Tax Planning

SECURE 2.0 Act Cliff Notes (So You Don’t Have to Read the Whole Thing)

SECURE 2.0 Act Cliff Notes

On December 29, 2022, President Biden signed into law a $1.7 trillion spending package, which includes the SECURE 2.0 Act, legislation that changes the rules on saving for retirement and emergencies and withdrawals from retirement plans. The good news is that it opens up opportunities to save more and expands on tax benefits for Roth IRAs and 401(k) plans.

Many of the SECURE 2.0 Act’s provisions take effect on January 1, 2023, while others may take years to implement. Here’s a summary of key provisions in the SECURE 2.0 Act and how they may affect your retirement savings goals.

If you are a client of Curtis Financial Planning, we will discuss these changes as they pertain to your situation, ensuring that you maximize every opportunity.

Changes to Required Minimum Distributions (RMDs)

For those who need to be made aware, this is when you must take withdrawals from your retirement accounts, even if you don’t need the extra income. The IRS wants to collect the deferred tax on these funds. (Remember that Roth IRAs don’t have RMDs, but all other IRAs and retirement accounts do).

The changes:

  • Raises the RMD age to 73 for those who turn 73 between 2023 and 2032. In 2033 and beyond, the RMD age will increase to 75. (Unfortunately, if you turned 72 in 2022 or earlier, you must keep taking RMDs).
  • Reduces the IRS’s 50% penalty for failing to satisfy your RMD before the year-end deadline to 25% of the RMD amount. The liability falls to 10% if an individual corrects the discrepancy promptly.
  • Roth accounts in employer retirement plans (such as Roth 401k’s) will be exempt from RMDs beginning in 2024. Nothing changes for individual Roth IRAs that have no RMD requirement.

Increases to Catch-Up Contributions per the SECURE 2.0 Act

Catch-up contributions aim to help older people make up for not saving enough earlier in their lives in their IRAs or company retirement plans.

  • Currently, if you’re 50 or older and are allowed to contribute to a 401(k) plan at work, in 2022, you can put in up to $6,500 more than younger people. Starting in 2025, individuals between the ages of 60 and 63 can make annual catch-up contributions of up to $10,000 to a workplace plan. This amount will be indexed to inflation.
  • Beginning in 2024, the IRA catch-up contribution amount for those 50 and older will be indexed to inflation. Currently, the maximum catch-up is $1000.00 and has been stagnant.
  • If your wage income exceeds $145,000 in the previous calendar year, you’ll need to make catch-up contributions to a Roth account in after-tax dollars. Those earning less than $145,000 are exempt from this requirement. The impact of this change is that you will not get a tax deduction for the catch-up contribution as you did with an traditional IRA, but the Roth contribution will grow tax-free.

Employer Matching for Roth Retirement Accounts

Employers can now offer employees the option of receiving matching and non-elective contributions to their Roth retirement accounts. Note that profit-sharing contributions do not qualify. The employer will get a tax deduction, but the employee must pay taxes on these employer contributions.

Changes to Qualified Charitable Distributions (QCDs)

  • Currently, IRA owners can transfer up to $100,000 each year to a charity as a QCD. This $100,000 will now be indexed for inflation.
  • There is now a one-time maximum $50,000 QCD distribution to a charitable remainder trust (CRUT), charitable annuity trust (CRAT) or charitable gift annuity (CGA). However, with the $50,000 limit the administrative costs to set this up may be prohibitive.

Self-Employed Plan Changes

Sole proprietors can now open up new 401(k) plans for the prior year up until the filing deadline (NOT including extensions) instead of year-end. But as before, self-employed can make contributions up to the extended filing date.

More Flexibility for 529 Plan Balances

The IRS will allow direct transfers from 529 plans (open for at least 15 years) to Roth IRAs starting in 2024. The Roth IRA must be in the name of the beneficiary of the 529 plan. The maximum lifetime transfer is $35,000 and is subject to annual IRA contribution limits. The IRS is working out the details on how to interpret this law.

Key Provisions for Younger Retirement Savers

  • Beginning in 2025, employers offering new 401(k) and 403(b) plans must automatically enroll eligible employees at an initial contribution rate of 3%. In addition, employees with low-balance retirement accounts may also have the option to automatically transfer their balance to a new plan when they change jobs.
  • Starting in 2024, employers can add a Roth emergency savings account option to employer plans such as 401(k)s. Non-highly compensated employees can contribute up to $2,500 annually, and their first four withdrawals per calendar year will be tax-free and penalty-free.
  • Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf.

Help for Part-Time Workers per the SECURE 2.0 Act

Currently, if you are a part-time worker at an employer with a 401(k) plan you can only contribute once you work there for at least 500 hours a year for three years or if you work for over 1000 hours for one year. The new rules will reduce the threshold to 500 hours a year for two years starting in 2025.

Changes for S Corp Owners

Owners of S Corporation stock may take advantage of like-kind exchange non-recognition treatment for their sales to an ESOP, beginning in 2028.

The SECURE 2.0 Act: Bottom Line

This is not an exhaustive list of the provisions, but I chose to write about those that pertain to most people. Also, now that Congress has passed the act, the IRS will provide details on how they will interpret some of the provisions, as clarifications are almost always necessary with a bill as far-reaching as this one.

