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The IRS just gave guidance that a “nondeductible” IRA may still be converted into a Roth IRA.  We have had our concerns that the new tax codes might have changed the IRS interpretation.

Until 1997, taxpayers over a certain level of income were no longer able to deduct their IRA contribution.  Many advisors thought that the rule was that the higher income earner could not open an IRA, which was incorrect. Note, that they were still able to make the contribution but simply lost the ability to deduct them.

Why would anyone open an IRA that they could not deduct?  Well, it still allowed tax-deferred growth after it was opened. It was a “tax-deferred annuity” that could be invested in any way that an IRA could be invested.  With the creation of a Roth IRA (1997) and the Roth conversion rules that developed afterward, the planning community spared no time in putting two and two together. Now we could convert the “excess” IRA contribution that had never been deducted into a Roth IRA. The future growth would be “tax-free” instead of “tax differed”.  Some refer to this as a “Back-Door Roth”. This allowed a way for Roth contribution for people who would previously not have been allowed to contribute.

With some of the changes in the new tax code, the planning community wondered if that ability had been forfeited.  The ruling came down in favor of allowing that to continue.

So, at least that part of the planning race is over until 2025!

The changes to the tax code have left bits and pieces like this for clarification that will take years to decipher.  Even grander in scope are new sections of the code like 199A, and new terms of art like “QBI” (Qualified Business Income) that will need to be further defined.  That endeavor will take so much time that several years of business returns will be filled without reliable guidance, so battles over letter audits will likely continue until 2025 and after.  Then, it all sunsets and goes away. We are back to the 2017 tax code. Right about the time we actually understand what we’re doing and reframe our business tax practices.

What should the Trump tax code be nicknamed?  “Finish Line 2025”!  Or, “The Constant Confusion of the American Taxpayer Act”.

So, if you have never used a tax planning firm in the past and have just used tax preparation firms, you may want to rethink that. If you need proof, consider that H&R Block just announced the closing of 400 offices and their stock has dropped significantly in value as a result.

“Plan Early and Plan Often!”™

Over-servicing a client happens on many occasions. More often than not, we’re talking about a longtime client who’s become friendly with your company and occasionally asks for additional tasks to be completed. Other times it can be about keeping a valuable name brand happy and bending over backward to keep them. Unfortunately, this is a drain on your company’s resources, and it could be forcing you to use far too many labor hours. In fact, several small tasks can turn into a significant amount of time if you’re not careful, and over-servicing costs can easily reach 500K/year.

That’s why it’s important to check to see if your firm is over-servicing any of your clients. After you’ve identified some of the clients with over-servicing problems, you can make the transition easier for your employees. No one wants to tell a friendly client that you can’t complete work for them, and sometimes it’s even harder to raise rates. But in order to keep your costs low, it must be done.

1. Reward Your Team for Not Over-Servicing

This ties into many of the points we’ll talk about in this article, but the end goal is to somehow reward your team for the extra “push-back” they’ll have to give towards the clients. Your teams are bound to build relationships with clients, so it makes sense that favors are done outside of contracts or previously agreed upon terms.

It’s tough to turn to a client of many years and state that there’s no way to complete the same tasks you’ve been giving away for awhile.

However, the idea of an incentive, such as a potential bonus, more vacation time, or even a small prize at the end of the month, reflects that you know how hard this process can be for employees.

2. Clarify to Clients How Over-Servicing May Be Hurting Their Businesses As Well

A great way to break the news about over-servicing to a client is to show information about how backing off on the relationship might benefit their company as well. For instance, you might have a phone tracking system which logs how long employees chat with clients. Consistently long conversations, or repeated calls for extra work, cut into your productivity. With that comes decreased productivity on your client’s end. Therefore, you might show the client that out of all of your clients, they take up most of the phone time, and backing off on so many calls would free up time for them as well.

3. Identify The Outliers

There’s a chance that many, if not all, of your clients are being over-serviced. However, the goal is to go for the big fish. Tap into your time tracking, phone records, analytics, and customer management systems to understand which clients require the most hand-holding. This develops a benchmark for when you check back in and see how well your efforts have been.

4. Negotiate Better Rates

Sometimes it’s tough to tell someone that you’re not going to be providing them as many services as you did before, especially if they’re accustomed to a certain level of support.

In this case, it may be better to raise rates for the same services. Consumers and clients have become used to pricing increases. Many companies do it. Think Amazon and Netflix. So, this gives you a chance to make more money and still provide the best service possible.

alright guys who's coming to happy hour meme

5. Or Develop a System for Better Efficiency

On the other hand, select clients will scoff at the idea of paying more money. These clients would rather you cut some of those extra services than cut into their margins. So, you can outline a system that makes your communications and services more efficient on your end, then explain the plan to the client.

6. Propose Trade-offs When Clients Ask for Extra Work

If you have an agreement, contract, or a list of services you offer for certain prices, explain to the client that the additional service or product isn’t included with their current package. Then, give them the option to either pay more money or trade out one of the services included in the contract. For instance, they might decide that they don’t need a logo designed, but would like additional website maintenance.

7. Implement Detailed Time Tracking

Time can be logged for all types of work and communications. The key here is to make the time tracking as detailed as possible. This way, you’re able to look at one (let’s say photography) client and see that your employees are spending an extraordinary amount of time making edits on photos, with not much time being spent on completing the jobs or actually taking new photos for the client. The right time tracker will make this abundantly clear and allow you to move resources in the most efficient way.

8. Raise Awareness at Weekly or Monthly Meetings

With time tracking, customer relationship management tools, and the tactics for backing off on over-servicing clients, your employees must know how to properly go about managing these situations. Therefore, you should hold regular meetings to check-in on which clients are still problems. These meetings also help for when you’re updating the process and your employees need to know.

Visit the original article by Brenda Barron at Clicktime.io.

