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The IRS announced that January 23 was the start of the 2023 tax season—or the date the IRS began accepting 2022 tax year returns.
If you have yet to file, most taxpayers have until Tuesday, April 18, 2023, to submit their tax return or request an extension. Taxpayers requesting an extension have until October 16, 2023, to file. Even if you file for an extension, you are still required to pay the taxes you may owe by April 18. Is your business organized as a partnership, are you a part of a multi-member LLC, or do you own an S-Corporation? If so, you must file the appropriate business form by March 15, 2023. C-Corps abide by the traditional April 18 deadline. For most deductions, deadlines to minimize taxes have already passed. For example, you can no longer take a tax loss on the sale of an asset for tax year 2022. The same holds true for charitable contributions. But as you prepare to file, I want to remind you that opportunities to harvest tax savings are still available. Fund your retirement You may contribute to an IRA and credit tax year 2022 up until April 18. To contribute to a traditional IRA, you or your spouse, if you file a joint return, must have taxable compensation, such as wages, tips, bonuses, or net income from self-employment. There are no income limits that might prevent you from contributing to a traditional IRA account. There is no age limit that would prevent a contribution to a traditional IRA. That change began in 2020. The maximum total annual contribution for all your IRAs (traditional and Roth) combined is:
50 or older?
Will your contribution be fully deductible in a traditional IRA? It depends on a couple of factors. If your income is less than a certain amount or if you (or your spouse) does not have an employer-sponsored retirement plan, your traditional IRA contribution is fully deductible. If you or your spouse has a 401(k) or pension plan, the tax-deductible portion of your IRA contribution may be limited For the tax year 2022, if you file single and participate in an employer-sponsored plan, you may take a full deduction if your modified adjusted gross income (MAGI) is less than $68,000. No deduction is available if your MAGI is greater than $78,000. The deduction is pro-rated for MAGI between $68,000 and $78,000. Limits rise to $109,000 if filing jointly and you participate in an employer-sponsored plan. There is a phase-out between $109,000 and $129,000. A deduction is not allowed if your MAGI is above $129,000. If your spouse participates in an employer-sponsored plan, you receive full deductibility if your MAGI is under $204,000, partial deductibility if between $204,000 and $214,000, and no deduction if your MAGI is above $214,000. While you may not be able to fully deduct your contribution, any appreciation in invested funds is tax-deferred if it remains in your IRA. Withdrawals of contributions are not taxed. How does this work? If you make a total of $20,000 in nondeductible contributions over several years and the account is worth $100,000, then 20% of a withdrawal is tax-free. Just be sure to file Form 8606 for every year you made nondeductible IRA contributions. Deductibility limits enhance the advantage of a Roth IRA A Roth is available if your MAGI is less than $129,000 and you are filing as a single, and $204,000 if married filing jointly. You lose the ability to contribute to a Roth if your income is above $144,000 (single) and $214,000 (married). The maximum contribution is pro-rated if your MAGI is in between the limits. Roth contributions are not deductible. HDHP & the HSA Do you have a high-deductible health plan (HDHP)? The IRS defines a HDHP as a plan with a deductible of at least $1,400 for an individual or $2,800 for a family. If you have HDHP, you may qualify for a Health Savings Account (HSA) if your health plan is HSA-eligible. Check with your insurance company to clarify whether your health plan is HSA-eligible. You must have HSA (health savings account) eligible insurance beginning December 1, 2022, to qualify for a 2022 HSA contribution. Contributions, other than employer contributions, are deductible on the eligible individual’s tax return. Earnings are not taxed inside the HSA, and withdrawals used for qualified medical expenses are not taxed. For 2022, you