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Clean Energy Tax Credits: What to Know Before You Buy

Inflation Reduction Act & Clean Energy Tax Credits

The Inflation Reduction Act introduces several clean energy tax credits and rebates that may benefit environmentally conscious taxpayers.

As a California-based financial advisor who works primarily with women, I frequently have conversations with clients about socially and environmentally responsible investment strategies. But with the recent passage of the Inflation Reduction Act, many environmentally conscious investors are seeking new ways to put their values into action while potentially benefiting financially in the process.

If you’re considering making climate friendly upgrades to your home or vehicles, you may be eligible to claim thousands of dollars in potential tax credits and rebates. However, before purchasing a rooftop solar panel or electric vehicle, it’s important to understand the various clean energy incentives available—and how to use them to your advantage.

Clean Vehicle Credits

The Inflation Reduction Act extends the Clean Vehicle Credit through 2032. It also introduces new credits for purchasing used electric vehicles.

Specifically, if you buy a new electric vehicle (EV), you may be eligible for a tax credit worth up to $7,500. For a used EV, your tax credit may be worth 30% of the purchase price or $4,000, whichever is less. You may also qualify for additional incentives from state and local governments, depending on where you live.  The caveat is that the new credits don’t go into effect until 2023. So, if you’re planning to purchase a used electric vehicle, you’ll likely want to wait until after the new year to maximize your potential tax benefit. 

For new EV purchases, it’s a little more complicated. If you purchase a new EV in 2022, the Inflation Reduction Act stipulates that the final assembly of the vehicle must take place in North America. However, purchases of General Motors and Tesla car models aren’t eligible for a tax credit until 2023.

Car manufacturers must also meet two battery-related requirements for consumers to receive the full credit in 2023 and beyond. That means some EVs won’t immediately qualify for a tax break as manufacturers work to meet these rules.

Lastly, beginning in 2024, car buyers can transfer their tax credit to dealers at the point of sale. That way it directly reduces the purchase price. This can be particularly valuable for two reasons:

  • First, you won’t have to wait until you file your tax return to benefit financially.
  • In addition, transferring the credit to the dealer at the point of sale ensures you’ll receive the full benefit since the credit amount can’t exceed your tax liability. Meaning, if you owe $6,000 in taxes for the 2023 tax year and take the Clean Vehicle Credit worth $7,500, you lose the remaining $1,500.

Keep in mind there are new adjusted gross income (AGI) thresholds to be eligible for a new EV tax credit. In 2023, the AGI limit is $150,000 for single taxpayers and $300,000 for married couples filing jointly.  

Residential Clean Energy Credit

The Residential Energy Efficient Property Credit was previously set to expire at the end of 2023. Now the Residential Clean Energy Credit, the Inflation Reduction Act extends it through 2034 and increases the credit amount, with a percentage phaseout in the final two years.

The Residential Clean Energy Credit is a 30% tax credit that applies to installation of solar panels and other equipment that makes use of renewable energy through 2032. The percentage falls to 26% in 2033 and 22% in 2034.

In addition, the credit is retroactive to the beginning of 2022. That means if you install a solar panel or similar equipment this year, you can qualify for the 30% tax credit on your 2022 tax return.

Energy Efficient Home Improvement Credit

The Inflation Reduction Act also extends the Nonbusiness Energy Property Credit and renames it the Energy Efficient Home Improvement Credit.

This is a 30% tax credit on the cost of eligible home improvements, worth up to $1,200 per year (as opposed to the previous $500 lifetime limit). The annual cap jumps to $2,000 for heat pumps, heat pump water heaters, and biomass stoves and boilers. In addition, roofing will no longer qualify for a tax credit.

Specifically, the annual tax credit limits for qualifying improvements are as follows:

  • $150 for home energy audits
  • $250 for any exterior door (up to $500 total) that meet applicable Energy Star requirements
  • $600 for exterior windows and skylights that meet applicable Energy Star requirements
  • $600 for other energy property, including electric panels and certain related equipment

The enhanced credit is available for projects you complete between January 1, 2023 and December 31, 2033, with some exceptions. Any projects you finish in 2022 aren’t eligible for new incentives. However, if you incur costs in 2022 for a project that you complete in 2023, these costs can count towards your tax break.

Additional Financial Incentives for Investing in Clean Energy  

Finally, the Inflation Reduction Act creates two rebate programs to incentivize clean energy and efficiency projects. Unlike many clean energy tax credits, these rebates are offered at the point of sale. Thus, consumers can reap the financial benefit immediately.

The HOMES rebate is worth up to $8,000 for consumers who make energy efficient upgrades to their homes—for example, HVAC installations. Ultimately, the rebate amount depends on the amount of energy you save and household income.

Meanwhile, the High-Efficiency Electric Home Rebate Program offers taxpayers up to $14,000 for buying energy efficient electrical appliances. This rebate is only available to lower income households, and the rebate amount varies by appliance.

The timeline for these rebates to go into effect is less clear than the three tax credits mentioned above. Many experts believe they won’t be broadly available to taxpayers until the second half of 2023 as the Energy Department issues rules governing the programs.