Let’s say, you’re already contributing the maximum amount to your 401(k) and you’re wondering what else you could possibly do to save for a comfortable future or even early retirement?  What are your retirement options? Depending on your situation, there are several options.  Some are driven by your taxable income and others are not.

Retirement Option One:

The common option is a ROTH IRA.  But, that isn’t really new.  People have known about ROTHs for years.  This is a type of qualified savings account in which you deposit “after-tax” money, it grows tax-free and you are not taxed upon withdrawal.  Unlike your 401(k) or IRA (and others), you are never “required” to withdraw. You can also withdraw your basis prior to age 59 ½ with no penalty.  This is greatly simplified but covers the basics of a ROTH account.

Running the calculations to their conclusion, let’s say that a 40-year old put $500/month into a Roth until age 65 and earned 7% on the investment.  That would be 300 payments of $500 for a total of $150,000.  A couple of clicks on the old financial calculator and we find that this account would hold $405,000!  That’s absolutely awesome!

Most people become more conservative when they retire.  So, let’s assume a 5% ROI after age 65.  Also, this saver wants to start reaping the rewards of their 25-year savings plan by taking $30,000 in tax-free income from the account.  Nothing abnormal with this.  How long until the account spends to zero? This account carries to age 87 or a total of 22 years.

What happens after that?  They take a $30k/year pay cut! The account is exhausted.

Another Retirement Option:

What if there were another type of account that acted in a similar way, but with other benefits? Imagine depositing the same amount into this new account for the same period and actually having about 44% more tax-free income? Imagine that while this happens your account is subject to much lower risk!

Looking at the first ROTH account, can you imagine that if 2007/9 hit 2 years before you retired?  To recap that period:

  • The SPY (a good S&P measurement) peaked on 10/15/07 at 157.52
  • 17 months later, it bottomed at 67.73
  • Total loss, if you pulled out at the bottom, 57.13% OUCH!!
  • The SPY next passed 157 on 4/15/13
  • Your recovery time was just over 4 years

Assuming you bought and held, your $500k account would now be worth $214,989. There are other ways to grow the money without taking on that potential for loss.  There may be other potential benefits for you as well.  As they are very specific to you as an individual, I’m not going to go into that discussion in a broad forum like this.

Each of these options has a utility based upon the needs of the individual.  Each is a tool and some are better while others are worse.

Is the right tool in here?

The thing about tools is that you should always choose the right tool for the job! Contact us is you have any questions.

Remember:

“Plan Early and Plan Often!”™

Employee engagement is more than a buzzword.

Time and time again, studies have found that higher employee engagement rates contribute to greater productivity and with it, profitability. According to the Gallup State of the American Workplace Report, companies were indicated to also experience 37% less absenteeism and 90% less turnover.

So, why do so few small businesses invest in employee engagement? Three words: budget, budget, and budget. With limited resources, it’s easy to see why investing in employee engagement tends to dwell on the bottom of SMB to-do lists. But here’s the good news. There are many low-cost ways for small businesses to increase employee engagement, and with it, foster a happy and healthy work environment.

1. Host a Brown Bag Presentation

Often used for training or information sessions, a brown bag is an employee-hosted casual meeting during lunch with a short presentation on a topic that usually relates to the business. Participants bring their lunches, listen in, and ask questions. Learning from a fellow co-worker versus reading a 60-page PDF is certainly optimal, and far more memorable.

2. Take a Half Day and Hang Out

Friday is known to be the least productive day of the week. The work slows down, people slip off to happy hour, and slam their computers shut at 3:00. Once in a while, encourage a final boost of productivity by offering a half day and then afterwards getting the team together for an outdoor event. This can be anything from a picnic in the park to a department-vs-department sporting event to a relaxing barbeque where employees can invite friends and family.

3. Try to Complete an Escape Room

An escape room is a physical adventure game, where puzzles and riddles have to be solved using clues and other strategies to get from one room to another. Perfect for the small company, escape rooms are known for encouraging teamwork. Learning to communicate with each other and solve puzzles is a positive skill that is directly transferred to the workplace. Another plus is seeing how individuals think and come up with solutions so you know the best person to bring certain problems to.

4. Host Work Clubs

Ever notice how certain hobbies bring about like-minded people? There can be different work clubs for beer, fantasy football, improv, and more! They’re a great way to change the conversation from purely work to personal life, and offer an environment to develop friendships in. When co-workers are also friends, they’ll be more likely to help each other out at work, which makes working less stressful and more enjoyable. A workplace comprised of good friends consists of better communication and greater engagement as a whole, which means they’ll be sticking around for a while. The Society for Human Resources Management found that the more friends an employee has at work, the more likely they are to reject another job offer.

5. Make Onboarding and Learning Fun

Ever have a job where you’re told that the first few months are like drinking out of a firehose? It can be stressful to have to learn so much in such a short time. If you have a lot of new information for employees to learn, you can make things easier by gamifying the process. Whether you have unique terminology for your line of business, lots of stats, or case studies, there are all sorts of creative ways you can incentivize learning. Encourage competition and set up an afternoon trivia game between teams, or hand out personal quizzes and set a timer. (Don’t forget the prizes!) Once onboarding is finished, have your new employees present to the larger team to ensure they understand the rules, regulations, and processes at your business.

6. Ask for Feedback Often — and Act upon It

Everyone wants to be heard. This is as true in the office as it is anywhere. Make it clear that you care and want all feedback — the good, the bad, the ugly. Then actually do something. Let your team know what you are changing or implementing based on what feedback was received. Connecting the feedback to real change makes employees feel valued and appreciated. The smaller a business is, the fewer decision makers there are. To act in the majority’s best interest, bring your employees’ voices in to help make decisions. Send out surveys on which snacks they’d like, how to utilize a currently empty room, or which brown bag topic they’d like next. Knowing one is heard and respected provides a huge incentive to stay.

