Wills & Trusts

The foundation of your rock-solid estate plan.

For so many of us, family is paramount. You probably expect to use your wealth to take care of your family in the here and now—health care, travel, college tuition and the like. But chances are you haven’t thought nearly as much about positioning your assets so they’re ready and able to help the people you love after you’re gone. Even if you have made some headway in this area, your plan for your estate is probably a little—and maybe a lot—out of date.

If that describes your situation, don’t fret. Even if you have many moving parts to your finances, you can get on track by focusing on two main areas of estate planning: wills and trusts. Here’s how to do it.

Where there’s a will, there’s a way

Read this next sentence three times in a row: Everyone should have a will.

Got it? A will should be the basic foundation of every estate plan—the starting point for a well-conceived strategy to transfer assets at death.

A will identifies precisely what you want to have happen to your assets and estate. Dying without a will means you have decided that the state knows what’s best for you and your family. In addition, dying without a will means you want to make the settling of your estate as difficult, as costly and as public as possible.

As with any decision, there are both positives and negatives to a will. That said, we strongly believe the benefits of writing a will far outweigh the drawbacks.

Is a trust for you?

  1. Are your beneficiaries unwilling or unable to handle the responsibilities of an outright gift (investing the assets, spending the gift wisely, etc.)?
  2. Do you want to keep the amount and the ways your assets are distributed to heirs a secret?
  3. Do you want to delay or restrict the ownership of the assets by the beneficiary?
  4. Do you need to provide protection from your and/or your beneficiary’s creditors and plaintiffs?
  5. Do you want to lower your estate taxes?

 If you answered “yes” to any of the five questions, you may find it beneficial to set up a trust.

Advantages:

  • You decide on the disposition of your hard-earned wealth.
  • Estate taxes are mitigated—especially when the will is part of a broader estate plan.
  • You specify who the fiduciaries will be.

Disadvantages:

  • You have to accept that one day—far in the future—you just might die.
  • There is a legal cost associated with writing up a will and with estate planning.

Trust in trusts

The second component of a smart estate plan is often a trust. A trust is nothing more than a means of transferring property to a third party—the trust. Specifically, a trust lets you transfer title of your assets to trustees for the benefit of the people you want to take care of—aka your selected beneficiaries. The trustee will carry out your wishes on behalf of your beneficiaries.

WILLS AND TRUSTS COMPARED 

Broadly speaking, there are two types of trusts: living (established while you are alive) and testamentary (created by your will after you’ve passed). Living trusts are becoming more and more popular to avoid the cost of probate. In the probate process, your representatives “prove” the validity of your will. The probate process also gives any creditors the opportunity to collect their due before your estate is passed to your heirs. There may be a long delay in settling your estate as it goes through probate. To add salt to the wound, probate can be costly. 

A living trust can avoid or mitigate the effects of probate. It is a revocable trust that you establish and of which you are also typically the sole trustee. The assets in your living trust avoid probate at death, and are instead distributed to your heirs according to your wishes.

Living trusts are sometimes said to be superior to a will, but that is certainly not the case for everyone. It’s important that you understand how they compare.

Comparing Wills and Living Trusts

Wills Living Trusts
Are viable only at death. Can have uses while you’re alive.
Are public. Are private.
Are not very good when you’re dealing with more than one state. Are good in every state and not encumbered by states.
Must go through probate. Can generally avoid probate.
Are less expensive to put in place. Are more expensive to put in place and administer.

Is a living trust for you? It depends on your particular situation. Nevertheless, you should certainly consider it in consultation with your legal advisor or wealth manager.

Your next move

We recommend that your estate plan be reviewed every year or two. The review should be conducted by a high-caliber wealth manager or tax professional—one who takes the time to learn what’s changed since you put your solutions in place, assess how those changes might impact your strategy, and make recommendations for getting your solutions current and in accordance with your wishes.

ACKNOWLEDGMENT: This article was published by the BSW Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2017 by AES Nation, LLC.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This article is for general information only and is not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.

 

 

Avoid These Life Insurance Missteps

Shop wisely when you look for coverage.

Are you about to buy life insurance? Shop carefully. Make your choice with insight from an insurance professional, as it may help you avoid some of these all-too-common missteps.

Buying the first policy you see. Anyone interested in life insurance should take the time to compare a few plans – not only their rates, but also their coverage terms. Supply each insurer you are considering with a quote containing the exact same information about yourself.1

Buying only on price. Inexpensive life insurance is not necessarily great life insurance. If your household budget prompts you to shop for a bargain, be careful – you could end up buying less coverage than your household really needs.1  

Buying a term policy when a permanent one might be better (and vice versa). A term policy (which essentially offers life insurance coverage for 5-30 years) may make sense if you just want to address some basic insurance needs. If you see life insurance as a potential estate planning tool or a vehicle for building wealth over time, a permanent life policy might suit those ambitions.1  

Failing to inform heirs that you have a policy. Believe it or not, some people buy life insurance policies and never manage to tell their beneficiaries about them. If a policy is small and was sold many years ago to an association or credit union member (i.e., burial insurance), it may be forgotten with time.2

Did you know that more than $7 billion in life insurance death benefits have yet to be claimed? That figure may not shrink much in the future, because insurers have many things to do other than search for “lost” policies on behalf of beneficiaries. To avoid such a predicament, be sure to give your beneficiaries a copy of your policy.2

Failing to name a beneficiary at all. Designating a beneficiary upon buying a life insurance policy accomplishes two things: it tells the insurer where you want the death benefit to go, and it directs that death benefit away from your taxable estate after your passing.3 

Waiting too long to buy coverage. Later in life, you may learn you have a serious medical condition or illness. You can certainly buy life insurance with a pre-existing health condition, but the policy premiums may be much larger than you would prefer. The insurer might also cap the policy amount at a level you find unsatisfactory. If you purchase a guaranteed acceptance policy, keep in mind that it will probably take 2-3 years before that policy is in full force. Should you pass away in the interim, your beneficiaries will probably not collect the policy’s death benefit; instead, they may receive the equivalent of the premiums you have paid plus interest.3

Not realizing that permanent life insurance policies expire. Have you read stories about seniors “outliving” their life insurance coverage? It can happen. Living to be 90 or 100 is not so extraordinary as it once was.3

Permanent life insurance products come with maturity dates, and for years, 85 was a common maturity date. If you live long enough, you could outlive your policy. The upside of doing so is that you will receive a payout from the insurer, which may correspond to the policy’s cash value at the maturity date. The downside of outliving your policy? If you want further insurance coverage, it may not be obtainable – or it could be staggeringly expensive.3

Take your time when you look for life insurance, and compare your options. The more insight you can draw on, the more informed the choice you may make.