may contribute up to $3,650 for single coverage. If you have family HDHP coverage, you can contribute up to $7,300. You have until April 18 to fund your HSA for tax year 2022. If you are 55 or older, you may contribute an additional $1,000. Triple-play for an HSA First, funds you contribute to an HSA are deductible. Second, earnings are tax-deferred, and third, if withdrawn for any reason at 65 or older, you pay only income taxes but no penalty. It’s much like an IRA; however, withdrawals for qualified medical expenses remain tax-free, unlike an IRA. If you are HSA-eligible, consider prioritizing an HSA over an IRA. Self-employed? An SEP may be your best bet If you are self-employed, consider a SEP (simplified employee pension) IRA. Almost any business can establish a SEP-IRA, and contributions limits are much higher than an IRA. You may contribute the lesser of 25% of compensation for an employee (20% if you're self-employed) or $61,000 for tax year 2022. In addition, a SEP-IRA may be opened and funded up to the tax-filing deadline, which includes extensions. These plans have various rules, which I can assist you with. You will be required to contribute to employee accounts when you contribute to your own SEP-IRA account, but this tax-deferred vehicle offers generous contribution options. Don’t forget tax credits Tax credits do not reduce taxable income. Instead, they reduce the taxes you owe. That means a $1,000 tax credit reduces federal taxes by $1,000. It’s that simple. Tax credits that may be available to you include:
The Inflation Reduction Act provides new ways to save. The Act creates or extends tax credits for wind, solar, zero-emission vehicles, energy savings, and other renewable sources. If you made energy-efficient improvements to your home last year or purchased a zero-emission vehicle, these credits may be available to you.
The list is not all-inclusive, and I encourage you to check in with your tax preparer or reach out to me if you have additional questions.
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“Those who work their land will have abundant food, but those who chase fantasies have no sense.” This ancient advice from Proverbs illustrates the importance of financial fitness.
What is financial fitness? Well, we are all familiar with the term physical fitness. If pressed for a definition, we might define it in terms of our own ideas and circumstances. When it comes to an explanation of financial fitness, the same applies. A lot may simply depend on the season you are in. Financial fitness might mean something different to someone who is single versus a couple with young kids, an empty-nester or a retiree. Even within those demographics, one’s perception could be colored by personal circumstances. Are you saddled with debt, debt-free, renting or a homeowner? There are many ways to get ahold of your finances; you can increase earnings, lower spending, start saving more (short-term and longer-term) and implement debt management. For many, earnings are difficult to influence in the short-term. For most, tackling the spending side of the equation will yield the quickest results. Below we consider six principles that will help you get into financially fit shape wherever you find yourself in life. 6 principles for financial fitness “An investment in knowledge pays the best interest.”—Benjamin Franklin
Absorbing the fundamentals—the foundation for success Those who fail to put sound principles into practice are like those who build their homes on sand. The rains come and the winds blow, and financial misfortune overtakes them. Wisdom encourages us to build our homes on a solid financial foundation. Though the rains come and the winds blow (and they will), the house and foundation are designed to withstand the financial storms. Every situation is unique. You may have mastered the fundamentals, and only need to apply the principles I've highlighted selectively, plugging small holes and shoring up your finances. Or a more aggressive approach might be in order. Focus on one theme at a time. Some may apply. Others may not. Having said all that, I never want to give the impression that you are all alone on a financial lifeboat. I’m always here to assist The US federal budget is on an unsustainable path…but not for the reasons that most people think.