7. Promote Perks That Support Physical and Mental Health

As a small business, providing great care is expensive. It also eats away at other perks you could be offering, and when 4 out of 5 employees want benefits more than a pay raise, it’s time to get with the program. Try giving a stipend each month to go to exercise classes or see a nutritionist. Consider including employee benefits packages. Employees will love the perks, be more encouraged to make healthy decisions, and feel that you really care about their well-being. Healthy employees also need less sick time, get more done, and are generally happier!

8. Offer Healthy Snacks

More and more, employees are expecting snacks in the office. (I blame the millennials!) You can help everyone out by offering snacks that give your team energy without the sugar crash. No more digging into the receptionist’s candy bowl — make it a fruit bowl. Healthy food improves concentration, provides lasting energy, helps with digestion, and overall increases happiness levels. For snacks consider having avocados, blueberries, nuts, and other fruits to munch on.

9. Ongoing Training and Mentorship

Once onboarding is complete, that shouldn’t mark the end of learning. Employees who are consistently challenged are more engaged! Communicate with employees and find out who their mentors are. Make an effort to connect young employees with other mentors you know of to help them grow. This will help build solid work experience, and offer your employees a way to grow their skills, their network, and their careers.

10. Bring in Motivational Speakers

This idea may be skipped over more than it should be. Having a good motivational speaker can do wonders. Think about your favorite pep talk or an inspiring speech from your favorite movie. Goosebumps, right? You’d watch it on YouTube the night before your 5,000 word essay you haven’t started and bang it out. Now, imagine hearing one for real. It may sound cheesy, but motivational speakers can be genuinely inspiring, and a good story can reignite some fading embers and inspire your employees to reach farther and work harder.

11. Sip’n’paint Night Vs Hackathon (Creatives vs Brainiacs)

Know what employees appreciate? Choices. Have activities geared more toward right-brained individuals, and activities geared more toward left-brained individuals. Then, encourage full participation at both! Each event will have different stars of the show, and give others the opportunity to try something new. Add in a little wine, and those not holding a paintbrush or clicking away can mingle and chat with others.

12. Create a Comfortable Work Space

Think about it. When your back hurts, when the sun is too bright, when the coffee machine is broken — are you really thinking about work? Make sure your employees have all the supplies they need to feel comfortable and focus for longer periods of time. Keep snacks stocked, the AC at a reasonable level, and be willing to invest in good chairs and more. Making the office feel like the home office will increase productivity and satisfaction. If you could use a time tracker to see how many hours your team spends in the office, you would agree: It’s time for better chairs.

13. SWAG

Everyone has seen the company backpacks, fleeces, and water bottles. They’re useful, memorable, and pretty cool! It’s a great way to get the word out when others see them and ask about the company, and employees can feel company pride using them. Some kind of onboarding goodie bag is a treat, and having smaller knick knacks to give away such as bottle openers and stickers are also fun for employees. Never underestimate the value of SWAG, it really is something that employees talk about and want to have.

14. Performance-based Promotions

Retention, you say? Millennials are notorious for job hopping, staying at the same company between 18 months and 3 years. Giving promotions based on performance rather than tenure can motivate employees to stick around longer if they continue to advance. Emphasizing performance will encourage more consistent communication between leaders and employees, build trust, and strengthen mutual respect. These take time and dedication to achieve, something an engaged employee won’t want to lose so soon.

15. Freedom in the Office

In 1981, Adam Osborne invented the very first laptop, “Osborne 1”. With all the major technological advancements made to computers since, laptops are more portable and cheaper than ever before, and there should be no excuse as to why any employee shouldn’t have access to one. Being constrained to a desk for several consecutive hours has been shown to cause back pain, migraines, and dangerous blood clots. Instead, have employees freely move to rooms they can concentrate better in, stretch their legs throughout the day, and reap the benefits of a more productive, happy employee.

Investing in your employees’ happiness and education is the key to fostering employee engagement, and will ultimately benefit the both of you in the long term.

By Michelle Kiss.  See the original article at Clicktime.

People’s Opinions Matter

The talking heads on CNBC and some of the other more neutral media outlets are talking about the signs we are already seeing of increasing confidence in the economy from the tax cut. This is the highest level since November of 2000. People are starting to see a little more in their paychecks this week, which brings a nice warm feeling this time of year.   For many working Americans, even $30/paycheck can be the difference between eating out, buying a new shirt…or doing nothing!  We seem to have been fighting off a stock market correction since the lows of Feb 9th.  Many analysts believe that businesses have more money to feed the economy and resist the correction. Others are concerned about the possibility of up to 4 more increases in the Fed Rate.

The reason that we taxpayers need to do a self-check on the happiness scale is that the bad news has been so bad for so long that it doesn’t seem to get the attention it deserves these days. Things are getting better in the tax code, but if this doesn’t work….

What do we mean?

These tax cuts are a “bet” that we as a country are making.  The “bet” is that since we can’t seem to curb our spending at the federal level, we will be able to grow our way out of all of our government obligations through a larger tax base. The tax cut was $1.5 trillion.  At an average tax of 20%, we need to grow the economy $7.5 trillion to break even on the cut. The 2016 GDP was $18.624 trillion, meaning we need to grow the economy by 40.27% to break even. Ahh, the magic of numbers!  Only a politician can make those numbers meet.

However, we have other issues to compound this problem. We have 20+ trillion dollars in federal debt. Add the promised nearly 13 trillion dollars (some say more some say less) out in future Social Security obligations. Now, factor in another 25-40 trillion (again, some say more, some say less) in unfunded expected health care obligations through Medicare and Medicaid.   How much more do you think we will need to grow our income to cover all of this?

Does anyone else see a problem here?

What if you and your spouse maxed out all of your credit cards, applied for more credit cards and maxed those out as well? Then to fix this, borrowed money on your house with a balloon mortgage note, then borrowed money from your parents. Then you solve the problem by saying “We’ll reduce our revenue and hope for the best!”