How to Invest in Clean Energy Strategically

The Inflation Reduction Act creates a variety of financial incentives for taxpayers to invest in clean energy and energy-efficient projects. Those who take advantage of these clean energy tax credits and rebates can potentially save thousands on their taxes while doing their part to fight climate change.

However, to maximize these incentives, it’s important to time them correctly and use their constraints to your advantage. A trusted financial advisor like Curtis Financial Planning can help you incorporate these purchases and investments into your financial plan, so you can reap the greatest benefit. We invite you to connect with us to find out more.

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7 End-of-Year Tax Planning Tips for 2022

End of Year Tax Planning Tips for 2022

With the end of the year fast approaching, Tax Season may be the last thing on your mind. Yet in many ways, the final months of 2022 may be your last chance to reduce this year’s tax liability. To avoid overpaying Uncle Sam and preserve more of your hard-earned income, consider the following end-of-year tax planning tips for 2022.

To minimize your tax liability, consider these end-of-year tax planning tips for 2022:

Tip #1: Identify Changes to Your Tax Situation

In 2022, the standard deduction is $12,950 for single filers and $25,900 for married taxpayers filing jointly. The standard rule of thumb is if you can deduct more than the standard deduction amount in eligible expenses from your taxable income, you should itemize. Otherwise, it’s generally easier and more valuable to take the standard deduction. 

If your income and circumstances have been relatively stable since last year, you likely know already if you plan to itemize or take the standard deduction this year. However, if you’re on the fence, there are end-of-year tax planning strategies you can utilize to reduce your taxable burden.

For instance, consider pre-paying certain deductible expenses—for example, charitable donations or out-of-pocket medical expenses—this year so that itemizing makes more sense.

Let’s say you plan to donate $5,000 to charity each year for the next several years. If you have extra cash on hand this year, you may want to consider donating $10,000 or more to your charity of choice so you can itemize your deductible expenses. Then, next year, you can skip your regular donation and take the standard deduction.

The same is true for out-of-pocket medical expenses. If you know you have certain expenses looming for 2023, you can pay them this year to make the most of the associated tax benefit.

Tip #2: Harvest Capital Losses

Capital gains taxes can eat away at your investment returns over time—specifically in non-qualified investment accounts. Fortunately, the IRS allows investors to offset realized capital gains with realized losses from other investments.

That means you can realize profits on your top-performing investments while selling poor performers to reduce this year’s tax bill. If you have substantial losses, you may be able to completely offset your gains and potentially reduce your taxable income. And in years like 2022 when markets have struggled, you may have more losses than you think.

Keep in mind if you work with a financial advisor, you may not need to initiate this strategy on your own. Most fiduciary financial planners proactively take advantage of tax-loss harvesting to help clients with end-of-year tax planning.

Tip #3: Review Your Charitable Giving Plan

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on this year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. In addition, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

When it comes to end-of-year tax planning, donor-advised funds (DAFs) can provide opportunities to meaningfully reduce your tax liability relative to other giving strategies. For example, if you plan to donate $10,000 each year to your favorite charitable organization, it may be more beneficial to take the standard deduction when you file your taxes.

On the other hand, you can front-load a donation of $50,000 to a donor-advised fund and request that the DAF distribute funds to your chosen charity each year for five years. In year one, you can receive a more favorable tax break by itemizing on your tax return. Meanwhile, you’ll still be meeting your charitable goals each year via the DAF. This strategy can be particularly beneficial in above-average income years.

And better yet, you can donate non-cash assets like highly appreciated stock to a DAF and avoid paying the capital gains tax. This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill. Plus, you can take an immediate deduction for the full value of the donation (subject to IRS limits).

Tip #4: Look for Opportunities to Reduce Income

Maxing out your qualified investment account contributions is indeed important for meeting your future financial goals like retirement. However, this can also be a valuable end-of-year tax planning strategy.  

First, be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans for 2022. You can also contribute up to $6,000 to an individual retirement account in 2022 (or $7,000 if you’re age 50 or over).  

In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA). An HSA can be a great way to save and grow your money on a tax-advantaged basis.

In fact, these accounts offer triple tax savings. Contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses. And like qualified retirement accounts, you can deduct your contributions from your taxable income in most cases to reduce your overall tax liability.

Meanwhile, depending on your compensation plan, you may want to consider deferring part of your income to reduce your taxable income in 2022.

Employees with deferred compensation agreements typically pay taxes on the money when they receive it—not as they earn it. That means if your employer pays you a lump sum per your distribution agreement, you could potentially get hit with a hefty tax bill.

There are different ways to structure income from a deferred compensation plan. Your options typically depend on your agreement with your employer. The distribution schedule can usually be found in your plan documents. So, if you haven’t reviewed your plan details recently, you may want to revisit them during end-of-year tax planning to avoid any surprises.

Tip #5: Take Advantage of Lower Income Years and/or Down Markets with a Roth Conversion

The IRS allows individuals to convert a traditional IRA to a Roth IRA via a Roth conversion. A Roth IRA conversion shifts your tax liability to the present. As a result, you avoid paying taxes on withdrawals in the future. In addition, Roth IRAs don’t require minimum distributions.