Mike Moffitt may be reached at phone# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com           

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

     Citations.

1 – smartasset.com/life-insurance/5-mistakes-to-avoid-when-buying-life-insurance [4/11/18]

2 – kiplinger.com/article/saving/T063-C032-S014-could-unclaimed-money-be-yours.html [10/13/17]

3 – nasdaq.com/article/4-errors-to-avoid-with-your-life-insurance-cm868133 [10/30/17]

 

Annuities for Retirement Income

What prospective annuity holders should consider.

Imagine an income stream you cannot outlive. This may be an appealing benefit for most annuities. If you are interested in steady retirement income (and the potential to defer taxes), you might want to look at the potential offered by annuities. Before making the leap, however, you should understand how they work.

Just what is an annuity? It is an income contract you arrange with an insurance company. You provide a lump sum or continuing contributions to fund the contract; in return, the insurer agrees to pay you a specific amount of money in the future, usually per month. If you are uncomfortable developing an income plan on your own or do not have time, annuities may appear very attractive options. While there are different kinds of annuities available with a myriad of riders and options that can be attached, the basic annuity choices are easily explained.2

Annuities can be either immediate or deferred. With an immediate annuity, payments to you begin shortly after the inception of the income contract. With a deferred annuity, you make regular contributions to the annuity, which accumulate on a tax-deferred basis for a set number of years (called the accumulation phase) before the payments to you begin.1,2

Annuities can be fixed or variable. Fixed annuities pay out a fixed amount on a recurring basis. With variable annuities, the payment can vary: these investments do essentially have a toe in the stock market. The insurer places some of the money that you direct into the annuity into suitable investments, attempting to capture some of the upside of the market, while promising to preserve your capital. Some variable annuities come with a guaranteed income benefit option: a pledge from the insurer to provide at least a certain level of income to you.1,3

In addition, some annuities are indexed. These annuities can be either fixed or variable; they track the performance of a stock index (often, the S&P 500), and receive a credit linked to its performance. For example, if the linked index gains 8% in a year, the indexed annuity may return 4%. Why is the return less than the actual index return? It is because the insurer usually makes you a trade-off: it promises contractually that you will get at least a minimum guaranteed return during the early years of the annuity contract.3

Annuities require a long-term commitment. Insurance companies expect annuity contracts to last for decades; they have built their business models with this presumption in mind. So, if you change your mind and decide to cancel an annuity contract a few years after it begins, you may have to pay a surrender charge – in effect, a penalty. (Most insurance companies will let you withdraw 10-15% of the money in your annuity without penalty in an emergency.) Federal tax law also discourages you from withdrawing money from an annuity – if the withdrawal happens before you are 59½, you are looking at a 10% early withdrawal penalty just like the ones for traditional IRAs and workplace retirement accounts.1,3

Annuities can have all kinds of “bells and whistles.” Some offer options to help you pay for long-term are. Some set the length of the annuity contract, with a provision that if you die before the contract ends, the balance remaining in your annuity will go to your estate. In fact, some annuities work like joint-and-survivor pensions: when an annuity owner dies, payments continue to his or her spouse. (Generally, the more guarantees, riders, and options you attach to an annuity, the lower your income payments may be.)1

Deferred annuities offer you the potential for great tax savings. The younger you are when you arrange a deferred annuity contract, the greater the possible tax savings. A deferred annuity has the quality of a tax shelter: its earnings grow without being taxed, they are only taxable once you draw an income stream from the annuity. If you start directing money into a deferred annuity when you are relatively young, that money can potentially enjoy many years of tax-free compounding. Also, your contributions to an annuity may lower your taxable income for the year(s) in which you make them. While annuity income is regular taxable income, you may find yourself in a lower tax bracket in retirement than when you worked.1

Please note that annuities come with minimums and fees. The fee to create an annuity contract is often high when compared to the fees for establishing investment accounts – sometimes as high as 5-6%. Annuities typically call for a minimum investment of at least $5,000; realistically, an immediate annuity demands a five- or six-figure initial investment.3

No investment is risk free, but an annuity may offer an intriguing investment choice for the risk averse. If you are seeking an income-producing investment that attempts to either limit or minimize risk, annuities may be worth considering.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com           

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

*Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.    

Citations.

1 – investopedia.com/articles/retirement/05/063005.asp [1/2/18]

2 – forbes.com/sites/forbesfinancecouncil/2018/01/04/annuities-explained-in-plain-english/#626afc215bd6 [1/4/18]

3 – apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=20&SnavID=29&TnavID&AreasofExpertiseID=107 [3/6/18]

 

 

When Gadgets Get on Your Nerves

How tech can make retirement harder for some couples.

In some retiree households, technology can cause friction. Maybe one spouse or partner is tech-savvy, while the other is not. Maybe one spouse or partner overshares on social media, to the other’s dismay. Or, one or both parties use their phones, tablets, or computers as distractions from relationship issues. According to a new Oxford University study, couples that frequently used five or more electronic communication channels reported 14% less satisfaction in their relationships than couples less reliant on them.

If too much tech is making your retired life harder instead of easier, think about these steps. Set aside some unplugged time – no screens at dinner, for example. Talk to your spouse or partner in person rather than via text. Affirm your spouse or partner in what you post, instead of merely including him or her. A lack of face-to-face engagement can make someone feel lonely and detached, but a good and open conversation can bring couples closer.2

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

CITATIONS

2 – forbes.com/sites/nextavenue/2018/03/08/how-tech-can-make-retirement-harder-for-couples/ [3/8/18]

What Should You Keep?

Even with less itemizing, there are still tax documents you want to retain for years to come.

Fewer taxpayers are itemizing in the wake of federal tax reforms. You may be one of them, and you may be wondering how many receipts, forms, and records you need to hold onto for the future. Is it okay to shred more of them? Maybe not.