Yes, the national debt is $31 trillion, well higher than annual GDP, and only going higher. Yes, the budget deficit last year was more than a $1 trillion for the third year in a row. None of this is good. But the real root of the fiscal problem, and our biggest concern, isn’t the debt or the deficits, it’s government overspending. If the government had an enormous debt, but spent little, the private sector could produce the country’s way out of the debt problem. And if the US had little debt, we could still have economic problems from too much government spending. Ultimately, the government funds itself by borrowing or taxing the wealth produced by private industry. If spending were high and borrowing low, taxes would have to be prohibitively high. The bottom line is that excessive spending leads to economic ills. According to the CBO, spending on entitlements like Social Security, Medicare, Medicaid, and other health care programs will rise from 10.7% of GDP to 15.1% in the next thirty years. Meanwhile, the net interest on the national debt will almost certainly be higher than it was last year, unless and until we bring the deficit down and slow the growth in debt. This is why the debt limit debate now going on in Washington, DC is so important. Don’t fall for the false narrative that one group of politicians wants to push the country into default. Nor, should anyone want to abolish the debt ceiling altogether. If there is a way to shine some light on overspending, why shouldn’t it be used? If debt ceiling politics can focus attention on fiscal issues, it’s done its job. What we expect is a last-minute budget deal that includes either caps on discretionary spending for future years, some sort of commission or committee that can make proposals to reform entitlements (with expedited procedural rules so the proposals get a congressional vote), or both, as part of a bipartisan deal to raise the debt ceiling. But let’s go down the highly unlikely path that the debt limit isn’t raised. The Treasury Department would still have enough cash flow to pay all securitized debt as it came due, as well as entitlements such as Social Security, Medicare, and Medicaid. It’s true that other programs and agencies would have to take substantial cuts to make sure those higher priority payments get made; and yes, the Biden Administration will not enjoy making that choice. But it’s still a choice that they alone get to make. Ultimately, investors and voters need to realize that not every national debt is the same, even if they’re the same amount. The US had a debt problem after the Revolutionary War, which was a small price to pay for starting an independent country. We had a debt problem after World War II, but that was a price we paid to win a crucial war. Our current debt problem is not like those. In too many cases, politicians spend to win favor with constituents. It’s not wrong to use the debt ceiling as a way to focus attention on this problem and the endemic overspending that it creates. That’s a habit this debt limit debate needs to break I trust everyone had a wonderful holiday season. Whether you reached your personal goals last year or faced challenges, a new year brings new opportunities and a fresh start.
Let’s jump right into this month’s topic. The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law in late 2019. Now called SECURE Act 1.0, it included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts. But it didn’t take long for Congress to enhance the landmark bill that was enacted barely three years ago. Tucked inside a just-passed 4,155-page, $1.7 trillion spending bill is another overhaul of the nation’s retirement laws. Dubbed SECURE Act 2.0, the bill enjoys widespread bipartisan support and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement. 9 key takeaways on SECURE Act 2.0 1. Changing the age of the required minimum distributions. Three years ago, 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turn 72 this year, the age required for taking your RMD rises to 73 with 2.0. If you turned 72 in 2022, you’ll remain on the prior schedule. If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1 and the second no later than December 31. Starting in 2033, the age for the RMD will rise to 75. Employees enrolled in a Roth 401(k) won’t be required to take RMDs from their Roth 401(k). That begins in 2024. In our view, the SECURE Act 1.0 and 2.0 updates were long overdue. The new rules recognize that Americans are living and working longer. 2. RMD penalty relief. Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%. But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD. 3. A shot in the arm for employer-sponsored plans. Too many Americans do not have access to employer plans or simply don’t participate. Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary. The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out. In order to encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus. Employees may opt out of the employer-sponsored plan. 4. Increased catchup provisions. In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000, (the greater of $10,000 or 50% more than the regular catch-up amount). The amount is indexed to inflation. Catch-up dollars are required to be made into a Roth IRA unless your wages are under $145,000. 5. Charitable contributions. Starting in 2023, 2.0 allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. One must be 70½ or older to take advantage of this provision. The $50,000 limit counts toward the year’s RMD. It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCD, beginning in 2023. 6. Back-door student loan relief. Starting next year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement. Additional provisions 7. Disaster relief. You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account. 8. Help for survivors. Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free. 9. Rollover of 529 plans. Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old. In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns. Final thoughts I welcome these changes. Many Americans lack adequate savings, and the just-enacted bill helps address some of the challenges many face as they march toward retirement. What I've provided here is a high-level overview of the SECURE Act 2.0. Keep in mind that it is not all-inclusive. I'm always here to assist you, answer your questions, and tailor any advice to your needs. Additionally, feel free to reach out to your tax preparer with any tax-related calculations. Sources: Secure Act 2.0 Act of 2022; SECURE 2.0: Rethinking Retirement Savings; Congress Passes Major Boost to Retirement Savings; The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws Not long after Friday’s Employment Report multiple analysts and commentators were calling it a “goldilocks” report, by which they meant it showed that the economy was neither “too hot” nor “too cold,” but instead, “just right.”
