Month: September 2024

It’s common for championship sports teams to have an ‘X’ Factor player with unique abilities which provide a critical edge over the competition. The big game clutch hitting of Boston Red Sox’ Big Papi. New England Patriot’s special teams returner Troy Brown. The Boston Celtic Dennis Johnson, who slowed the Lakers down without ever turning the ball over. While smart tax planning is always an important aspect of sound financial planning, in several respects it is financial planning’s ‘X’ Factor today. Let’s consider the setup, the extra benefits, the mindset, and the means of effective tax planning while it is most needed.

The Setup: while Americans have in recent years enjoyed tax rates well under the long-term average,¹ the high probability of a meaningful tax hike is perceivable. Medicare and Social Security are unfunded programs, the benefits of which soon will no longer be covered by new receipts. Government deficits are already unprecedented, as is the existing national debt. The Trump-era tax cuts are scheduled to sunset December 31, 2025, and Kamala Harris has revealed a desire to aggressively increase taxes on wealthy (hard-working and successful) Americans, which always filters down to the middle class via the government’s inflation game.

The Extra Benefits: tax planning always reduces total taxes paid, which increases net income and improves the family budget, and if the savings isn’t squandered, also improves the balance sheet. Inflation acts as an extra tax, and savvy Americans are creatively finding new ways to reduce income, capital gains, and estate taxes to offset the inflation tax. A second extra benefit of tax planning today is a reduction in the risk of future tax abuse. Retirees with all their retirement capital in Traditional IRA/401(k)’s are asleep at the wheel; make sure this isn’t you.

The Mindset: an effective strategy is to maximize the taxes you pay in lower brackets and minimize the taxes you pay in high brackets, so always know what bracket you are in. Secondly, track the cost basis (already taxed and tax-free portion) of your total retirement capital and net worth. This will instill the proper tax mindset and keep you from pretending your ‘yet to be taxed’ assets are entirely yours.

The Means: Qualified Charitable Distributions (once 70½ years old), Strategic Roth Conversions (in lower than average income years), 1031 and 721 Exchanges, selling a primary residence when the tax free capital gain is achieved, living in a tax friendly state, Donor Advised Funds, Gift Trusts, Irrevocable Life Insurance Trusts, traditional retirement contributions (in higher than average income years), Back-Door Roth IRA’s, never missing a tax deduction (student loan interest deductions, medical expense deductions and property tax deductions) or tax credit (the earned-income tax credit, the child tax credit, the saver’s credit, and education credits)² are some of the means being used by prudent tax planners today.

Grade the overall tax knowledge of your fiduciary advisor, CPA, and Esquire, and require a high level of proficiency. Put a great tax planning team together and enjoy the benefits; it may be the single smartest financial move you make in an era such as this.

Think about it, Shaun.

“When there is no guidance a people falls, but in an abundance of counselors there is safety” ~Proverbs 11:14

1 Ed Slot, America’s IRA Experts, “A History of U.S. Tax Rates”, 1924-2024 2 Smart Asset, Smart Money Minute, “How Can Social Security Benefits Affect Your Taxes?, September 28, 2024

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

The trek Nando Parrado and Roberto Canessa made to Santiago from deep in the Andes Mountains following the Uruguayan rugby team’s plane crash in October of 1972 was a legendary winter mountaineering expedition. Fighting -35F temps in civilian clothes while trying to stabilize the injured, grieve for the dead and simply stay alive made for challenging circumstances in which to plan a 10-Day trek. The lack of technical climbing gear on glaciated, 60-degree, 3,000 vertical foot slopes made it a death march, yet with the creative use of the contents of one crashed plane, they succeeded and saved sixteen lives! Effectively planning a multi-decade long retirement income stream in a materialistic, high inflation society, post the defined-benefit pension era, and amidst unfunded social programs and spiraling national deficits may be a comparably challenging endeavor! Creatively identify the right mix of the right income strategies to source your long-term retirement income needs:

• Let’s start by recognizing high interest cash accounts alone are not a solution, but a trap. Volatility is not the enemy, greenbacks are. Never forget that. The cash return is not sufficient to sustain you financially; you must assume some risk to beat inflation long-term after taxes.

• Well-managed rental real estate properties can provide a competitive, reliable, and inflation-resistant income, and present market dynamics suggest the appreciation homeowners have enjoyed in recent years may continue. Maintenance and repair costs can eat income as later retirement approaches, so plan property management and liquidations in advance.

• Various annuity types can provide a competitive lifetime income stream, and even offer unique riders that may benefit you further. Disadvantages include complexity, so thoroughly understand what you are buying, and high costs, so cap your allotment to this strategy to one-third of retirement capital.