The Internal Revenue Service has not changed its viewpoint. It still wants you to keep a copy of this year’s 1040 form (and the supporting documents) for at least three years. If you somehow fail to report some income, or file a claim for a loss related to worthless securities or bad debt deduction, make that six years or longer. (It also wants you to keep employment tax records for at least four years.)1

Insurers or creditors may want you to keep records around longer than the I.R.S. recommends – especially if they concern property transactions. For the record, the I.R.S. advises you to keep documents linked to a property acquisition until the year when you sell the property, so you can do the math necessary to figure capital gains or losses and depreciation, amortization, and depletion deductions.1

Can you scan documents for future reference and cut down the clutter? Yes. The I.R.S. says that legibly scanned documents are acceptable to its auditors. It wants to you keep digitized versions of paper records for as long as you would keep the hard-copy equivalents. Assuming you back them up, digital records may be more durable than hard copies; after all, ink on receipts frequently fades with time.2

While many itemized deductions are gone, many records are worth keeping. Take the records related to investment transactions. It is true that since 2011, U.S. brokerage firms have routinely tracked the cost basis of equity investments purchased by their clients, to help their clients figure capital gains. Some of the biggest investment providers, like Fidelity and Vanguard, have records for brokerage transactions going back to the 1990s. Even so, errors are occasionally made. Why not save your year-end account statement (or digital trading notifications) to be safe? In addition, you will certainly want to keep any records related to Roth IRA conversions (which as of the 2018 tax year can no longer be recharacterized).3,4,5

The paper trail pertaining to health care should also be retained. In 2018, you can deduct qualified medical expenses that exceed 7.5% of your adjusted gross income (the threshold is scheduled to rise to 10% in 2019).4,5

Some records really should be kept for decades. Documentation for mortgages, education loans, loans from a retirement plan at work, and loans from an insurance policy should be retained even after the loan is paid back. Documentation pertaining to a divorce should probably be kept for the rest of your life, along with paperwork related to life insurance. You should also keep copies of property and casualty insurance policies, receipts of expenses for home repair or upgrades, and inventories of valuable and moderately valuable items at your home or business.

The big picture of personal financial recordkeeping has not changed much. It is still wise to keep records pertaining to financial, health care, insurance, and real estate matters for at least a few years, and perhaps much longer.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records [2/23/18]

2 – turbotax.intuit.com/tax-tips/tax-planning-and-checklists/keeping-good-tax-records/L61fGcXtc [3/15/18]

3 – nytimes.com/2018/02/23/your-money/financial-documents-you-should-keep.html [2/23/18]

4- turbotax.intuit.com/tax-tips/health-care/can-i-claim-medical-expenses-on-my-taxes/L1htkVqq9 [3/15/18]

5- irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions [1/23/18]

 

2018 Tax Guide

The legislation popularly know as the Tax Cuts & Jobs Act did not  exactly “rewrite the book” of the federal tax laws, but it almost seems that way. 

On January 1, a host of important, new tax provisions entered the Internal Revenue Code, and others were suddenly repealed.

 Due to these reforms, federal tax law has changed to a degree unseen since the 1980s. This guide reviews the major adjustments to the Internal Revenue Code and more:

  • Key tax changes for households
  • Key tax changes for businesses
  • Tax breaks disappearing in 2018
  • Social Security & Medicare changes
  • COLAs & Phase-Out Range Adjustments
  • Last, but not least, some other, interesting developments

Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.

Key Tax Changes for Households

Whether you file singly, jointly, or as a head of household, you will want to keep these significant alterations to federal tax law in mind. These new tax provisions will remain in place through at least 2025.

 1 Lower income tax rates and adjusted tax brackets.

Thanks to the tax reforms, the seven income tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% have been revised to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The new taxable income thresholds:

 

Bracket          Single Filers                       Married Filing Jointly            Married Filing                 Head of Household

                                                                    or Qualifying Widower         Separately                      

 

10%                $0 – $9,525                       $0 – $19,050                           $0 – $9,525                     $0 – $13,600

12%                $9,526 – $38,700             $19,051 – $77,400                 $9,526 – $38,700           $13,601 – $51,800

22%                $38,701 – $82,500           $77,401 – $165,000              $38,701 – $82,500         $51,801 – $82,500

24%                $82,501 – $157,500        $165,001 – $315,000            $82,501 – $157,500      $82,501 – $157,500

32%                $157,501 – $200,000      $315,001 – $400,000            $157,501 – $200,000    $157,001 – $200,000

35%                $200,001 – $500,000      $400,001 – $600,000            $200,001 – $300,000    $200,001 – $500,000

37%                $500,001 and up             $600,001 and up                   $300,001 and up           $500,001 and up

The federal government is now using the Chained Consumer Price Index to calculate inflation. That should reduce the size of the yearly adjustments to these brackets.

In scrutinizing all this, you may notice something: the “marriage penalty” applying to combined incomes is nearly gone. That is, the thresholds for joint filers are simply double what they are for single filers for five of the seven brackets. Only married couples in the two uppermost brackets now face the “marriage penalty.”1,2

2 The standard deduction nearly doubles.

While the personal exemption is gone (more about that later), the new law gives an enormous boost to the standard deduction in 2018 for all filers.2

*Single filer: $12,000 (instead of $6,500)

*Married couples filing separately: $12,000 (instead of $6,500)

*Head of household: $18,000 (instead of $9,350)

*Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

Incidentally, the additional standard deduction remains in place. Single filers who are blind, disabled, or aged 65 or older can claim an additional $1,600 deduction for 2018. Married joint filers can claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 in 2018.3

3 AMT exemption amounts are much larger.

The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

Look at the change in AMT exemption amounts for 2018:

*Single filer or head of household: $70,300 (was $54,300 in 2017)

*Married couples filing separately: $54,700 (was $42,250 in 2017)

*Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers, as opposed to respective, prior thresholds of $120,700 and $160,900.2

4 The Child Tax Credit doubles to $2,000.

In compensation for the loss of the personal exemption, the Tax Cuts & Jobs Act boosted this credit, which is especially significant for large families. Up to $1,400 of the CTC is now refundable. Phase-out thresholds for the credit have moved north dramatically. They are now set at the following modified adjusted gross income (MAGI) levels:

*Single filer or head of household: $200,000 (was $75,000 in 2017)

*Married couples filing separately: $400,000 (was $110,000 in 2017)

Also, the Child & Dependent Care Tax Credit remains – parents still have a chance to deduct qualified child care expenses of up to $1,050 for one child under age 13 or $2,100 for two children under age 13. Dependent care Flexible Spending Accounts (FSAs) are still allowed as well: employees may save up to $5,000 of pre-tax dollars per year to help pay for qualified child care expenses.

Lastly, see the “Other Interesting Developments” section of this guide to learn about a significant non-financial change involving the Child Tax Credit.2,4

5 You may be eligible to claim a new $500 non-refundable credit for non-child dependents.

This represents an effort to compensate for the loss of the personal exemption taxpayers could previously claim for non-child dependents. The MAGI phase-out thresholds applicable to the Child Tax Credit also apply to this “family credit.” You are eligible to claim it if you have qualifying dependents in your household who do not meet the federal tax definition of a qualifying child: parents, relatives, children age 17 or older.2,5

6 The yearly SALT deduction is capped at $10,000.

This is arguably the most controversial tax law change of 2018 for individual taxpayers. If you live in a high-tax state (or alternately, a state that imposes no income tax), you may be grumbling about the new cap on the state and local tax (SALT) deduction. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or (b) state and local income taxes or sales taxes annually. Taxes paid or accumulated as a consequence of trade activity or business activity are exempt from the $10,000 limit.