In turn, the theory goes, the Federal Reserve could stop raising short-term rates earlier and at a lower peak than previously expected, inflation would continue to cool, and the economy could pull-off an elusive “soft landing.” The biggest headlines from the Employment Report were definitely good news. Nonfarm payrolls rose 223,000 in December, beating the consensus expected 203,000. Meanwhile, civilian employment, an alternative (although volatile) measure of jobs that includes small-business start-ups, surged 717,000. Rapid job creation helped push the unemployment rate down to 3.5%, tying the lowest level since Joe Namath was a reigning Super Bowl champion. (If you’re a Millennial or Gen Z, yes, that’s the same guy in the Medicare commercials.) But, behind the headlines, the data were not as good. Temporary help service jobs (temps) fell 35,000 in December, the fifth straight monthly decline, to a level of temp jobs below a year ago. Why are these jobs important to watch? Because, when businesses face increased demand, the quickest way to respond is hiring temporary help. And the same thing happens in the opposite direction. Meanwhile, the total number of hours worked in the private-sector ticked down 0.1% in December, the second consecutive monthly decline. Even though payrolls were up, total hours worked data show less work was done. Putting it all together, this is the equivalent of losing 125,000 jobs in December, not gaining jobs. Fewer temporary workers and fewer hours worked suggest some weakness in the job market. What this means is that businesses are still hiring, but their workers have less to do. Why would businesses do that? Because finding qualified workers has been unusually difficult during the re-opening from the COVID shutdowns. In turn, many firms might be willing to keep hiring workers until it’s clear the economy is in a recession. But this also means that if a recession happens – and we continue to think it will – more workers have to be let go. The figure that the optimists focused on the most was the wage report, which showed a relatively moderate gain of 0.3% in average hourly earnings in December and a gain of 4.6% versus a year ago. Moderate wage growth, the conventional thinking goes, diffuses the potential for a “wage-price spiral” that keeps inflation high or even pushes it higher. But this is a basic misunderstanding of inflation dynamics. As Milton Friedman taught us, it’s loose money that causes inflation to go up. The fact that wages sometimes go up faster at the same time is also a sign of loose money, but it’s not a sign that wage growth causes inflation. What analysts, commentators, and the markets should have spent more time chewing over was the ISM Services report, which screamed stagflation. The overall index came in at 49.6, well below consensus expectations and the first reading in contraction territory since the onset of COVID. In fact, excluding very early COVID, it was the first sub-50 reading since 2009. Meanwhile, although the prices paid index declined to 67.6 (versus 70.0 in November), that’s still higher than it ever was between mid-2011 and early-2021. This week’s CPI report should show tame overall inflation for December itself, but that’ll largely be due to falling energy prices. The ISM report suggests inflation isn’t going back to the Fed’s 2.0% target anytime soon. Put it all together and it looks like both the surge in M2 growth in 2020-21 (which created the inflation) and the abrupt slowdown in 2022 (which would cause slower growth) are still wending their way through the economy. If so, we should see weak economic data, soon. Further forward, if the Federal Reserve maintains slow M2 growth – an open question given the Fed’s reluctance to focus publicly on the monetary aggregates when setting policy – we could see a major slowdown in inflation in 2024. Time, and the direction of monetary policy, will tell. Right now, it looks like Real GDP expanded at a 2.5 – 3.0% rate in the last quarter of 2022. But how fast it’s growing in the first quarter of 2023 – if at all – is anyone’s guess. The housing sector was a huge and early beneficiary of the super-loose monetary policy of 2020-21. But, once the Fed started tightening, housing took the lead downward, as well. This isn’t a repeat of the 2006-11 housing bust, but it will drag on. Don’t expect any real recovery in housing until at least late 2023 or early 2024. Home sales and prices will continue to drag in 2023, particularly in the existing home market.