Don’t misunderstand, stimulating the economy is a very good thing! Putting more spendable dollars in the hands of Americans will do just that.  The best solution would be to spend less at the same time we are achieving more growth, but that’s not looking possible with today’s political process.

Toss in the towel?

Should we all just toss in the towel and give up?  No, not at all.  Just look down the road to the finish line in 2025, when the tax cuts are expected to expire.  If we have paid down enough debt to solve these problems, or at least make them more manageable, we will all be happy!  However, if instead, we are still in the same spot or worse, it will be time to cut the leg off the patient to save his life.  What will that look like?  Possibly a drastic reduction in all welfare programs. Remember, Social Security, Medicare and Medicaid are essentially welfare. We could see increasing the Social Security retirement age to 70, 75, or 80?  End Medicare as we know it, move the enrollment age back 3-4 years, or make premiums 40% of income for everyone over 65?   No one believes these things would be allowed to happen.

I certainly do not believe politicians are capable of making hard decisions.

It will likely be more likely this. All 401K, IRA, 403B…any retirement plan or retirement savings will need to be taxed at the same rate they were when you deferred them with a minimum rate of, let’s say 20%.  This means no 0% tax, no 10% tax, and no 12% tax.  Those are all set to expire at finish line 2025 and go back to 2017 rates.

So, what should YOU do?

Granted, it’s all opinion.  One possible goal will be developing a plan to expose all of your pretax accounts to taxation in a strategic manner over the next several years and before the finish line is reached in 2025.  Then, when the next sweeping tax changes happen, you would have no pretax dollars left. You could have only “tax-free” dollars that have already been taxed by the government, and cannot be taxed again!  If you don’t get yourself to “no pretax money” before 2025, some guess that the US government will do it for you.

Go see a tax planner, today!

“Plan Early and Plan Often!”™

Tax Rule Changes

With regards to your tax, mortgage interest deduction is always claimed on schedule A of your federal return. So, the first observation is that many people will simply no longer get any value from their mortgage interest because the new standard deduction is twice as much as before.  In 2018, the new tax rule dictates that second mortgages and Home Equity Lines of Credit (HELOC) are no longer deductible.  When “HELOC” interest became deductible they were not so common and had smaller balances but over the last several years they have become a popular way to fund the giant college spending needs for many, and for others, they have become a popular way to finance vacation homes and even investment property.

So, what can you do to fix this problem?

First, relax! The changes are not necessarily going to mean an increase in taxes at all.  In fact, many people may see a lower tax bill because of the increased standard deduction.   However, anyone with a large amount of HELOC debt should sit down with a tax planner and look at alternatives.  People who used HELOCs to pay for college or are currently using it because they felt they would not qualify for student loans may now want to find a college planner and really try hard to find that kind of loan. Educational loans are still deductible on a part of the tax return that is not connected to schedule A. So you might still enjoy that deduction as well as the big increase in the standard deduction.  People who used it for investment property might go and seek out a commercial mortgage to replace the HELOC. Even with generally higher rates and closing costs it could be beneficial.  Moving the interest to a line expense on your Schedule E (investment property schedule) and off your Schedule A might more than make up for the cost associated with getting the new loan.

There are also many lesser-known but very smart bank products out there to replace both a traditional mortgage and HELOC and wrapping them into an “All in One Loan”. This is a primary mortgage and still fully deductible but also leaves HELOC like access to equity.  That access could be used for either investment, for college funding, or whatever you fancy.  More importantly, it applies payments to principle first, before interest, helping people to pay off a home potentially much faster than a traditional mortgage without making larger payments.   See http://www.aiosim.com/Simulator/GetStarted for additional information.

Lastly, the mortgage interest deduction is now limited to the first $750,000 in principal loan amount (it was previously a $1,000,000 limit).  That’s not a problem for people who had already established their mortgage before December of 2017. They are “grandfathered”.  Going forward, it is simply “buyer beware” that $750,000 is the new deduction limit.  If you can afford a million dollar plus home then you are likely smart enough to find a creative way to buy the mortgage down to $750,000 loan.  You could also take out two loans, one for $750,000 and another for the balance. The tax law does not prevent you from buying a 1.5 million dollar home. You simply cannot get a tax deduction for any mortgage above $750,000.

As I write this I can hear the wheels turning. UNDER NO CIRCUMSTANCES would it ever make sense to take money from pre-tax accounts like 401(k)s to pay down mortgages or fund refinances or purchases. The lack of a deduction would be a small penalty in comparison to the financial suicide of taking retirement money out while working.

So, what is the summary of the information dump above?  Go see a Tax Planner!

“Plan Early and Plan Often!”™

2018 Tax Changes

Like many people, I look hopefully at the New Year and all its potential.  The changes in the tax code are still not out in full detail. This is something the IRS has often done by year-end. Enough is out to safely say that one New Year’s resolution should be to change some old habits around both financial behavior and record keeping.

Structurally, many things remain the same.  There are still seven tax brackets! Where you land in those brackets will dictate how much of your income you will owe the government.  The numbers have changed from 10% to 12% and 15% to 22% but the standard deduction almost doubling for many will mean that although you might think, “I’m going from 10% to 12%, that’s more tax on me”, the end result might actually be less out of pocket.  There are also increases in child tax credits, so families in the lower brackets are likely going to get additional help. But, the personal exemption is gone.

There is no tax planning to be done at that level.  It will just have to play itself out and we will all settle into our new skin.