The SALT deduction cap is just $5,000 for married taxpayers who file their returns separately.1,6

7 The ceiling on the mortgage interest deduction falls to $750,000.

As the median U.S. home price is well under $750,000, a relatively small percentage of homebuyers will be affected by this change. The new annual $750,000 limit applies for any taxpayer taking out a home loan between December 15, 2017 and December 31, 2025. For those who arranged their mortgages prior to this window of time, the $1 million ceiling remains in place.

There is much more to note on this topic. When the Bipartisan Budget Act of 2018 became law on February 9, a pair of expired tax breaks were retroactively reinstated for the 2017 tax year: taxpayers still have an opportunity to deduct mortgage insurance premiums and may also exclude income from the discharge of debt on their principal residence, if eligible for such a deduction. Regarding mortgage insurance premiums, a taxpayer is fully eligible to claim that deduction when his or her adjusted gross income (AGI) is below $100,000 (a phase-out range occurs between $100,000-$110,000). The total of the mortgage insurance premiums is treated as additional deductible mortgage interest. 7

Homeowners should also be aware that the annual mortgage interest deduction is now just $375,000 for married taxpayers filing separately and that the deduction for interest paid on home equity debt has disappeared.2,6

8 The qualified medical expense deduction improves.

One of the few itemized deductions kept under the tax reforms also has a lower threshold this year. You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies to qualified medical expenses in 2017 and 2018. (The old deduction threshold was 10%.)2,6

9 529 plan assets may now be used to pay for qualified elementary education expenses.

Prior to 2018, 529 plans were college savings vehicles only; assets within them were earmarked for payment of qualified higher education expenses. Now, federal tax law says you can also distribute up to $10,000 a year from a 529 plan to pay for K-12 tuition, tutoring, and linked curriculum materials and that these qualified distributions will be tax free. Some state laws governing 529 plans do not allow this, however. As a result, 529 plan participants in select states are being told to wait before devoting any 529 plan assets to elementary education, as they risk wading into a gray area in terms of tax law by doing so.6,8

Incidentally, funds from 529 plans may not be used to pay homeschooling expenses for students who would otherwise attend classes in grades K-12.8

10 No one may recharacterize a Roth IRA conversion.

Before this year, a traditional IRA owner who “went Roth” and subsequently changed his or her mind had a chance to undo the conversion within a certain time frame. This option is now disallowed.9

11 The federal estate tax exemption doubles.

Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.2,6

12 Two changes apply to the charitable deduction.

The charitable deduction was retained amid the tax reforms, but middle-class taxpayers may have far less incentive to donate to charity than they once did due to the greater standard deduction. A pair of adjustments have been made. One, taxpayers can now deduct charitable donations equal to 60% of their incomes; previously, the limit was 50%. Two, charitable contributions made to a university or college that give the donor the right to buy sports tickets are no longer deductible.2

13 Certain types of discharged student loan debt are now exempt from income tax.

From 2018-25, no income tax will be applied to federal or private student loan debt discharged because of the borrower’s death or disability.

In the past, if a borrower died or became severely disabled while carrying an outstanding education loan balance, the lender could release the borrower from liability and reduce the debt to zero. The only problem: the I.R.S. viewed the discharged debt as the equivalent of income. A $10,000 discharged student loan would have ordinary income tax levied on it. Now, that will not happen. The new law does not mandate private lenders to discharge debt on these occasions, however.6

Key Tax Changes for Businesses

Some of these alterations to the Internal Revenue Code are permanent, unlike nearly all the changes affecting households.

 1 The corporate tax rate is now a flat 21%.

Last year, the corporate tax rate was marginally structured and topped out at 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new, permanent 21% flat rate brings U.S. corporate taxation in line with that in many other nations. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.2,6

2 Our corporate tax system is now territorial.

The 2018 federal tax reforms instruct the I.R.S. to treat foreign profits more gently. Before the reforms, the U.S. corporate tax system was a worldwide system, meaning that American corporations paid American taxes on profits earned outside America; that amounted to a double tax on those profits, and those profits could be subjected to a 35% corporate tax rate in the process.

Now repatriated earnings are being taxed differently to encourage U.S. companies to bring profits home rather than leave them overseas. A new, one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% on illiquid assets is in place, payable over a comfortable, 8-year term.2

3 The corporate AMT has been eliminated.

The 2018 tax reforms permanently repealed this 20% supplemental tax.2

4 Many pass-through businesses can claim a 20% deduction on earnings.

Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)

Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.6,10

 

5 The Section 179 deduction doubles.

Business owners who want to deduct the whole cost of an asset during its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million.1

6 Bonus depreciation also doubles.

This is a near-term perk, one that, starting in 2027, will likely vanish for most pass-through firms and corporations. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company can now write off 100% of qualified property costs through 2022 rather than through a longer period. Besides the jump from 50% to 100%, there is another eye-opener here: bonus depreciation now applies for used equipment as well as new equipment.1,10

7 1031 exchanges are restricted to real estate.

Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property pass muster.10

8 Deductions for business interest expenses are now limited to 30% of AGI for large firms.

This limit pertains to firms with over $25 million in gross receipts.1,10

9 Carryover and deduction rules applying to net operating losses change.

Before 2018, most net operating losses incurred were eligible for a 2-year carryback and a 20-year carryforward, and both carryovers and carrybacks could offset as much as 100% of taxable income. While carrybacks are still permitted for two years, NOLs may now be carried forward indefinitely – but they can only offset up to 80% of income.10,11

 Tax Breaks Gone in 2018

Due to the reforms, some standbys of federal tax law are gone this year and for the foreseeable future. It is too early to tell if they will return in coming years.

 1 Personal exemptions are eliminated.

In the interest of simplification, the new tax reforms repeal the core personal exemption, plus the exemptions taxpayers could claim for relatives and dependent children. (The personal exemption phase-out rule naturally disappears as well.) The new $12,000 standard deduction financially surpasses the previously scheduled combination of the personal exemption and standard deduction for 2018 ($6,500 standard deduction + $4,150 personal exemption).1,2

 2 Many itemized deductions are gone.

When the Tax Cuts & Jobs Act headed to Congress in fall 2017, it appeared the list of repealed deductions would be very long. While some itemized deductions were retained, the list of lost deductions includes the following:

*Home equity loan interest deduction

*Moving expenses deduction

*Casualty and theft losses deduction (though it still applies this year in certain areas; see the “Other Interesting Developments” section)

*Unreimbursed employee expenses deduction

*Subsidized employee parking and transit deduction

*Tax preparation fees deduction

*Investment fees and expenses deduction

*IRA trustee fees (if paid separately)

*Convenience fees for debit and credit card use for federal tax payments

*Home office deduction

*Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025.12,13

Several expired deductions have been put back into place for the 2017 tax year, thanks to the Bipartisan Budget Act of 2018.