With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate. That’s why it can be a particularly powerful end-of-year tax planning strategy in tax years when your income is below average.

At the same time, a down market can be an opportune time to take advantage of a Roth conversion. Since account values typically decline in a negative market environment, so does the amount on which you pay taxes when converting to a Roth. Meanwhile, there’s greater potential for future appreciation and withdrawals that tax-free.

After you convert your traditional IRA to a Roth, any withdrawals you make in retirement will be tax-free. However, you must be over age 59 ½ and satisfy the five-year rule. And since Roth IRAs don’t have RMDs, you can leave your funds to grow tax-free until you need them.

While Roth conversions can be beneficial for many, they don’t make sense for everyone. Be sure to consult with a trusted financial advisor or tax expert before leveraging this strategy.

Tip #6: Strategically Transfer Wealth

If you expect to leave significant wealth to your heirs, proper estate planning is key. Fortunately, there are end-of-year tax planning strategies you can leverage to help minimize your estate’s potential tax burden.  

In many cases, gifting is one of the simplest ways to efficiently transfer wealth while reducing your estate. Each year, the annual gift-tax exclusion allows you to gift a certain amount (up to $16,000 in 2022) to as many people as you like without incurring the federal gift tax. Moreover, spouses can combine the annual exclusion to double the amount they can gift tax-free.  

Indeed, cash gifts are most common. However, you can also use the annual exclusion to transfer personal property or contribute to a 529 college savings plan. Alternatively, the IRS allows you to pay educational and medical expenses on behalf of someone else without incurring federal taxes. However, you must pay the institution directly.   

Trusts can also help you transfer wealth strategically while reducing your family’s taxable burden. However, trusts are varied and complex. It’s important to consult your financial planner or estate planning attorney to determine if a trust may be an appropriate end-of-year tax planning strategy.

Tip #7: Donate Your Required Minimum Distribution (RMD)

To keep people from using retirement accounts to avoid paying taxes, the IRS requires individuals to begin taking minimum distributions from certain qualified accounts once they reach a certain age. As of 2020, required minimum distributions (RMDs) kick in at age 72.

You can withdraw more than your RMD amount in any given year—but be prepared for the potential tax consequences. On the other hand, the IRS imposes a penalty of up to 50% if you fail to take your full RMD before the deadline.

Both scenarios can be costly. Fortunately, careful end-of-year tax planning can help you manage your RMDs to avoid high taxes and other penalties.

For example, if you don’t need the extra income, you can donate your RMD to charity. This is a tax planning strategy called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year.

QCDs can satisfy all or part of your RMD each year, depending on your income needs. You can also donate more than your RMD amount up to the $100,000 limit. And since QCDs are non-taxable, they don’t increase your taxable income like RMDs do.

It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your requirement. If you take advantage of this tax planning strategy, be sure to make the QCD before making any other withdrawals from your account.

For More End-of-Year Tax Planning Tips, Consult a Trusted Financial Advisor

This isn’t an exhaustive list of end-of-year tax planning strategies. However, these tips can help you determine if there are opportunities to reduce your taxable burden in 2022.  At the same time, a trusted financial advisor or tax expert can help you identify which strategies are right for you within the context of your overall financial plan.

To learn more about how Curtis Financial Planning helps our clients take control of their finances, please explore our services and client onboarding process.

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How Will Student Loan Forgiveness Affect You?

Student Loan Forgiveness

After months of discussion and debate, President Biden announced on August 24, 2022 that many federal student loan borrowers will be eligible for some type of debt forgiveness. Those who didn’t receive a Pell Grant may be eligible for up to $10,000 in forgiveness. Meanwhile, Pell Grant recipients may see as much as $20,000 of debt forgiven.

President Biden’s student loan forgiveness plan comes as welcome news to many Americans drowning in debt. Yet many—voters and politicians alike—oppose the program.

In fact, many Republican leaders are threatening legal challenges in an effort to block the bill. If this happens, the plan’s future may be in jeopardy.

Nevertheless, borrowers who are eligible for student loan forgiveness should be prepared to take advantage of the program if and when it begins. Here’s what you need to know about Biden’s student loan forgiveness program, including how it works and how it may benefit you.

What’s Included in Biden’s Student Loan Debt Relief Plan?

The Student Loan Debt Relieve plan forgives $10,000 of student loan debt for federal student loan borrowers. In addition, borrows who received a Pell Grant may be eligible for up to $20,000 in student loan forgiveness.

The plan also includes:

  • An additional (and possibly final) extension on federal student loan payments until December 31, 2022
  • A push for borrowers who may be eligible for the Public Service Loan Forgiveness Waiver (PSLF) to apply for the waiver before it expires on October 31, 2022
  • The creation of a new income-driven repayment plan (IDR) that would lower monthly payments and potentially reduce the time period required for loan forgiveness for eligible borrowers.

Who’s Eligible for Student Loan Forgiveness?

To be eligible for forgiveness, borrowers’ income levels must be under $125,000 for single borrowers and $250,000 for married couples and head of household filers. Borrowers may use their 2020 and 2021 tax returns to determine their income. They only need to meet the income requirements in one of these tax years.

In addition, only Federal loans funded by June 30, 2002 are eligible for forgiveness. This includes consolidated debt.