Table 1. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Single Filer
Current Law Tax Cuts and Jobs Act
10% $0-$9,525 10% $0-$9,525
15% $9,525-$38,700 12% $9,525-$38,700
25% $38,700-$93,700 22% $38,700-$82,500
28% $93,700-$195,450 24% $82,500-$157,500
33% $195,450-$424,950 32% $157,500-$200,000
35% $424,950-$426,700 35% $200,000-$500,000
39.6% $426,700+ 37% $500,000+

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Married Filing Jointly
Current Law Tax Cuts and Jobs Act
10% $0-$19,050 10% $0-$19,050
15% $19,050-$77,400 12%  $19,050-$77,400
25% $77,400-$156,150 22% $38,700-$165,000
28% $156,150-$237,950 24% $165,000-$315,000
33% $237,950-$424,950 32% $315,000-$400,000
35% $424,950-$480,050 35% $400,000-$600,000
39.6% $480,050+ 37% $600,000+

The changes for small business owners with pass-through income are very complicated! A deduction against pass-through income is tied to W-2 wages paid by the business. Since many businesses pay little or no W-2 wage, there may be some big disappointments. Many of us thought that the new pass-through deductions would save a lot in taxes.  To actually measure the real benefit for most will mean careful planning and likely an increase in W-2 wages paid, with the resulting additional payroll taxes being weighed against the lower tax rate to get a small targeted additional benefit at best.
Another potential major change is the loss of the ability to re-characterize, or “unroll” a Roth IRA conversion.  This change will not affect most taxpayers. But for those doing a strategic Roth conversion, the ability to unwind it later in the year was a safety valve against a mid-year income surprise. Now, most Roth conversions are likely to be done only in the last few weeks of each year in order to avoid this potential pitfall.  The weeks between Thanksgiving and Christmas have typically been among the quietest times in a financial advisor’s office, but they are now likely to be among the busiest!
But the bigger changes that are really going to matter are numerous.  Everyone is talking about the state, local and property tax deduction limit. This will affect many people in more expensive areas.  Home equity line loan interest is no longer deductible.  Many Americans have been trained by the tax code to use a HELOC for auto loans or for second homes. These accounts are much more flexible than a standard mortgage.  Many of those people are still above the new $24,000 standard deduction and may need to rethink their borrowing behavior. The risk for home equity loans is that most have a variable interest rate and we are in a rising rate environment.  The rate risk without the tax benefit may no longer be worth it!

You know the old saying:  Change is the only constant in life.  So, we can complain, be blindly excited only to be unpleasantly surprised later, or shrug it off as “Whatever, I’ll find out how I fare in 2019 when I file my 2018 taxes”.

Those who like to keep as much of their money as possible need to add time to a tax planner’s office to their New Year’s resolution list.  The alternative is to just hand that hard earned cash to the IRS.  Planning with a professional will be easier than losing weight. A “WIN” in the resolutions achieved column will feel great!

“Plan Early and Plan Often”™

Radio

Soon after the trick-or-treaters are done banging on your doors its time for fall wrap up. Remaining lawn chairs, storm windows, et cetera, are dealt with ahead of winter except for places here in the Southwest.  Here in Scottsdale, winter is just a nice break from the heat.  In 2016 we had 30 days of 110° or higher and average 110 days of 100° weather. Crazy, isn’t it?  But, for a majority of the country that lives in the Snowbelt, November means batten down the hatches. The same is true for finance and tax planning. Many people start looking at holiday shopping budgets and year-end projections to see if they are on target.  Tax 911 calls usually start in early December.

I’m going to talk about the most used tax planning concept in the month of November and December, charitable planning.  If you’re a regular contributor to charities, good for you. There are many ways to do this beyond simply writing a check to a charity and saying goodbye money.  Savvy investors often create “Donor Advised Funds” (DAF) with a financial planner.  It’s a simple subset of a 501c charity that allows you to name your fund. In many cases, you can control the investments inside your funds, or at least have some say, and then finally, make recommendations to the 501c about where to send that money.  The fund normally follows your recommendations. The only caveat is that the charity must qualify by IRS rules.

Here is an Example:  The Smiths give $10,000 a year to their church and several local charities that they care about.  Rather than simply writing those checks, Mr. and Mrs. “Smith” decide to use their own personal philanthropy as a learning experience to make sure their children understand the importance of giving. Perhaps planting the seeds so that their children don’t become too entitled.  They also asked their children what charities they would like to give to and why. Then, instead of giving money directly to their church and charities, the parents create the “Smith Donor-Advised Fund”.  They name themselves as the trustees of the funds, and their children are the successor trustees of the fund.

With a DAF, the family gets to name charities that it wants to donate to today. In addition, they state the purpose of their charitable giving as a guideline for the document and build in flexibility for the future. The trustee can add or subtract churches and charities. Therefore, if a charity stops needing funds because it’s endowed by another greater charity or it merges with another charity or for any other reason, they can instantly change recipients of the Fund.

Most likely, even though it’s been happening for years most children are truly unaware of the gravity of the size of the gifts that their families give. Soon they will be talking about the fact that they’ve started a permanent lifelong charitable foundation that will be in effect their entire lives and their children’s lives, and tell their children that someday they’ll be in charge of this charity and they’ll have to make the decisions that you’re making currently today.  The children can then help decide what types of charities to fund.

Here is the best part; the money put into the DAF will provide a tax deduction even though the actual gifting to the charities might not happen in the same calendar year.  A $10,000 deposit in the family Donor-Advised Fund gets treated as a $10,000 deduction on their schedule A in the year it is made.

Contributions can be many different types of assets:

  • Cash
  • Highly appreciated stock
  • Mutual Funds shares
  • Real Estate
  • Shares in privately held businesses

You potentially could contribute highly appreciated stock or real estate at its current value and get a deduction of up to 50% of your AGI in the year of donation while avoiding having to pay tax on the accumulated capital gains.  Imagine donating stock in which you originally invested $50,000 with a current value of $250,000.  You could get up to a $250,000 charitable deduction and avoid capital gain tax on $200,000 in accumulated capital gains.  This could be a significant tax windfall.

Much tax planning these next weeks will be charitable in nature. Talk to us about a Donor-Advised Fund that you can name, guide, and control the assets in, and take your family philanthropy to the next step.