*The above-the-line deduction for qualified tuition and related expenses was retroactively reinstated for TY 2017. With this in place again, a taxpayer has the option to take a deduction for the amount of tuition and linked higher education expenses from adjusted gross income (AGI) on page 1 of Form 1040, if it provides a better tax break than claiming the Lifetime Learning Credit or the American Opportunity Tax Credit for the same expenses.

*As noted earlier, the deduction for mortgage insurance premiums is back.

*So is the chance to exclude the amount of debt forgiven on your principal residence from your taxable income.

*Three credits pertaining to energy efficiency have been restored for 2017. One, the 10% tax credit for energy-efficient home improvements returns, with its $500 ceiling now limited to a lifetime available credit. Two, the 10% residential energy property credit for the use of qualified fuel cell, small wind energy, fiberoptic solar lighting, and geothermal heat pump components returns – in fact, these credits will be offered through 2021. Three, the 10% tax credit for buying a two-wheeled, plug-in electric vehicle returns, with a limit of $2,500.

*If you are eligible to claim the Earned Income Tax Credit for 2017, you can either use your earned income from 2016 or 2017 to calculate the credit – whichever amount gives you the chance for a larger tax break.7

 Social Security & Medicare Changes

1 Social Security benefits increase 2.0%.

This increase in retirement income is essentially eaten up by higher Medicare Part B premiums for many seniors, however (see #3 below).14

2 Social Security withholding thresholds are higher.

Before and during the year you reach Full Retirement Age, Social Security withholds some of your benefits when your earned income surpasses certain thresholds.

If you have yet to reach your FRA, you may earn up to $17,040 in 2018 before having $1 in benefits withheld for each additional $2 in earned income above that level.

If you reach your FRA in 2017, you may earn as much as $45,360 before having $1 in benefits withheld for each additional $3 in earned income above that level.14

3 Many seniors are paying higher Medicare Part B premiums this year.

In 2017, Medicare’s “hold harmless” statute held Part B premium costs down for about 70% of Medicare enrollees. While around 30% of Medicare recipients paid about $134 per month for Part B coverage, others paid Part B premiums of just $107-109 as a result. They got this discount because the “hold harmless” rule says that on an annual basis, Part B premiums cannot increase more than Social Security’s cost-of-living adjustment – and the 2017 COLA was tiny.

This year, about 42% of Medicare recipients will pay the standard Part B premium even though they are subject to the “hold harmless” provision, as the annual increase in their Social Security benefits will equal or surpass the increase in their Part B premiums. Around 28% of recipients will pay less than $134 per month for Part B, since the annual increase in their Social Security benefits will be less than the Part B premium increase.15

4 Medicare’s Part A deductible increases.

In 2017, the Part A deductible (on hospital stays) is $24 higher than in 2017, rising to $1,340. The yearly Part B deductible remains at $183.15

5 There are some Part D adjustments of note.

Medicare enrollees in Part D drug plans will pay only 35% of the cost of brand-name medications and 44% of the cost of generics while in the “donut hole” in 2018. Average monthly premiums for standalone Part D drug plans are expected to become $1.20 cheaper this year; the projected average is $33.50. The annual Part D plan deductible limit rises $5 this year to $405.16

6 New I.D. cards are being issued to Medicare recipients.

“Why did Medicare put my Social Security Number on my Medicare I.D. card?” If you have ever asked this question (and in this age of rampant identity theft, you may have asked it more than once), you will be glad to know an answer to this problem is just ahead. Medicare is mailing out new I.D. cards in April. These new cards will not have your SSN, but a new 11-character Medicare Beneficiary Identifier (MBI) code made up of numbers and upper-case letters.17

 COLA Phase-ut Range Adjustments

Here are some details pertaining to retirement plans and other items largely unaffected by the 2018 tax reforms.

1 Many cost-of-living adjustments have been made.

 *401(k), 403(b), 457 Plan Contribution Limits

The ceiling on elective deferrals to these plans rises to $18,500, with an additional standard catch-up contribution of up to $6,000 permitted for those who will be 50 or older by the end of 2018.18

 *Defined Contribution Plan Annual Addition Limit

In 2018, the cap on annual employer profit-sharing additions to these plans heads from $54,000 up to $55,000.18

*SEP Plan Contribution Limits

Employers may contribute up to $55,000 (or up to 25% of eligible compensation per employee) to a SEP plan in 2018, to a cap of $275,000. Both limits were $5,000 lower in 2017. The minimum compensation level is again at $600.18

*Limit on ESOP Maximum Balance

This improves by $25,000 to $1,105,000 in 2018.18

 *Amount for Lengthening of 5-Year ESOP Period

As in 2017, this limit gets a COLA of $5,000, moving north to $220,000.18

 *Limit on Annual Retirement Benefit Payable from a Defined Benefit Plan

Another $5,000 COLA also pushes this limit to $220,000.18

 *Limit on Income Subject to Social Security Tax

For 2018, the taxable wage base rises to $128,400, an increase of $1,200. 18

 *Health Savings Account Contribution Limits

The annual contribution limit for a self-only policy increases $50 this year to $3,450. It is $4,450 for those who will be 55 and older in 2018. The contribution limit on a family policy rises $150 this year to $6,900 and $7,900 for those who will be 55 and older this year.19

*Out-of-Pocket Amount Limits for Medical Savings Accounts (MSAs)

The 2018 caps are $4,600 for self-only coverage (a $100 increase) and $8,400 for family coverage (up by $150).20

*Earned Income Credit

If your family has three or more qualifying children and you are married and filing jointly, the maximum EIC is $6,444 this year, $126 more than last year.20

*Adoption Credit

The credit has a limit of $13,840 in 2018, a $270 increase. (Married couples who file separately may not be eligible to claim it.)21

*Annual Gift Tax Exclusion

For the first time in five years, this limit gets a COLA. It rises $1,000 to $15,000 in

  1. (It is never adjusted in increments greater than $1,000.)21

*Foreign Earned Income Exclusion

This rises $2,000 to $104,100 in 2018.20

 No 2018 COLAs have been made to these limits:

*IRA Contribution Limit

The yearly cap of $5,500 stays in place. An additional $1,000 catch-up contribution

is allowed for those who will be 50 or older by the end of 2018, so the cap for those