From May 2020 until June 2022, both the national Case-Shiller price index and the FHFA price index rose more than 40%. But, since June 2022, Case-Shiller is down 2.4% and the FHFA is down 1.1%. The biggest declines so far have been out West, in San Francisco, Seattle, Phoenix, San Diego, and Las Vegas. But every major metropolitan area is down in the past three months, no exceptions. The drop in home prices should continue. Prices got too high relative to rents and need to fall more to better reflect rental values. We expect a total decline, peak-to-bottom in the 5-10% range, nothing like the 25% drop in 2006-11. Why a smaller drop this time around? First, compared to the average of the past forty years, home prices are already close to fair value when measured against construction costs. Second, there is no massive excess inventory of homes, unlike during the prior housing bust. And, unlike during the subprime-era, the vast majority of homeowners with mortgages are locked-in at extremely low fixed rates, which means they will be very reluctant to sell. The real effect of the change in interest rates is evident in the existing home market. Sales hit a 6.65 million annual rate in January 2021, the fastest pace since 2006. But, by November 2022, sales were down to a 4.09 million annual rate, a drop of 38.5% so far. Meanwhile a decline in pending home sales in November (contracts on existing homes) signals another drop in existing home sales in December. Existing home buyers have two major problems: first, much higher mortgage rates, which means substantially higher monthly payments. Assuming a 20% down payment, the rise in mortgage rates and home prices since December 2021 amounts to a 52% increase in monthly payments on a new 30-year mortgage for the median existing home. Meanwhile, it’s hard to convince a current homeowner with a low fixed-rate mortgage to sell. If anything, it makes sense for them to ask for even more money if they’d have to take out a new mortgage elsewhere at a much higher rate. In other words, sellers should now want more for their homes, while buyers want to pay significantly less. This won’t change soon and so expect existing sales to be even weaker in 2023 than last year. New home sales are also down substantially since the COVID peak, but should find a bottom sooner. The key is that with a new home, the seller is a contractor. Also, housing has been underbuilt in the previous decade. The average price of a new home will likely fall, but we need more of them. And more houses will be likely be put in rental pools. What’s important to remember is that this business cycle isn’t normal. COVID led to a massive surge in government stimulus, both monetary and fiscal, to fight widespread and overly draconian shutdowns. Housing is rarely a bright spot in recession years and this year should be no different. But don’t expect a catastrophe like the prior bust and, once a recession is over, housing will rebound much more swiftly than after the Great Recession in 2008-09. Stocks have been battered by the Federal Reserve’s quest to rein in the highest rate of inflation in 40 years.
So far, however, investors have expressed little concern over the crisis that has rocked cryptocurrencies. It’s a far cry from the reaction to Lehman’s demise in 2008, which sparked the financial crisis and nearly wrecked the global financial system. Investing in cryptocurrencies is highly speculative. For instance, legendary investor Warren Buffett has not been shy about expressing his disdain. A couple of years ago Buffett said, “Cryptocurrencies basically have no value, and they don’t produce anything…. “They don't reproduce, they can't mail you a check, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero.” Bitcoin, the oldest and best-known cryptocurrency, was trading around $65,000 a year ago. Last month, it dropped below $16,000 (MarketWatch). Earlier in the year, TerraUSD, which is a ‘stablecoin’ that used algorithms to peg its value to the dollar, worked well— until it didn’t and collapsed. Crypto trading platforms such as FTX and Celsius Network are languishing in bankruptcy, rocked by the digital version of bank runs and a lack of liquidity. Those who hold funds with the likes of FTX, whose demise is being compared to the collapse of Enron, can no longer withdraw funds, and may never see their investments again. And it’s not simply investors. Celebrities who lent their names to some of these platforms are feeling the fallout through soured investments and lawsuits. But the storm that descended upon the crypto world has barely made a ripple in traditional financial markets and finance. “Crypto space…is largely circular,” Yale University economist Gary Gorton and University of Michigan law professor Jeffery Zhang write in a forthcoming paper. “Once crypto banks obtain deposits from investors, these firms borrow, lend, and trade with themselves. They do not interact with firms connected to the real economy.” In other words, the dominoes that fell in crypto only knocked down other crypto dominoes. A recent article in the Wall Street Journal suggested the crisis may have done the economy and equity investors a favor, notwithstanding losses for those in crypto. Eventually, traditional firms and investors would have embraced an industry that lacks regulatory controls. An implosion several years from now could have had far different consequences. I hope you’ve found this review to be educational and helpful. Once again, let me gently remind you that before making decisions that may impact your taxes, it is best to consult with your tax preparer. And if you have any questions or would like to discuss any matters, please feel free to give me a call. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor The holidays are a busy time of year. Shopping, family events, company holiday parties and more may dot your calendar. But I suggest that you carve out some time for year-end financial planning so that you will be better positioned as the new year begins.