Funding Home Health Care

There are a lot of potential options. Are you choosing the right one?

More of us find ourselves facing health care decisions for ourselves, our parents or loved ones regarding whether to provide assistance in the home or in a group facility.  About 40% of people reaching age 65 will eventually need Long-Term Care (LTC).  As you reach your mid-80’s the rate is much higher. A question you have to ask yourself is how you want to receive your care and how much control you want to have.  Funding home health care is critical to all of us!

As medical advances help us living significantly longer, more and more of us will find ourselves in a position that requires home health care.  This care can require either medical or non-medical assistance.  Medicare only covers short-term, prescribed home health care for certain services. Typically, after 100 days of Medicare assistance, you are required to pay your own way.  This is why many LTC Insurance policies have a 90-day deductible to prevent a lapse in coverage between potential Medicare coverage and self-coverage.

Non-medical care in Arizona averages over $22/hour.  To make the math simple, let’s assume a cost of $20/hour.  That equals $480 per day and $14,000 per month for full-time care.  If you are just wanting 4 hours per day it drops to a paltry $2,400 per month.  That is more than most house payments.

My goal with this writing is to discuss and inform on potential ways to fund home care.  In an effort to keep this of reasonable length, I’m only listing some of the pros and cons of each.  The decision on which is best for any situation is a personal one based upon each individual’s financial situation.  This is why I suggest you work with a financial advisor knowledgeable in all aspects of the topic.

A list of the major potential funding mechanisms and a non-exhaustive discussion of each follows:

  • LONG-TERM CARE INSURANCE

    (LTCi) can assist with these payments.  If you bought the policy since 2000 and if you need assistance with at least two ADL’s, it is likely that home health care is covered. It is unlikely that it can cover more than part of your costs.  The reason is that most coverages considered group setting rather than home care.  Group settings are much less expensive to provide assistance.  Regardless, only about 7.5% of care (of any kind) will be covered by insurance.  LTCi Statistics. Most benefits are tax-free as well.

    • This is a form of health insurance that is specific to LTC needs. If you have a policy and are deficient in 2 of 6 Activities of Daily Living or have dementia, these benefits will begin payout after the contractual deductible period.  Many modern policies pay for home care.  Many older policies do not pay for anything below a nursing level of care.  If you have a policy and it covers home care, you should use it immediately.  After years of the insurance company getting into your pocket, it makes no sense to “wait until later”.  This is the time to get into the insurance companies pocket! If you have this kind of insurance. Use it!
    • Benefits Modern policies can provide a significant benefit to supplement your home-care needs. Some policies have cost of living increases and can provide quite a nice monthly base against expenses. Also, in certain circumstances, a portion of your premium might be deductible.  Talk with your tax accountant.
    • Drawbacks: There will be a waiting period on the policy before it takes effect. Commonly 90 days, it could be quite a bit longer.  The policy may reimburse expenses or it might provide indemnity.  This could affect your payout.

If you do not have LTCi (and few do own policies) or your benefits have run out or the benefits do not fully cover your needs, you shall be funding the balance of care from your assets.  Assets refer to basically anything with a potential cash value.  Here is a list of common assets and information on how to use them wisely:

  • HOME

    Yes, your home is a countable asset in any calculation. There are a couple of potential ways to access this asset’s value.  One is to sell your home and move into an apartment or with relatives.  This could potentially fund care for many months. The second method would be a Reverse Mortgage.  With a reverse mortgage, you can either take a lump sum or monthly payments. Again, consulting a financial advisor with no direct benefit from the mortgage is a great option.

    • BENEFITS: A home is often a person’s largest asset and may represent your largest pool to draw upon.
    • DRAWBACKS: Selling your home defeats the purpose of having care delivered in the place you are most comfortable. While a reverse mortgage allows you to stay in your home, it doesn’t give you access to 100% of the value of your home.

  • SAVINGS

    This would include bank savings, CDs, collectibles, brokerage accounts, etc.  Generally, taxes have been paid on this money and after a “rate of return” analysis, we can determine exactly what you need to earn and fund care without drawing the account down.  Or, how long the accounts will last at your expected rate of expenditure.

    • If Mrs. Jones was earning 5% on her accounts and using $5,000 a month for home care, she would need at least $1,200,000 in her accounts to fund care from her earnings alone. If that $1.2 is in CD’s at 1% the calculation obviously changes. She will be spending the corpus of her accounts at $4,000/month in the beginning. Remember, the cost of care increases over time.
    • Under the same scenario, if Mrs. Jones only had $400,000, her savings would be exhausted in 97 months or just over 8 years.
    • BENEFITS: You remain in control. If nothing changes the outcomes are easily calculated and the financial advisor knows the rate of return required to protect both the client and their accounts.  Also, this money would have already been taxed and not require extra money for taxes be withdrawn to meet your monthly needs.
    • DRAWBACKS: If you do not have enough money in the beginning, it requires an unreasonable rate of return to protect the account and client.  This will put you into a spend-down of your accounts and possibly into Medicaid at some point. Believe me, you do not want to have yourself or a loved one in Medicaid if it can be avoided.
  • IRA’S AND OTHER QUALIFIED ACCOUNTS 

    These accounts can be held in any of the account types listed under savings. The difference is that this money has never been taxed and will be upon withdrawal from the account.  As with the previous example, a “rate of return” analysis should be conducted to determine the necessary return required to meet your needs.

    • BENEFITS: This is often a great place to withdraw money for care. If care is medically necessary, it should be at least partially deductible on your federal and state returns.  Because of this, your taxes owed may be offset by medical expenses.  This can be quite positive for heirs if there will be an estate remaining.  It is much better to inherit a regular savings account than an IRA.
    • DRAWBACKS: If your expenses are under 10% of your adjusted gross income, there is not going to be a federal deduction.
  • ANNUITIES

    Annuities can be either qualified or non-qualified. As a contract between you and the insurance company, they each have different rules, but they also have commonality.