IRA owners is $6,500.18

 *SIMPLE Plan Contribution Limit

The annual limit is still $12,500 with a $3,000 catch-up contribution permitted for those who will be 50 or older by the end of this year.18

*Definition of a Key Employee

The dollar limitation linked to the definition of a key employee in a top-heavy plan stays at $175,000.18

*Definition of a Highly Compensated Employee

The definition (used with regard to defined contribution and defined benefit plans) stays at $120,000 this year.18

2 Numerous phase-out ranges have been adjusted higher for inflation.

*Traditional IRA Contribution Deductions When You or Your Spouse Have Access to a Retirement Plan at Work

In 2018, the MAGI phase-out ranges are:

*Single filer or head of household: $63,000-$73,000 ($1,000 higher)

*Married couples filing jointly: $101,000-$121,000 ($2,000 higher)

*Married couples filing separately: $0-$10,000 (it never changes)

Below the phase-out ranges, you may claim a dollar-for-dollar deduction for contributions to a traditional (i.e., deductible) IRA. These are not phase-outs affecting the amount of your traditional IRA contributions. They only affect the amount of the deduction you may take on your 1040 form for making them during 2018.22

*Traditional IRA Contributions if You Lack Access to a Workplace Retirement Plan, but Your Spouse Has Access to Such a Plan

Note the slight increase for joint filers here.

*Married couples filing jointly: $189,000-$199,000 ($3,000 higher)

*Married couples filing separately: $0-$10,000 (it never changes)22

*Roth IRA Contributions

Your ability to make a 2018 Roth IRA contribution is reduced when your MAGI falls into these phase-out ranges. If it exceeds the high end of these ranges, you cannot make one.

*Single filer or head of household: $120,000-$135,000 ($2,000 higher)

*Married couples filing jointly: $189,000-$199,000 ($3,000 higher)

*Married couples filing separately: $0-$10,000 (it never changes)22

*Lifetime Learning Credit

This year, the phase-out ranges start at $57,000 for single filers ($1,000 higher) and $114,000 for joint filers ($2,000 higher).21

*Adoption Credit

The MAGI phase-out range in 2018 rises by $4,040 to $207,580-$247,580. This range applies for all filing statuses.21

*Saver’s Credit

In 2018, taxpayers are not eligible to claim this credit of up to $2,000 if their MAGI is above $63,000 as a joint filer, $47,250 as a head of household, or $31,500 otherwise.22

Other Interesting Developments

1 The long-term capital gains tax rate thresholds do not quite sync with the new income tax thresholds.

 Taxpayers in the bottom two marginal tax brackets paid no tax on long-term capital gains tax in 2017. Taxpayers in the top marginal bracket paid a tax of 20%. Everyone else faced a tax of 15%. This year, the long-term capital gains rates are structured as follows:

Bracket          Single Filers                       Married Filing Jointly            Married Filing                 Head of Household

                                                                    or Qualifying Widower         Separately                      

 

0%                  $0 – $38,600                     $0 – $77,200                           $0 – $38,600                   $0 – $51,700

15%                $38,601 – $425,800        $77,201 – $479,000              $38,601 – $239,800      $51,701 – $452,400

20%                $425,801 and up             $479,000 and up                   $239,501 and up           $452,401 and up

As for short-term capital gains, they are taxed as ordinary income – and since tax rates fell slightly at the beginning of 2018, any short-term gains you take in could be taxed less than they would have been last year.

The highest earners should know that the 3.8% net investment income tax still exists – it was not repealed in December, and its income thresholds remain the same.2

 2 The individual health insurance mandate is still here for 2018, but scheduled for repeal in 2019.

The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year.1,20

3 The electric car credit is still around.

Electric car buyers can claim a credit of as much as $7,500 this year. The credit begins to phase out for buyers of certain makes, however, once a manufacturer sells more than 200,000 plug-in vehicles.23

4 The school supplies deduction remains.

This is the deduction that teachers take for out-of-pocket expenses they incur to buy classroom materials. Although certain legislators in Washington wanted to double it as part of the tax reform package, it was not sweetened. It stays at $250 this year, and teachers may take it whether or not they choose to itemize.6,23

5 Business owners can no longer deduct some food and entertainment costs.

If you are accustomed to writing off some of the cost of a corporate lunch, you are in luck: in most cases, businesses may still deduct 50% of the expenses of qualifying meals. The cost of complimentary snacks you put out for your workers, however, is now just 50% deductible – it gets the same federal tax treatment as restaurant meals you provide to employees.

The deduction for business expenses for employee entertainment fell victim to the reforms and is gone as of 2018.1,23

6 Two important education tax breaks are preserved.

First, tuition waivers for graduate students engaged by universities as researchers or teaching assistants remain tax free. Some worried that their waivers would be subject to income tax as a result of the reforms.

Second, interest on student loan debt can still be deducted, even if a taxpayer declines to itemize deductions.6,23

7 Parents must provide SSNs for their kids when claiming the Child Tax Credit.

You must do this for each child you claim the CTC for in 2018.5

 8 Casualty, disaster, and theft losses are still deductible for some taxpayers, depending on where they live.

During 2018-25, taxpayers who suffered such losses as an effect of a federal disaster declared by the President may still qualify to take a federal tax deduction for these types of personal losses.

In addition, the Bipartisan Budget Act of 2018 extends tax benefits to victims of Hurricanes Harvey, Irma, and Maria and California wildfires. Federal tax relief provided for disaster areas declared between September 21 and October 17, 2017 in the aftermath of Hurricanes Harvey, Irma, and Maria has been prolonged. New rules now allow Golden State residents impacted by wildfires access to retirement funds and temporarily lift limits on deductions for charitable contributions. They also permit deductions for personal casualty disaster losses and alter measurement of earned income to help affected taxpayers qualify for the Earned Income Tax Credit.

Taxpayers who live in 2016 presidentially declared disaster areas may take distributions of up to $100,000 from IRAs and workplace retirement plans regardless of age restrictions – they will not be hit with the 10% early withdrawal penalty for withdrawing these assets too early, they can spread the taxable income represented by the withdrawal over three tax years, and they can optionally repay the amount distributed to them within three years.9,13,24

 9 Chained CPI is now the benchmark for yearly inflation adjustments to federal tax thresholds.

Before 2018, the Consumer Price Index for All Urban Consumers (CPI-U) was the inflation yardstick used to calculate COLAs. Now, the “chained” version of the CPI-U, commonly called the Chained CPI, is being used.

