached that long-awaited goal of retirement! The direction of our work and our questions pivot to maximizing this period of your life.

There are many factors that can derail your retirement picture – investment risk, inflation risk, catastrophic illness, long-term care, and taxes to name some. A comprehensive retirement planning process should account for stress testing these obstacles to provide confidence in the probability of your success under these scenarios.

Below are some general concepts to evaluate during this period of life:

Think of retirement in phases. Our ability to enjoy our retirement years often wanes over time due to our health. This is sometimes referred to as your go-go years, your slow-go years, and your no-go years. You may decide that you want to continue to work part-time in the early years of retirement. You may want a larger travel budget that reduces over time.
Increase your reserve fund. While six months’ expenses may be an adequate emergency fund during working years, you may want to extend that to a year’s worth of expenses during retirement. This comfort level is certainly different for each client, however the objective is to not have to liquidate funds in a down market. This consideration will also factor into recommendations of investment allocations across various accounts or “buckets” of money.
Systematize and Keep It Simple. We generally recommend evaluating your regular living expenses and your current income sources, and then setting up an automatic, once per month transfer from an investment account to your checking account for the difference. For you, there is still a systematic income each month that resembles the paycheck you received prior to retirement. Your overall investment allocation can be set up so that the account those transfers are coming from is invested with about a year’s worth of funds at a conservative risk level. This account is then replenished periodically from other accounts based on market conditions and tax strategies. The goal is for you to be able to enjoy life, and for us to manage that income flow for you.
Consider Social Security carefully. Various timing strategies are available for claiming Social Security benefits. Many times clients are eager to begin drawing their benefits as soon as they can – after all, they have been paying into them for years. However, claiming early can have significant impacts on your total benefit. Though you can begin drawing at age 62, you will receive a reduction of 5/9^th of one percent for each month you draw earlier than your full retirement age (FRA) up to 36 months, and 5/12^th of one percent for each month thereafter. For example, drawing at age 62 when your FRA is age 67 will result in about a 30% reduction in your benefit. Delaying Social Security after your FRA has benefits worth considering. You receive a guaranteed 8% increase for each year you defer your benefit from your FRA to your age 70. This is in addition to any cost of living adjustment. For married couples, the timing of Social Security claiming is of particular importance for the spouse with the higher benefit amount. After the death of the first spouse, the surviving spouse will get the higher of the two benefits. The lower benefit amount will then cease. It is also of note that a divorced individual who was married to their previous spouse for more than ten years has the right to claim on the former spouse’s benefit without affecting the former spouse’s personal benefit. When should you file? The answer will depend on your specific circumstances and the greater context of your financial plan, including the consideration of your health and family longevity. A greater Social Security benefit is helpful if you or your spouse are alive to receive it.
Don’t Forget Taxes. Tax planning is arguably more important than ever in retirement. The timing and order of withdrawals from various types of accounts can have significant tax consequences – negative and positive. For clients with no concern over beneficiaries, maybe withdrawing from taxable accounts first, then tax-deferred, and finally tax-free accounts is best. However, even in this example, consideration should be given to current and future tax rates and brackets, and the impact of Medicare IRMAA charges and Social Security taxation on a surviving spouse. Clients who expect to leave funds to their children or other heirs should add particular consideration to substantially appreciated assets that might be better held and passed at death to obtain the step-up in basis for the heirs. Roth conversions can be utilized to take advantage of lower income years or lower tax rates, moving assets from tax-deferred to tax-free growth going forward. Charitable goals can increase the benefit of sound charitable planning. Utilization of batched giving, a donor advised fund, or maintaining tax deferred funds for future qualified charitable distributions after age 70 ½ are some valuable strategies that may apply.
Remember that your plan knows about those dollars, too. Clients sometimes mention spending accumulated funds held in outside accounts on splurge purchases with a comment like, “But those were from my funds in my other account.” Or, “those funds came from the sale of that investment property I had”. It is very important to remember that your plan has likely accounted for those funds, too.

When building a client’s plan, we discuss various resources including retirement accounts, pension incomes, rental property, private investments, etc. Sometimes those income sources are for limited periods, or they might come in as a one-time future infusion of income. Your plan factors these income sources in, as well as the growth on those assets once received, to fund your current and future retirement goals.

Inflation can have a significant impact on your retirement expenses over time. The longer a retirement period, the greater the impact. By the time that the long-term care need occurs, the cost will likely be much greater than you might think. The cost of your current lifestyle will likely cost substantially more twenty years from now. Funding those future goals generally requires growth of your assets over time.