Federal loans for graduate school are also eligible for forgiveness, as are Parent Plus Loans. However, if a parent has more than one Parent Plus Loan for multiple children, they’re only eligible for total forgiveness up to $10,000.

Current students are also eligible for student loan forgiveness if they have debt. But if the student is a dependent of their parents, the parents’ income will determine eligibility for forgiveness.

Lastly, it’s important to emphasize that student loan forgiveness only applies to federal loans. Borrowers who refinanced their student loans with a private lender cannot take advantage of the program.

What Do Borrowers Need to Do?

Some parts of the student loan forgiveness plan will go into effect automatically. For example, many borrowers with IDR plans who have already recertified their income with the US Education Department will be eligible for loan forgiveness automatically.

Meanwhile, other aspects of the plan may require borrowers to take more action. One example applies to borrowers who made payments on their student loans since the start of the Covid-19 pandemic.

Since the government paused federal student loan payments in March 2020, borrowers can request a refund of any payments they made after that date. This makes most sense if a borrower’s loan balance is less than $10,000, and a refund would allow those payments to be forgiven instead.

Is Student Loan Forgiveness Taxable?

Thanks to the American Rescue Plan Act of 2021, most student debt discharged through 2025 will be tax-free—at least at the federal level. At the state level, income tax consequences will vary by state.

Currently, 13 states may treat forgiven student loan debt as taxable income. These states include Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.

The Tax Foundation estimates that borrowers could incur anywhere from $300 to over $1,000 in state taxes, depending on where they live, if they receive the full $10,000 in student loan forgiveness. These figures could double for Pell Grant recipients, since they’re eligible to receive up to $20,000 in student loan forgiveness.

Planning Considerations for Those Who Haven’t Filed a 2021 Tax Return Yet

Indeed, most taxpayers have already filed their 2020 and 2021 tax returns. However, if you filed an extension for your 2021 return, there are a few strategies you may be able to leverage to help you qualify for student loan forgiveness.

  • First, consider contributing to an eligible retirement plan if you haven’t reached your contribution limit yet. This strategy makes sense is the contribution is enough to reduce your AGI to a level that’s eligible for forgiveness.
  • Income thresholds for married couples filing separately are still unclear. However, if the thresholds for single filers apply to married couples filing separately, you may want to see if changing your filing status will help you qualify for forgiveness.

As you consider these strategies, keep in mind that the extension deadline is October 17, 2022.

Student Loan Forgiveness: Next Steps

The forgiveness process will be relatively easy for most borrowers. For example, federal student loan borrowers already have income information on file with the US Department of Education. Thus, those who are eligible are likely to receive forgiveness automatically.

Of course, there are still many unknowns, including how a potential challenge by Republicans will affect student loan forgiveness. In any event, the official application should be available soon. The U.S. Department of Education sent out a notice recently that it could be available as soon as early October, 2022.  In the meantime, eligible borrowers can receive updates from the Department of Education by signing up here.

Lastly, a trusted financial advisor can help you better understand how student loan forgiveness may impact your financial plan. They can also help you identify other strategies to pay down your debt and reach your financial goals.

To learn more about how Curtis Financial Planning helps our clients take control of their finances, please explore our services and client onboarding process.

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Strategic Charitable Giving: How to Make an Impact with Your Donations While Minimizing Your Tax Bill

Strategic Charitable Giving

Americans are some of the most generous people in the world. In 2021, Americans gave over $484 billion to charity, according to Giving USA’s 2021 Annual Report. More impressive is that individuals represent 67% of total giving, giving nearly $327 billion in 2021.

There are many reasons to give to charity, from feeling good to creating a legacy. Yet charitable giving can also be important from a financial planning perspective.

In this article, I’m sharing three charitable giving strategies to help you minimize your year-end tax bill.

Charitable Giving and Your Taxes

First, let’s review how charitable giving impacts your taxes.

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on that year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. In addition, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

You need to know your marginal tax rate to calculate your potential tax savings. Your marginal tax rate is the amount of additional tax you pay for every additional dollar earned as income. So if your marginal tax rate is 28% and you itemize, you’ll save roughly 28 cents for every dollar you give to charity.

How to Make a Bigger Tax Impact With Your Giving

Yes, you can write checks to your favorite charities throughout the year, and while your donations may be generous, this approach to giving isn’t the most tax-efficient. Here are some ways to give that are:

#1: Donor-Advised Funds

One of the most efficient ways individuals can donate to charity is through a donor-advised fund (DAF). A DAF is a registered 501(c)(3) organization that can accept cash donations, appreciated securities, and other non-cash assets.

One of the advantages of a DAF is that you can take a taxable deduction in the year you contribute to it, even if you haven’t decided which charities to support. You can then invest and grow your funds tax-free within your DAF until you decide how to distribute them.

And, even better than donating cash, you can donate non-cash assets like highly appreciated stock to a DAF and avoid paying the capital gains tax. This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill. Plus, you can take an immediate deduction for the full value of the donation (subject to IRS limits).

#2: Bunching Charitable Donations

Bunching your charitable donations can be beneficial if your total allowable itemized deductions are just under the standard deduction. In 2022, the standard deduction for single taxpayers is $12,950 and $25,900 for married couples.