    • Living Benefits are an income benefit that pays for either a period or guaranteed for your life. Some are a “withdraw” benefit and others require annuitization. Each contract is different and should be analyzed by a professional.
    • Critical Care Benefits are benefits (usually a rider) that can be applied if you go into care. Each has a different value and triggering mechanism. When triggered, these often allow you greater free access to your principal. Some require only ADL’s and others require that you are moved into outside care.  Again, evaluation by a professional is your safest route.
    • ANNUITIZATION is in effect the creation of a pension with your annuity assets. You give your asset to the insurance company and the insurance company guarantees you a payout (pension) for either a period of years, life or joint lives.  Contact an advisor for your best choice and to be given further explanation.
  • LIFE INSURANCE WITH LTC BENEFITS

    A few companies have designed life insurance products around a LTCi base.

    • Pure LTC  based universal life policies guarantee you a base amount of both life insurance and LTC insurance.  You are usually guaranteed your full premium back at death (life insurance) and a leveraged amount for LTC that goes up over time.  These are complex and mostly based upon age, sex of the applicant and time that passes between purchase and use.
    • Rider base LTC policies are very common.  They allow access to a portion of your death benefit for LTC purposes.  An example might be 2% of the death benefit per month until the policy is exhausted in about 50 months.  These are a good way to hedge a death benefit against potentially needing care. Many of these are good for home care.
  • ALTERNATIVE INSURANCE BENEFITS

    • LTC Annuities are annuities that leverage your annuity deposit. Each one is different, but most pay the LTC benefit at a stated monthly rate over a stated period.  Example: $1500 per month for 36 months.  Many contracts increase the rate of payout the longer you have your money held in the annuity.
    • LTC Annuity Benefits are a particular benefit that might double your annuity payout during the time you are in care for between 5 years and life.
    • Life Insurance Critical Care Benefits. Some life insurance policies are designed to fund LTC from early withdrawals from the death benefit and others are designed specifically to be LTC vehicles. Either is a great source of LTC funds.
  • LONG-TERM LIFE CARE BENEFITS

    • These benefits are relatively new to the long-term care arena. Life Care Benefits are benefits gained from selling your life insurance policy (either term policies or whole life) to a company that deposits the purchase price into an escrow account held in your name. This account can only be used to pay for LTC needs.  You will have to talk with a specialist.

I cannot reiterate enough that it is critical for you to work with a skilled and knowledgeable advisor.  One with experience in all aspects of creating LTC income and who understands your goals and needs.  The analysis is one of funding mechanisms, not selling products.

You should never call an insurance company without the assistance of a professional.  You may believe that you are asking the correct question, but often you are not.  Because of liability, the company will answer the question you ask rather than guide you to the questions you should ask.

Feel free to contact me and I should be able to put you in touch with a specialist in your area.

Plan Early and Plan Often™

Funding Home Health Care

There are a lot of potential options. Are you choosing the right one?

More of us find ourselves facing health care decisions for ourselves, our parents or loved ones regarding whether to provide assistance in the home or in a group facility.  About 40% of people reaching age 65 will eventually need Long-Term Care (LTC).  As you reach your mid-80’s the rate is much higher. A question you have to ask yourself is how you want to receive your care and how much control you want to have.  Funding home health care is critical to all of us!

As medical advances help us living significantly longer, more and more of us will find ourselves in a position that requires home health care.  This care can require either medical or non-medical assistance.  Medicare only covers short-term, prescribed home health care for certain services. Typically, after 100 days of Medicare assistance, you are required to pay your own way.  This is why many LTC Insurance policies have a 90-day deductible to prevent a lapse in coverage between potential Medicare coverage and self-coverage.

Non-medical care in Arizona averages over $22/hour.  To make the math simple, let’s assume a cost of $20/hour.  That equals $480 per day and $14,000 per month for full-time care.  If you are just wanting 4 hours per day it drops to a paltry $2,400 per month.  That is more than most house payments.

My goal with this writing is to discuss and inform on potential ways to fund home care.  In an effort to keep this of reasonable length, I’m only listing some of the pros and cons of each.  The decision on which is best for any situation is a personal one based upon each individual’s financial situation.  This is why I suggest you work with a financial advisor knowledgeable in all aspects of the topic.

A list of the major potential funding mechanisms and a non-exhaustive discussion of each follows:

  • LONG-TERM CARE INSURANCE

    (LTCi) can assist with these payments.  If you bought the policy since 2000 and if you need assistance with at least two ADL’s, it is likely that home health care is covered. It is unlikely that it can cover more than part of your costs.  The reason is that most coverages considered group setting rather than home care.  Group settings are much less expensive to provide assistance.  Regardless, only about 7.5% of care (of any kind) will be covered by insurance.  LTCi Statistics. Most benefits are tax-free as well.

    • This is a form of health insurance that is specific to LTC needs. If you have a policy and are deficient in 2 of 6 Activities of Daily Living or have dementia, these benefits will begin payout after the contractual deductible period.  Many modern policies pay for home care.  Many older policies do not pay for anything below a nursing level of care.  If you have a policy and it covers home care, you should use it immediately.  After years of the insurance company getting into your pocket, it makes no sense to “wait until later”.  This is the time to get into the insurance companies pocket! If you have this kind of insurance. Use it!
    • Benefits Modern policies can provide a significant benefit to supplement your home-care needs. Some policies have cost of living increases and can provide quite a nice monthly base against expenses. Also, in certain circumstances, a portion of your premium might be deductible.  Talk with your tax accountant.
    • Drawbacks: There will be a waiting period on the policy before it takes effect. Commonly 90 days, it could be quite a bit longer.  The policy may reimburse expenses or it might provide indemnity.  This could affect your payout.