The Chained CPI makes a subtle but important assumption – it assumes that given higher prices, a consumer will choose to substitute a cheaper product or service for a more expensive one in its class. As increases in the Chained CPI are smaller than those of the CPI-U, the switch to the Chained CPI implies that tax bracket and phase-out thresholds will rise in smaller increments, and it also implies smaller COLAs for some credits and deductions.2

Do these tax law changes prompt any concerns or questions? If they do, please feel free to contact me at 641-782-5577 or via email at mikem@cfgiowa.com . I will be happy to discuss them with you.

Sincerely,

Mike Moffitt

ChFC, CEPA

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Advantage Investment Management, a registered investment advisor.  Cornerstone Financial Group and Advantage Investment Management are separate entities from LPL Financial.

This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting, or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both Mike Moffitt and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither Mike Moffitt nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

Citations.

1 – blog.indinero.com/2018-business-tax-deadlines [6/2/17]

2 – thebalance.com/payroll-tax-deadlines-for-january-and-february-3974577 [12/4/17]

3 – tgccpa.com/wordpress/?p=1395 [8/8/17]

4 – trustetc.com/resources/investor-awareness/contribution-limits [1/3/18]

5 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]

6 – fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]

7 – cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html [12/26/17]

8 – cnbc.com/2017/12/22/tax-reform-breaks-may-help-parents-defray-child-care-cost.html [12/26/17]

9 – forbes.com/sites/kellyphillipserb/2017/12/21/how-will-the-expanded-child-tax-credit-look-after-tax-reform/ [12/21/17]

10 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

11 – taxfoundation.org/retirement-savings-untouched-tax-reform/ [1/3/18]

12 – americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill [11/14/17]

13 – rsmus.com/what-we-do/services/tax/washington-national-tax/net-operating-losses-after-the-tax-cuts-and-jobs-act.html [1/2/18]

14 – tinyurl.com/y7uqe23l [12/26/17]

15 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]

16 – ssa.gov/news/press/factsheets/colafacts2018.pdf [1/4/18]

17 – cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-11-17.html [11/17/17]

18 – medicareresources.org/faqs/what-kind-of-medicare-benefit-changes-can-i-expect-this-year/ [9/14/17]

19 – cms.gov/Medicare/New-Medicare-Card/ [1/3/18]

20 – irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions [11/29/17]

21 – irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]

22 – pscpa.com/irs-issues-2018-cost-living-adjustments/ [11/1/17]

23 – ascensus.com/news/industry-regulatory-news/2017/10/19/irs-announces-2018-ira-retirement-plan-limitations/ [10/19/17]

24 – vox.com/policy-and-politics/2017/12/19/16783634/gop-tax-plan-provisions [12/19/17]

 

 

 

How Retirement Spending Changes With Time

Once away from work, your cost of living may rise before it falls.

New retirees sometimes worry that they are spending too much, too soon. Should they scale back? Are they at risk of outliving their money?

This concern is legitimate. Many households “live it up” and spend more than they anticipate as retirement starts to unfold. In ten or twenty years, though, they may not spend nearly as much.1

The initial stage of retirement can be expensive. Looking at mere data, it may not seem that way. The most recent Bureau of Labor Statistics figures show average spending of $60,076 per year for households headed by Americans age 55-64 and mean spending of just $45,221 for households headed by people age 65 and older.1,2

Affluent retirees, however, are often “above average” in regard to retirement savings and retirement ambitions. Sixty-five is now late-middle age, and today’s well-to-do 65-year-olds are ready, willing, and able to travel and have adventures. Since they no longer work full time, they may no longer contribute to workplace retirement plans. Their commuting costs are gone, and perhaps they are in a lower tax bracket as well. They may be tempted to direct some of the money they would otherwise spend into leisure and hobby pursuits. It may shock them to find that they have withdrawn 6-7% of their savings in the first year of retirement rather than 3-4%.

When retirees are well into their seventies, spending decreases. In fact, Government Accountability Office data shows that people age 75-79 spend 41% less on average than people in their peak spending years (which usually occur in the late 40s). Sudden medical expenses aside, household spending usually levels out because the cost of living does not significantly increase from year to year. Late-middle age has ended and retirees are often a bit less physically active than they once were. It becomes easier to meet the goal of living on 4% of savings a year (or less), plus Social Security.2

Later in life, spending may decline further. Once many retirees are into their eighties, they have traveled and pursued their goals to a great degree. Staying home and spending quality time around kids and grandkids, rather than spending money, may become the focus.

One study finds that medical costs burden retirees mostly at the end of life. Some economists and retirement planners feel that retirement spending is best depicted by a U-shaped graph; it falls, then rises as elders face large medical expenses. Research from investment giant BlackRock contradicts this. BlackRock’s 2017 study on retiree spending patterns found simply a gradual reduction in retiree outflows as retirements progressed. Medical expenses only spiked for most retirees in the last two years of their lives.3

Retirees in their sixties should realize that their spending will likely decline as they age. As they try to avoid spending down their assets too quickly, they can take some comfort in knowing that in future years, they could possibly spend much less.

Mike Moffitt may be reached at ph# 641-782-5577 or email mikem@cfgiowa.com

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – kiplinger.com/article/retirement/T037-C032-S014-why-the-4-withdrawal-rule-is-wrong.html [1/25/18]

2 – fortune.com/2017/10/25/retirement-costs-lower/ [10/25/17]

3 – cbsnews.com/news/rethinking-a-common-assumption-about-retirement-spending/ [12/26/17]

Why You Want a Retirement Plan in Writing

Setting a strategy down may help you define just what you need to do. 

Many people save and invest vaguely for the future. They know they need to accumulate money for retirement, but when it comes to how much they will need or how they will do it, they are not quite sure. They will “wing it,” hope for the best, and see how it goes. How do they know they are really contributing enough to their retirement accounts? Would they feel less anxious about the future if they had a written plan?

Make no mistake, a written retirement plan sharpens your focus. It can refine dreams into goals and express a strategy to pursue them. According to a Charles Schwab study, just 24% of Americans plan their financial futures according to a written strategy. Here is why you should join their ranks, if you are not yet among them.1,2

You can figure out the “when” of retirement planning. When do you think you will retire and start drawing income from your taxable and tax-advantaged accounts? At what age do you anticipate you will start to collect Social Security? How long do you think you will live? No, you cannot precisely know the answers to these questions at this point – but you can make reasonable assumptions. Your assumptions may be altered, it is true – but a good retirement plan is an evolving document, one that can be revised with changing times.

You can set a target monthly or annual savings rate. Once you have considered some of the “whens,” you can move on to “how.” Assuming a conservative rate of return on your invested assets, you can specify how much to defer into retirement accounts.

You can decide on a risk tolerance and an investment mix that agrees with it. Ultimately, you will invest in a way that a) makes sense for your objectives and b) makes you comfortable. The investment mix that you decide on today may not be the one you will favor ten years from now or even three years from now. Regular portfolio reviews should complement the stated investment approach.