9 smart planning moves for year-end 1. Review your financial plan. Long-term data and my own personal experience tell me that the shortest distance between investors and their financial goals is adherence to a well-diversified, holistic financial plan. I stress that investors must take a long-term view, but I also recognize that 2022 has been a challenging year. As we build your financial plan, we tailor it to your specific goals. How might you set goals? They should be: Specific, Measurable, Achievable, Relevant (to your situation), and attainable within a specific Timeframe. These are SMART goals. An adaptable plan A financial plan is never set in concrete. It is a work in progress which can and should be adjusted as your life evolves. Are you reaching a milestone in your life such as retirement? Has there been another upcoming change in your personal circumstances? Whether you have welcomed a new baby or an adopted child into your family, a hearty congratulations is in order— but it’s also time to look at the financial side of the equation. Did you become a grandparent or are there new grandchildren in your family? A job change, job loss, marriage, or divorce are also events that usually warrant revisiting your financial plan. When stocks tumble, some investors become very anxious. When stocks post strong returns, others feel invincible and are ready to load up on riskier assets. I caution against making portfolio changes that are simply based on market action. Remember, the financial plan is the roadmap to your financial goals. In part, it is designed to remove the emotional component that may compel you to buy or sell at inopportune times. That said, has your tolerance for risk changed in light of this year’s volatility? If so, let’s talk. 2. Harvest your losses and reduce your income taxes. Let’s look at strategies for taxable accounts. If you have gains from the sale of stock, you may decide to sell underperforming equities for a loss and offset up to $3,000 in ordinary income. For example, if you sold a stock you have held one year or less and realized a profit of $30,000 and you sold a stock held for one year or less and took a loss of $35,000, you would not only pay no taxes on the $30,000 gain, but you could offset ordinary income of up to $3,000 in 2022 (married couples filing separately limited to $1,500). You would carry forward $2,000 into 2023. Losses on investments are used to offset capital gains of the same type. In other words, short-term losses offset short-term gains and long-term losses offset long-term gains. An asset held for one-year or less is a short-term gain or loss. Anything more than a year is long-term. But don’t run afoul of wash-sale rules. The wash-sale rule prevents you from taking a loss on an investment if you buy the same or a “substantially identical” investment 30 days before or after the sale. 3. Tax loss deadline. You have until December 31 to harvest any tax losses and/or offset any capital gains. Did you know that you pay no federal taxes on a long-term capital gain if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er)? Therefore, it may be worth taking a long-term capital gain. Simply put, you sell the stock, take the profit, and pay no federal income tax. And you could re-invest in the stock, upping your cost basis. But be careful. The sale will raise your adjusted gross income (AGI), which means you’ll probably pay state income tax on the long-term gain. In addition, by raising what’s called your modified adjusted gross income (MAGI), you could also impact various tax deductions, impact taxes on Social Security, or receive a smaller ACA premium tax credit if you obtain your health insurance from the Marketplace. Or you might trigger a higher Medicare premium, as premiums are also based on your MAGI. 4. Mutual funds and taxable distributions. This is best explained using an example. If you buy a mutual fund in a taxable account on December 15 and it pays its annual dividend and capital gain on December 20, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just five days. It’s a tax sting that’s best avoided because the net asset value (NAV) hasn’t changed. It’s usually a good idea to wait until after the annual distribution to make the purchase. Given the volatility in trading this year, some actively managed funds may have large taxable distributions, even though the NAV of the fund may be down since the beginning of the year. 5. It’s time to take your RMD. If you are 72 years or older, an annual required minimum distribution (RMD) is required from most retirement accounts. If you turned 72 this year, you have until April 1, 2023, to take your first RMD. That will reduce your taxable income in 2022, but you will be required to take two RMDs in 2023, potentially pushing you into a higher tax bracket next year. If you miss the deadline, you could be subject to a 50% penalty on the portion of your RMD you failed to withdraw. For all subsequent years, including the year in which you took your first RMD by April 1, you must take your RMD by December 31. The RMD rules apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD is also required from a Roth 401(k) account. However, the RMD rules do not apply to Roth IRAs while the owner is alive. Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor published by the IRS. If you continue working past age 72, you are still required to take your RMD from your IRA. If, however, you continue to work past age 72 and do not own more than 5% of the business you work for, most qualified plans, such as 401(s) plans, allow you to postpone RMDs from your current employer's plan until no later than April 1 of the year after you finally stop working. 6. Maximize retirement contributions. By adding to your 401(k) plan, you can reduce income taxes during the current year. In 2022, the maximum contribution for 401(k)s and similar plans is $20,500 ($27,000 if age 50 or older, if permitted by the plan). The limit on a Simple 401(k) plan is $14,000 in 2022 ($17,000 if 50 or older). For 2022, the maximum you can contribute to an IRA is $6,000 ($7,000 if you are 50 or older). Contributions may be fully or partially deductible. A Roth IRA won’t allow you to take a tax deduction in the year of the contribution, but it gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met. Total contributions for both accounts cannot exceed the prescribed limit. You can contribute if you (or your spouse if filing jointly) have taxable compensation. You can make 2022 IRA contributions until April 18, 2023 (Note: statewide holidays can impact the final date). 7. Convert your traditional IRA to a Roth IRA. The decline in the stock and bond markets has taken a toll on most retirement accounts. However, this may be the time to partially or fully convert the reduced value of the account into a Roth IRA. You’ll pay ordinary income taxes on the converted portion of the IRA. But going forward, you won’t have an RMD requirement (based on current law), growth is tax-deferred, and if you meet certain requirements, you’ll avoid federal income taxes when you withdraw the funds. A Roth may make sense if you won’t need the money for several years, you believe you’ll be in the same or higher tax bracket at retirement, and you won’t need to use retirement funds to pay the taxes. Once converted, you cannot ‘recharacterize’ (convert back to a traditional IRA). The deadline to convert is December 31. 8. Charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. Did you know that you may qualify for what’s called a “qualified charitable distribution” (QCD) if you are 70½ or older? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity. It may be especially advantageous if you do not itemize deductions. It may be counted toward your RMD, up to $100,000. If you file jointly, you and your spouse can make a $100,000 QCD from your IRA accounts. You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made. 9. Finally, take stock of changes in your life and review insurance. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen. I trust you’ve found these planning tips to be useful, and if there are any that you would like some help with, I am always here to assist. Please feel free to reach out if you have any questions or you may want to check in with your tax preparer. Long-term care includes a whole host of services that you may require to meet various personal needs. And eventually, around 60% of us will need assistance with things many take for granted, according to the Administration for Community Living, a division of the U.S. Dept. of Health and Human Services.
Whether it is because you have been visited by an unfortunate event or due to health conditions that come about through aging, things like getting dressed, taking a bath, running errands, or making meals may require assistance. Planning is the key, but many people are not sure what is covered by insurance, and others are often misinformed about Medicare coverage. Get informed There are many common misconceptions about what Medicare covers and doesn’t cover. Medicare only pays for long-term care if you require skilled services or rehabilitative care. But there are limits.