Example:

Let’s say you give $3000 a year to charity, and it doesn’t get you over the standard deduction amount. However, you could go over the standard deduction if you “bunched” your charitable contributions into one year. For example, in 2022, if you gave $9000 instead of $3000 you could itemize deductions and save tax dollars. Then, you would skip donating in the next two years and go back to the standard deduction. Then, in the third year, you would donate $9000 again.

The result will be more significant tax savings over multiple-year timeframes.

#3: Qualified Charitable Contributions

If you’re age 72 or older and have a traditional IRA, the IRS requires you to take a minimum distribution (RMD) from your account each year. In most cases, RMDs are taxable at your ordinary income tax rate. There’s also a steep penalty for not taking your RMD before the deadline.

Meanwhile, if you have other sources of income like Social Security benefits and possibly a pension, your RMD can push you into a higher tax bracket. That means you may pay more taxes than you would otherwise, even if you don’t need the extra income.

The good news is you can donate your RMD by making a Qualified Charitable Distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year and avoid taxation on the amount.

A QCD can satisfy all or part of your RMD, depending on your income needs. You can also donate more than your RMD, so long as you stay below the $100,000 limit. This strategy can be helpful if you want to reduce your IRA balance and RMDs in future years.

It’s important to note that the IRS considers the first dollars from an IRA to be your RMD until you take the total amount. So, make your QCD before you take any other withdrawals from your account if you want to realize the full tax benefit of this charitable giving strategy.

A Trusted Financial Advisor Can Help You Incorporate Charitable Giving Strategies into Your Financial Plan

Of course, this is not a comprehensive list of charitable giving strategies that can help you make a bigger impact with your donations while lowering your tax bill. Other giving and tax planning strategies may be more appropriate depending on your circumstances and goals.

A trusted advisor like Curtis Financial Planning can help you incorporate giving strategies into your financial plan, so you don’t miss out on valuable tax benefits. Please start here to learn more about how we help our clients and the other services we provide.

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Returning 2020 RMD’s To Avoid Taxation – New IRS Notice

One of the March 27, 2020 CARES Act’s key provisions was to waive the requirement to take Required Minimum Distributions (RMD’s) in 2020. This waiver is good news for retirees who don’t need the money but have to withdraw and pay taxes anyway. However, some people take their RMD, part or in whole early in the year, or take it as a monthly distribution starting in January. At first, it appeared that these early-birds did not catch the worm in this case, because they didn’t avoid the tax on this income.

Good News
The IRS must have heard the groans from the early-bird RMD takers (and their financial advisors and accountants) because they have modified the rules several times since the original provision passed into law.

The Fix
On June 25th, the IRS issued a notice that fixes all the confusion for those who took RMDs earlier. The Notice says that all RMDs taken in 2020 can now be rolled back into the IRA. These rollovers need to be completed by the latest, August 31st of 2020 – including RMD’s taken in January, received as monthly distributions that may be more than 60 days old, and any RMDs withdrawn by beneficiaries.

How Do You Return Them?

With most custodians, you can do a rollover electronically. Or call and find out what the correct steps to take. If you have a financial advisor, they can do it for you.

Documentation: Best Practice

To prevent any problems later, be sure to document these transactions. Take notes and put them in your 2020 tax file, save a copy of your statement that reflects the transactions. Lastly, don’t forget to tell your tax accountant about the rollover so you don’t pay unnecessary tax.

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CARES Act Review Part II: Retirement Account Provisions

Photo Credit: Kelly Sikkema, Unsplash

There are several retirement account provisions in the CARES ACT meant to reduce your tax liability or help with current cash flow or both. Here are the details:

1. RMD-REQUIRED MINIMUM DISTRIBUTIONS

You don’t have to take your RMD (Required Minimum Distribution) for 2020, whether it be from an IRA (regular, Simple, SEP), inherited IRA, 401(k) plans, 403(b) plans or 457(b) plans.

PLANNING TIP: If you already withdrew your RMD for 2020, and the withdrawal has been within 60 days, you can redeposit it to your account and avoid tax. If a distribution was taken more than 60 days ago and you can qualify for the coronavirus-related distribution (described below) you can redeposit it and avoid tax. Note: Non-spouse inherited IRA beneficiaries cannot redeposit the withdrawal. 

2CORONAVIRUS DISTRIBUTIONS FROM RETIREMENT ACCOUNTS  – new more tax-friendly rules 

For 2020, the 10% penalty will be waived for taking an early distribution from your IRA or employer plan. Previously, distributions before the age of 59 1/2 incurred a 10% penalty in addition to tax owed (with a few hardship withdrawal exceptions).

  • The distribution can be up to $100,000
  • It must be taken in 2020
  • The income is spread over 3 years for tax purposes unless you proactively elect to include it all in 2020
  • Beginning on the day after receipt of a Coronavirus-related distribution, an individual has up to three years to repay the amount as qualified rollover distribution (in one or multiple payments). Any distribution going back to January 1, 2020 qualifies

PLANNING TIP:  If you elect to take a distribution, it may be beneficial to include the entire distribution in 2020 if you expect your income to significantly decline in 2020 and be higher in future years).​​​​​​

PLANNING TIP: In a perfect world, withdrawing from retirement accounts early should be a last resort. These accounts get tax-deferral benefits to incentivize us to save for our future non-earning years. The compounding that happens when the money is left to grow tax-deferred is invaluable in building a nest egg. However, keeping that caution in mind, these are challenging times and the loosening up of these rules may be very helpful to many people. The good news is that there is a way to pay it back and avoid tax and penalties.