You can think about ways to get more retirement income instead of less. Tax reduction should be part of your retirement strategy. Think about the possibility of part of your Social Security income being taxed. Think about tax on your Required Minimum Distributions (RMDs) from your IRAs and employee retirement plan. What could you do to manage, or even minimize, the income and capital gains taxes ahead of you?

You can tackle the medical expense question. That is, how will you fund the medical care that you will inevitably need to greater or lesser degree someday? Should you assign part of your savings to a special account or form of insurance for that purpose? Retiring before 65 may mean paying for some private health insurance in the years before Medicare eligibility.

You can think about your legacy. While a retirement plan should not be equated with an estate plan, the very fact of planning for your later years does make you think about some things: where you want your money to go when you are gone; your endgame for your company or professional practice; whether part of your accumulated wealth should go to causes or charities.

 A written plan promotes confidence and a degree of control. A 2017 Wells Fargo/Gallup survey determined that those with written retirement plans were nearly twice as confident of having sufficient retirement income in the future, compared to those with no written plan.3

If you lack a written retirement plan, talk to the financial professional you know and trust about one. Writing it all down may make a difference in planning for your second act.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – kiplinger.com/article/retirement/T023-C032-S014-do-you-have-a-written-financial-plan.html [10/25/17]

2 – aboutschwab.com/images/uploads/inline/Charles_Schwab-Modern_Wealth_Index-findings_deck.pdf [6/17]

3 – time.com/money/4860595/how-to-retire-wealthy/ [7/18/17]

 

Think Total Return

Never touch your principal in retirement?  Think again.

More than a century ago, an American financial archetype emerged – the household that lived on the interest earned by its investments, never touching its principal.

Times have changed. While the Vanderbilts, Carnegies, and Rockefellers could do that back in the Gilded Age, you will likely face a tough challenge trying to do the same in retirement. The reason? Low interest rates.

The federal funds rate has not topped 3% since the winter of 2008. In fact, the nation’s benchmark interest rate has been under 2% since October 2008. In today’s interest rate environment, you will need a substantial investment portfolio to live solely on income and dividends in retirement. In some parts of the country, a million-dollar portfolio might not generate enough income and dividends to help you maintain your lifestyle.1

Try another approach – the approach used by institutional investors. Wall Street money management firms and university endowment funds frequently rely on the total return investment strategy. In a retirement income context, this means that you strategically sell some assets to complement the dividends and interest income you receive.

Portfolio rebalancing is central to the total return strategy. The recurring ups and downs of the financial markets gradually unbalance a portfolio over time. A long bull market, for example, will usually leave a portfolio with a larger stock allocation than initially desired. To get back to the portfolio’s target allocations, you need to sell shares of stock (or, stocks aside, amounts of other kinds of investments). The proceeds of sale equal retirement income for you.

Before you pursue this strategy, you need to determine two things. One, do you have a portfolio built so that you can potentially derive income from diverse asset classes? Two, assuming you have that diversification, how much dividend and interest income is your portfolio likely to generate this year? The amount may fall short of the income you need. Rebalancing might be able to help you make up the slack.

Besides being fundamental to a total return approach for retirement income, rebalancing may also help you accomplish other objectives.

Rebalancing keeps your portfolio diversified, so that your retirement income does not depend too heavily on the performance of one asset class. It can stave off a potentially risky response to the ongoing desire for yield (some investors, frustrated by poor returns, direct money into high-risk investments they barely understand). It may also allow you to sustain your lifestyle and spending; relying only on dividends and interest may cause you to pare your spending back and notably reduce your quality of life.

Think total return. Explore the total return approach to retirement income planning, today.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – thebalance.com/fed-funds-rate-history-highs-lows-3306135 [12/13/17]

 

Why You Should Have an Online Social Security Account

In monitoring your Social Security profile, you may help to thwart fraud.

Could your personal information soon be stolen? The possibility cannot be dismissed. Sensitive financial and medical data pertaining to your life may not be as safe as you think, and thieves may turn to a vast resource to try and mine it – the Social Security Administration.

Consider three facts, which in combination seem especially troubling. One, Social Security’s databases contain sensitive personal information on hundreds of millions of Americans, both living and dead. Two, more than 34 million Americans interact with the SSA online. Three, nearly 100% of Social Security benefits are disbursed electronically.1

The more you reflect on all this, the more you realize that cybercrooks could take advantage of you by creating a bogus online Social Security account in your name, in order to steal your benefits and/or your personal data.

Creating and maintaining a MySSA account may lessen the threat. Last year, Social Security advised all current and future benefit recipients to set up and actively use an online profile. The agency’s blog noted that this simple move could “take away the risk of someone else trying to create [an account] in your name, even if they obtain your Social Security number.” This is a case where you want to be first rather than second.1

Setting up a MySSA account is easy; the first step is to visit ssa.gov. Whether you have an existing account or not, you will want to review your mailing address, date of birth, and other essential pieces of information. If they are not correct, they demand attention. 

Are you working full time in your late sixties? Then be vigilant. If you have reached Full Retirement Age (66 or 67) without filing for retirement benefits, your Social Security profile may be especially tantalizing to a cyberthief. In this circumstance, you are eligible to receive up to six months of benefits retroactively, as a lump sum. That could mean a payday of more than $10,000 for a criminal who assumes your identity.2

Make no mistake, cybercrooks have exploited Social Security accounts. While the SSA told Reuters this year that the incidence of fraud is “very rare,” a 2016 audit by the Office of the Inspector General found that during 2013, around $20 million in Social Security payments were directed to the wrong parties. That swindling involved about 12,200 MySSA accounts – less than 2% of the total in 2013, but certainly enough to raise eyebrows.1,2

The SSA tightened authentication standards in 2017. It added security codes to help certify the legitimacy of MySSA account users. It regularly analyzes MySSA transactions for fraud.1

What should you do if you suspect fraud? If you log in and it appears your monthly benefit has not been sent to you, contact the SSA at 1-800-772-1213 or call your local SSA field office. In addition, you can activate the “Block Electronic Access” option on your MySSA account; that will prevent anyone, you included, from accessing your Social Security records via computer or phone. Electronic access is only restored when you get in touch with Social Security to confirm your identity.1

Establish an online Social Security account and keep checking it. In logging on regularly, you may do your part to help the SSA detect and ward off criminals who could use your identity to collect or file for benefits.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – reuters.com/article/us-column-miller-socialsecurity/social-security-online-accounts-safe-from-identity-theft-idUSKBN1FE296 [1/25/18]

2 – tinyurl.com/yb4wqgka [2/8/18]