• A portfolio of bonds can offer higher income than stocks with less volatility but may not produce sufficient returns to keep pace with inflation long-term. Present market dynamics seem favorable towards high quality bonds.

• A systematic withdrawal funded by periodic liquidations of securities within a diversified portfolio offers short-term income predictability, simplicity, and investment flexibility. Bear to mind that prudent asset management within this strategy is critical: high costs and low returns can cause withdrawals to consume principle, and absent principle withdrawals cease; low costs and high returns can make this a winning strategy. 

• A careful selection of capital-efficient, dividend-paying, industry-dominating stocks offers near zero expenses and an increasing and steady stream of retirement income with substantial appreciation potential. The risk is a bear market can alter both ROR issues dramatically.¹

• Real Estate Investment Trusts (REIT’s) and Master Limited Partnerships (MLP’s) can provide competitive income streams but may not be liquid, and thrive in distinct market dynamics, can delay tax returns due to late K-1 1099 distribution, and are generally more leveraged (indebted).

• Required Minimum Distributions (RMD’s) can remain invested for those who overshot the income goal, but otherwise form a base of retirement income with other fixed income sources. For 501(c)(3) givers, Qualified Charitable Distributions (QCD’s) should be set up at age 70½ for all such gifting.

Just as Nando and Canessa had to assess the net benefit and weight of every item in the plane to reach Santiago, whether to carry or to leave, we must weigh these and other income options, not only to reach our income destination, but in a manner that is smart from both a tax and an estate planning perspective. May God bless your effort! Shaun.

“In an abundance of counselors there is safety” ~Proverbs 11:14

“The heart of man plans his way, but the Lord establishes his steps,” ~Proverbs 16:9

1 Smart Asset, “How to Create a Retirement Income Stream, August 20, 2024

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Residential real estate has been a highly productive investment for many Americans in recent years, and in particular, rental homes producing a competitive net yield have exemplified the successful growth and income investment. The time and effort required to maintain a home can become burdensome with age, however, and hiring professionals for every maintenance and repair project eats into investment returns. These dynamics make the ownership of physical homes impractical for many by their mid-late retirement years, inspiring a generally taxable sale of property. Be well acquainted with the ways you can minimize, or even avoid capital gains taxes on the sale of an appreciated home:

• Individuals selling a primary residence can exclude up to $250,000 in profits ($500,000 for married couples filing jointly) from taxes. The two prerequisites are 1) minimum of two years of ownership, and 2) the home must be the primary residence for 24 of 60 months preceding sale.

• Those who inherit a highly appreciated property do so with a “step-up” in cost basis. This means the cost basis (non-taxable investment amount) becomes the value on the day of the former owner’s death. An appreciated home in this case sold immediately following the inheritance would result in minimal or no tax bill.¹ 

• Becoming a full-time resident of a state that does not tax capital gains prior to selling an appreciated property can eliminate more taxes than you might imagine, but don’t underestimate the significance of a move, financially or otherwise, and be well acquainted with the behavior of your present state in such cases.

• Understand many expenses incurred to maintain, repair and improve a home become part of the cost basis. Keep an accurate record, and every receipt for these expenses.

• In the tax year of selling an appreciated home use realized losses on other investments to offset your taxable gains, and don’t forget about carry-over losses realized in former years. Your CPA should retain this figure from year to year. 

• 1031 and 721 Exchanges allow for a continued deferral of capital gains taxes following the sale of an appreciated property, which can include the sale of a high maintenance physical home and corresponding purchase of certain zero maintenance Real Estate Investment Trusts (REIT’s). One prerequisite is the new investment must be a “like” property with the same purpose as the one sold.²

Don’t ever miss an opportunity to reduce capital gains taxes, which directly reduce net profit. That said, seek professional counsel from your team of financial professionals, and understand every detail of each of these tax reduction strategies before acting.  

Think about it, Shaun.

“Give to Caesar what belongs to Caesar, and to God what belongs to God.” Mark 12:17

“Unquestionably, there is progress. The average American now pays out twice as much in taxes as he formerly got in wages.” ~H.L. Mencken

1 Smart Asset, “We’re Inheriting a House. How Can We Avoid Capital Gains Tax When We Sell It?”, July 9, 2024

2 Centura Wealth Advisory, “Trapped by Your Real Estate Investment?”, Sean Clark, Director of Financial Planning, 2019

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to provide tax advice, and it is recommended that you consult a certified tax professional prior to acting on this information. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.