Medicare does not pay for non-skilled assistance with what is called Activities of Daily Living, which make up most of long-term care services. These would include bathing, eating, getting dressed, getting in and out of bed, walking, and assistance using the bathroom. You will have to pay for long-term care services that are not covered by a public or private insurance program. However, Medicaid does pay for the largest share of long-term care services. To qualify, your income must be below a certain level, and you must meet minimum state eligibility requirements. To be eligible for Medicaid, you must have limited income and assets. The income limit for Medicaid varies by state. Medicaid will count things such as Social Security and disability benefits, pensions, salaries, wages, and interest and dividends. It will not include food stamps, housing assistance from the federal government, and home energy assistance. Medicaid will also review your assets, including assets that are counted for eligibility. These include checking and savings accounts, stocks and bonds, CDs, and property outside your primary residence. However, equity in your home may affect whether Medicaid will pay for long-term care services, including nursing home care and home and community-based waiver services. Are you considering gifting assets to qualify under Medicaid’s stricter limits? According to the American Council on Aging, the date of one’s Medicaid application is the date from which one’s look-back period begins. The look-back period is 60 months in D.C. and all states but California, where it is a more lenient 30 months. That said, if there is just one takeaway, please realize that Medicare coverage for long-term care is limited, and there are hurdles that may prevent you from obtaining Medicaid. Laws vary depending on the state. If you have additional questions, we’d be happy to assist you. Paying for long-term care If you don’t have long-term care insurance or are unable to obtain it, here are some options you may consider outside of Medicaid. Have you considered a reverse mortgage on your home? There are no income or medical requirements to get a reverse mortgage, and you must be 62 or older. The loan amount is tax-free and can be used for any expense, including long-term care. However, if you have an existing mortgage or other debt against your home, you must use the funds to pay off those debts first. You may live outside the home, including a nursing home, for up to 12 months before the loan comes due. The reverse mortgage could affect Medicaid eligibility but does not affect Medicare or Social Security benefits. How about a home equity loan? There isn’t a requirement to live in the home, and there is plenty of flexibility in paying the loan back. But beware that the inability to make payments could force foreclosure. And, in today’s rising rate environment, your payment could rise. Life insurance that includes a long-term care benefit could provide needed cash, while policies with an "accelerated death benefit" provide tax-free cash advances while you are still alive. The advance is subtracted from the amount your beneficiaries will receive when you pass away. Are you familiar with a life settlement? A life settlement is the sale of a current life insurance policy to a third party. It’s usually available for those 70 and older. Although the proceeds are taxable, you could raise cash by selling your policy. The proceeds may be used as you wish, including long-term care. You may also tap existing assets. Health Savings Accounts can be used to pay qualified medical expenses without incurring a tax liability. Depending on your age, you may take tax-free withdrawals to pay long-term care premiums. If you have a Roth IRA, you could pay long-term care costs or premiums without paying taxes. You may invest in a long-term care annuity. You will pay a lump sum of money and receive a set amount of income, paid regularly, for the rest of your life. Long-term care annuities offer special provisions to help pay for long-term care expenses. The need to access or finance long-term care is an unpleasant prospect most of us would rather not think about. But avoidance is not a strategy. Be proactive. Be aware of your options. Plan early. As always, I am happy to answer any of your questions or get you pointed in the right direction. Managing and wrapping your head around health care costs and health insurance may seem like a daunting task.
A financial wellness study by PricewaterhouseCoopers found that over one-third of baby boomers—38% to be exact—said that the cost of health care is their top fear. It’s even higher than anxieties generated by the fear of running out of money. But there are ways to manage costs and reduce surprises as you travel the road into retirement. Let’s look at several ideas.
How you decide to approach health care will ultimately depend on various factors that are unique to your situation. I'm here to assist and am happy to entertain any thoughts or questions you may have. |
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