 Eligibility (very broad):

  •  People diagnosed with COVID-19, or have a spouse or dependents diagnosed with the virus.
  •  People who are experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced hours, unable to work because of childcare issues, and a handful of other similar reasons.
  •  Business owners that had to close or operate under reduced hours
  •  Meet some other reason that the IRS decides to say is OK

3. ​​​​​​​COMPANY RETIREMENT PLAN LOANS – a provision to further expand company retirement plan loans (like from a 401(k):

  • The maximum amount of an allowable plan loan doubled from $50,000 to $100,000
  • The loan may be for up to the present value of the participant’s account
  • Payment on plan loan otherwise owed may be delayed for one year

In addition, the usual 20% mandatory tax withholding for non-direct rollovers from company plans is waived for 2020.  However, you will still need to pay tax (at tax time) on any amounts that you don’t roll back into a retirement plan within 60 days.

Next up: A review of enhanced Unemployment Benefits in the CARES Act

If you missed Part I: Stimulus Payments go here.

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The Coronavirus Aid, Relief and Economic Security Act: Stimulus Payments

The CARE Act signed into law on March 27, 2020, is a 2 trillion package of aid to individuals and businesses to ease financial distress due to COVID-19.  It’s an over eight hundred page bill, so there are lots of details. Over a series of blog posts, I’m going to describe the provisions that will have the most impact on individuals and small businesses.

To start, I’ll describe the stimulus payments to individuals provision.

STIMULUS PAYMENTS

In general, individuals will be entitled to $1200, while joint filers will receive $2400 and taxpayers will receive $500 for each child under the age of 17. The payments are not taxable. Limitations and  phase-outs depend on income (AGI- adjusted gross income) as follows:

The rebate will be reduced for taxpayers whose AGI exceeds:

$75,000 for individuals
$150,000 for joint filers
$112,500 for Head of Household

For each $100 over the applicable threshold, you lose $5 of the rebate until it goes to zero, which means that once you hit the following AGI, you don’t get a rebate:

$99,000 for individuals
$198,000 for joint filers
$136,500 for Head of Household

The above numbers are based on the AGI from your 2019 tax return, or if that return hasn’t been filed yet, your 2018 return. If your income was higher in 2018 or 2019 than you anticipate in 2020, when you file 2020 taxes, you will get the rebate.

PLANNING TIP: If your income is lower in 2019 than in 2018 and you haven’t filed 2019 taxes yet, it would be a good idea to do so as soon as you can. It’s not clear how soon the rebates will go out. 

You don’t have to apply for payment. If the IRS already has your bank account information because you have a direct deposit of your social security check or tax refunds, the money will go there. Otherwise, the IRS will mail a check. If your payment gets misdirected somehow, you will get a paper notice in the mail letting you know where the payment went and in what form. If that doesn’t work, you will have to contact the IRS using the information in the notice.

PLANNING TIP: If you know the IRS doesn’t have your most current address and you expect a rebate, you can file Form 8822 to have your address updated. 

Next up on the blog: CARE Act Retirement Account provisions.

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Tax Tips for 2017: How to Make Tax Season Easier for Yourself Next Year

Best Tax Tips for 2017 Tax SeasonIf you are like many of us, you are breathing a huge sigh of relief  that the last pesky K-1 came in and you have sent all the tax documents to your accountant.

Or, if you “do-it-yourself,” you have wrangled with your tax software to the point where you have no error alerts. Yay!

No one likes to do taxes, except maybe for accountants or why ever would they have chosen that for a career?

Not only is the document gathering and fact checking time consuming, but the fear of doing something wrong or filing late keeps people up at night. Filing taxes is never going to be a favorite chore, but there are steps you can take to make it easier for yourself next year.

Here are my seven tips to chilling at tax time next year:

1. Don’t stress about getting your taxes done “early.”

You need to wait until your employer, various banks and other institutions send you tax documents before you can finish your taxes. These institutions have deadlines which they mostly keep and you just have to be patient.

As long as you file by the deadline date in April, or properly file an extension, you won’t pay any penalties or extra tax.

2. Find a good software program that will let you identify and track expenses.

Log in monthly and categorize your tax-related items. At year-end, you just need to click a couple of buttons to produce a tax expense report. Voila!

3. If you don’t want to use a software program, be diligent about saving receipts or writing down tax-deductible expenses.

Either deposit them into a shoebox or better yet, slip them into separate envelopes marked: charitable deductions, property taxes, investment-related expenses. You’ll be so happy you did when tax season rolls around again.

4. If you plan on hiring an accountant to do your taxes, don’t wait until March to do it.

It’s best to establish a relationship as early as before year-end. Accountants get busy the few months before the tax deadline in April.