It is easy to think of your current expenses and to get too comfortable with those being covered by part-time income, short-term or level pension amounts, etc. It is important, though, to have a comprehensive retirement plan that keeps everything in perspective and to remember that your plan is counting on those excess funds received to be invested in accordance with long-term investment allocation.

There are no easy roads, but a disciplined approach to retirement planning that emphasizes consistent savings, a modest lifestyle based on your income, and minimal debt should serve you well as you travel the road toward financial security and retirement. A sound financial plan also provides freedom. Once you know you have your bases covered for retirement, you can feel more free to enjoy life now as well.

If you have questions about any of these concepts or how they might apply to your situation, please reach out to me or your CapSouth advisor.

To learn more about CapSouth Wealth Management visit our website at https://capsouthwm.com/what-we-do/or Connect With Us to learn more about our process.

By: Scott F. McDowall, CFP®

IRA Strategy #1

March 10, 2022
Uncategorized

The 50/50 Minimum Strategy: Maintain 50% of your 401(k) and IRA money in Roth accounts

Why pay taxes today when you can postpone them until years later? The obvious answer is to delay paying taxes as long as possible. But sometimes the obvious answer is not the best answer. Let’s consider several assumptions that support the 50/50 Minimum Strategy.

First, if one invests the money that would have gone to taxes, it should compound over time and the total investments, less the eventual taxes to be paid, would potentially be greater than the amount of the Roth conversion, plus earnings. The problem with this is most people will not diligently invest the money that would have gone to pay the tax. It is more easily spent in the normal household budget. And even if it were invested, the potential to keep it invested over a long period of time is dependent on many variables.

Second is the assumption that a person’s income will be lower in retirement. This is true for many taxpayers. However, many of our clients remain in a high tax bracket after retirement. This is especially true if one has large IRA balances that require minimum distributions combined with large investment accounts that create capital gains.

Third is the assumption that tax rates will remain relatively stable over time. This is the most dangerous assumption. Congress has the power to change the tax rates at any time and with the skyrocketing budget and related government debt, it appears likely that tax rates will be higher in the future. So, even if one’s income is lower, the tax rate could be higher.

How high could tax rates go? The following chart provides a history of the highest marginal tax rate for 1944 through 2022 for married couples filing jointly:

Years Highest Marginal Rate# Taxable Income Over#

1944 through 1951 91% $200,000 (1950)

1952 through 1953 92% $300,000 (1953)

1954 through 1963 91% $300,000 (1958)

1964 77% $200,000 (1964)

1965 through 1981 70% $180,000 (1974)

1982 through 1986 50% $108,300 (1984)

1987 38.5% $80,000 (1987)

1988 through 1990 28% (Bubble Rate 33%) $78,400 (1988)

1991 through 1992 31% $70,450 (1991)

1993 through 2000 39.6% $288,350 (2000)

2001 39.1% $297,350 (2001)

2002 38.6%$ $307,050(2002)

2003 through 2012 35% $388,350 (2012)

2013 through 2017 39.6% $444,550 (2017)

2018 through 2022 37.0% $647,850 (2022)

# Rate for Married Couples Filing Jointly

Information provided by The Tax Foundation, Washington, DC. 20005

The strategy that we have continued to recommend to most of our clients is to approach retirement with a minimum of 50% of their IRA and 401(k) assets held in Roth accounts. With this approach, an investor takes a balanced approach to the payment of taxes. Pay taxes at the rates in effect now on the Roth contributions and conversion amounts while delaying the taxes on the non-Roth portion of their deferrals or contributions. If we err on one side or the other, we prefer to convert more of the retirement assets and pay the taxes at today’s rates as opposed to leaving these assets subject to whatever future rate Congress enacts.

If a client is charitably minded, we do not recommend converting ALL your IRA assets. The preferred use of a portion of your IRA assets is to process Qualified Charitable Distributions (QCD) with the pre-tax IRA assets. After age 70.5, taxpayers may donate money directly from their IRA to qualified charities utilizing the QCD provisions. The annual limit on QCD donations is currently $100,000.

ACTION: Consider adopting the strategy of working towards a minimum Roth balance of 50% of your total retirement assets by your retirement date. Work with your financial advisor to determine if you should convert a higher percentage.

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 to schedule an appointment to speak with an advisor.

By: Donald P. Bolden, CFP®, CLU & Lewis Robinson, CPA

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.