If you do not have LTCi (and few do own policies) or your benefits have run out or the benefits do not fully cover your needs, you shall be funding the balance of care from your assets.  Assets refer to basically anything with a potential cash value.  Here is a list of common assets and information on how to use them wisely:

  • HOME

    Yes, your home is a countable asset in any calculation. There are a couple of potential ways to access this asset’s value.  One is to sell your home and move into an apartment or with relatives.  This could potentially fund care for many months. The second method would be a Reverse Mortgage.  With a reverse mortgage, you can either take a lump sum or monthly payments. Again, consulting a financial advisor with no direct benefit from the mortgage is a great option.

    • BENEFITS: A home is often a person’s largest asset and may represent your largest pool to draw upon.
    • DRAWBACKS: Selling your home defeats the purpose of having care delivered in the place you are most comfortable. While a reverse mortgage allows you to stay in your home, it doesn’t give you access to 100% of the value of your home.

  • SAVINGS

    This would include bank savings, CDs, collectibles, brokerage accounts, etc.  Generally, taxes have been paid on this money and after a “rate of return” analysis, we can determine exactly what you need to earn and fund care without drawing the account down.  Or, how long the accounts will last at your expected rate of expenditure.

    • If Mrs. Jones was earning 5% on her accounts and using $5,000 a month for home care, she would need at least $1,200,000 in her accounts to fund care from her earnings alone. If that $1.2 is in CD’s at 1% the calculation obviously changes. She will be spending the corpus of her accounts at $4,000/month in the beginning. Remember, the cost of care increases over time.
    • Under the same scenario, if Mrs. Jones only had $400,000, her savings would be exhausted in 97 months or just over 8 years.
    • BENEFITS: You remain in control. If nothing changes the outcomes are easily calculated and the financial advisor knows the rate of return required to protect both the client and their accounts.  Also, this money would have already been taxed and not require extra money for taxes be withdrawn to meet your monthly needs.
    • DRAWBACKS: If you do not have enough money in the beginning, it requires an unreasonable rate of return to protect the account and client.  This will put you into a spend-down of your accounts and possibly into Medicaid at some point. Believe me, you do not want to have yourself or a loved one in Medicaid if it can be avoided.
  • IRA’S AND OTHER QUALIFIED ACCOUNTS 

    These accounts can be held in any of the account types listed under savings. The difference is that this money has never been taxed and will be upon withdrawal from the account.  As with the previous example, a “rate of return” analysis should be conducted to determine the necessary return required to meet your needs.

    • BENEFITS: This is often a great place to withdraw money for care. If care is medically necessary, it should be at least partially deductible on your federal and state returns.  Because of this, your taxes owed may be offset by medical expenses.  This can be quite positive for heirs if there will be an estate remaining.  It is much better to inherit a regular savings account than an IRA.
    • DRAWBACKS: If your expenses are under 10% of your adjusted gross income, there is not going to be a federal deduction.
  • ANNUITIES

    Annuities can be either qualified or non-qualified. As a contract between you and the insurance company, they each have different rules, but they also have commonality.

    • Living Benefits are an income benefit that pays for either a period or guaranteed for your life. Some are a “withdraw” benefit and others require annuitization. Each contract is different and should be analyzed by a professional.
    • Critical Care Benefits are benefits (usually a rider) that can be applied if you go into care. Each has a different value and triggering mechanism. When triggered, these often allow you greater free access to your principal. Some require only ADL’s and others require that you are moved into outside care.  Again, evaluation by a professional is your safest route.
    • ANNUITIZATION is in effect the creation of a pension with your annuity assets. You give your asset to the insurance company and the insurance company guarantees you a payout (pension) for either a period of years, life or joint lives.  Contact an advisor for your best choice and to be given further explanation.
  • LIFE INSURANCE WITH LTC BENEFITS

    A few companies have designed life insurance products around a LTCi base.

    • Pure LTC  based universal life policies guarantee you a base amount of both life insurance and LTC insurance.  You are usually guaranteed your full premium back at death (life insurance) and a leveraged amount for LTC that goes up over time.  These are complex and mostly based upon age, sex of the applicant and time that passes between purchase and use.
    • Rider base LTC policies are very common.  They allow access to a portion of your death benefit for LTC purposes.  An example might be 2% of the death benefit per month until the policy is exhausted in about 50 months.  These are a good way to hedge a death benefit against potentially needing care. Many of these are good for home care.
  • ALTERNATIVE INSURANCE BENEFITS

    • LTC Annuities are annuities that leverage your annuity deposit. Each one is different, but most pay the LTC benefit at a stated monthly rate over a stated period.  Example: $1500 per month for 36 months.  Many contracts increase the rate of payout the longer you have your money held in the annuity.
    • LTC Annuity Benefits are a particular benefit that might double your annuity payout during the time you are in care for between 5 years and life.
    • Life Insurance Critical Care Benefits. Some life insurance policies are designed to fund LTC from early withdrawals from the death benefit and others are designed specifically to be LTC vehicles. Either is a great source of LTC funds.
  • LONG-TERM LIFE CARE BENEFITS

    • These benefits are relatively new to the long-term care arena. Life Care Benefits are benefits gained from selling your life insurance policy (either term policies or whole life) to a company that deposits the purchase price into an escrow account held in your name. This account can only be used to pay for LTC needs.  You will have to talk with a specialist.

I cannot reiterate enough that it is critical for you to work with a skilled and knowledgeable advisor.  One with experience in all aspects of creating LTC income and who understands your goals and needs.  The analysis is one of funding mechanisms, not selling products.

You should never call an insurance company without the assistance of a professional.  You may believe that you are asking the correct question, but often you are not.  Because of liability, the company will answer the question you ask rather than guide you to the questions you should ask.

Feel free to contact me and I should be able to put you in touch with a specialist in your area.

Plan Early and Plan Often™

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