5. If you plan on working with a financial planner, hire someone earlier in the year.

As a financial planner, I also get a lot of people contacting me for planning in March. Doing taxes forces us to take a hard look at our finances, and I get it – it’s a motivator to get the help we need. Unfortunately, planners also get busy during tax season, so it pays to think about hiring someone earlier in the year.

6. Use one credit card for employee-related business expenses.

If you own a business or have lots of employee-related business expenses that you can deduct, use one credit card for these charges for easier tracking later.

7. If all else fails, you can file an extension.

For 2016 taxes the deadline for filing is October 16, 2017.  But, remember that you still have to estimate how much tax you owe and send in a check with the extension. There are no free rides when it comes to the IRS.

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Clearing up the confusion over the Gift Tax Law, updated for 2018

There are many confusing tax laws, but the one that seems to generate the most misunderstanding is the gift tax law.

Many are aware that gifts can be made up to $15,000 in 2018, (this amount is periodically adjusted for inflation) with no tax consequences – but beyond that it’s fuzzy. A client asked me if she would have to pay tax on a $100,000 gift her parents were planning to give her to buy a house. The answer is no.

Here’s the low-down on the gift tax law:

1. Anyone can make gifts of up to $15,000 (in 2018) to as many people as they choose without any tax implications. This gift is called an “annual exclusion gift”- meaning the gift is tax-free for the giver and the receiver.

In each following year,  the donor can start all over again giving gifts up to the annual exclusion amount to as many people as they choose. The gift can be either cash or goods. The gift does not have to be to a family member, it can be to anyone the giver chooses. In addition, married couples can each give $15,000 a year, so your grandchild could receive $30,000 from you and your spouse in a given year.

2. If a donor exceeds the annual exclusion ($15,000 in 2018) to any one person, that is also a tax-free event – unless the gifts go over the generous lifetime estate and gift tax exemption of $11.18 million per person.  A minor annoyance:  Form 709 – United States Gift Tax Return – must be filed with that year’s tax return. But NO tax is due.

3. The recipient of said gifts (of any amount) does not pay tax on the money ever, at all.

If a gift tax return (Form 709) is required, it will be due on April 15 of the year following the year in which the gift was made.

Let’s step back and define what a gift is for IRS purposes:  It’s something that is given and nothing is received in return. It is complete as a gift. Loans are not gifts.

What are some of the reasons people give gifts?

  1. They are generous and kind.
  2. They want to help a loved one with expenses such as a down payment on a house,
    education costs, or a vacation.
  3. They are very wealthy and want to reduce the size of their estate and therefore, estate taxes.
  4. They know they won’t spend all their money during their lifetime and want to
    share it with their loved ones before they die.

Examples:

1. You and your spouse decide to give $15,000 each to your four grown children for Christmas. The total gift amount is $120,000. No tax is due and no gift return is filed.

2. The Brown’s gives $200,000 to their daughter Sally, to assist in the purchase of her first home. A gift tax return (Form 709)  for $170,000 ($200,000 –  $15,000 x 2) would be filed with that year’s tax return.  In subsequent years, any gifts the Browns’ give over the exclusion amount will be added to the $170,000.

How the estate and gift tax are tied together:

Let’s say the Brown’s, over their lifetime, gift $1,000,000 in gifts over the annual exclusion amount. When they die, the $1,000,000 will be subtracted from their lifetime estate and gift tax exemption – $11.8 x 2 =  $22.36 million – $1 million  = $21.36 million or $10.68 million each.

It’s obvious that very few but the most wealthy will exceed the estate and gift tax exemption, and in consequence few people pay estate or gift tax. This wasn’t always so. The basic exclusion amount (or applicable exclusion amount in years prior to 2011)  was $1,500,000 (2004-2005), $2,000,000 (2006-2008), $3,500,000 (2009), $5,000,000 (2010-2011), $5,120,000 (2012), $5,250,000 (2013), $5,340,000 (2014), $5,430,000 (2015), $5,450,000 (2016), and $5,490,000 (2017).

Spousal gifts and portability

Spouses fall under different rules when it comes to gifting and estate or gift tax. The unlimited marital deduction allows you to gift any amount of money or property to your spouse without incurring either the federal gift tax or a state gift tax if you live in a state that imposes one.

In addition, in 2013, Congress passed the American Tax Relief Act of 2012 (“ATRA”). One of the key provisions of ATRA is to make permanent the portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Portability allows the first spouse to die to transfer his/her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his/her gift or estate tax purposes. The key is to be sure to file an estate tax return at the first spouse’s death to elect portability.

Gifts made directly for education or medical expenses qualify for exclusion.

Payments that you make on someone’s behalf for qualified tuition or medical expenses do not count towards the annual limit for gift tax purposes. This means that you can pay for a child’s tuition in the amount of let’s say $20,000 and if it is paid directly to the institution, you can still give that child $15,000 that year.

However, your payment(s) must be made directly to a qualifying educational organization or medical care provider in order to qualify for the exclusion.

In the case of 529 contributions, these gifts are considered part of the annual gift exclusion.  So you can give $15,000 a year to a 529 plan (or you can also give 5 years in one year or $70,000 and use up 5 years of the exclusion amount).  Note, these contributions are not made directly to an institution.

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