Roth IRA Conversions of After-Tax Money: Beware of the IRA Aggregation Rules

How Do the Tax Cuts and Jobs Act of 2017 Effect Roth IRA Conversions?

With the historic low tax rates under the Tax Cuts and Jobs Act of 2017, we have received many inquiries regarding Roth IRA conversions.  Two of the most common inquiries we receive are as follows:  1) when a client retires and wants to convert after-tax money in their employer retirement plan to a Roth IRA, and 2) when a client is not eligible to make Roth IRA contributions but wishes to get additional savings into Roth IRAs.

Transferring After-Tax Contributions from an Employer Plan to a Roth IRA

If you have after-tax contributions in your employer plan and you are retiring, ideally you want the company to issue one check directly payable to a Roth IRA consisting of the after-tax funds and the balance to a rollover IRA or other qualified plan.  That is the easiest way to convert the after-tax contributions to a Roth IRA.  Unfortunately, some companies will not do a direct transfer of the after-tax funds to a Roth IRA and will either write you a check for the after-tax funds or deposit all your retirement funds including the after-tax contributions into a rollover IRA.  If all the funds are deposited into a rollover IRA, then you cannot segregate the after-tax contributions without meeting special rules.  If you receive a separate check for your after-tax contributions, then you have 60 days to transfer that check to a Roth IRA.  If you do not take advantage of the 60-day period, then those dollars can never be recontributed to a Roth IRA.

How Do you Get Additional Funds into IRAs if Your Income is Above the Roth IRA Contribution Income Eligibility Limit?

If your income exceeds the Roth IRA contribution income eligibility limit, then you can make a nondeductible IRA contribution and then convert it to a Roth IRA.  However, if you have pre-existing IRAs, then those IRAs must be considered to determine the taxation of the conversion.  For example, suppose that you make a $5,500 nondeductible IRA contribution but have a rollover IRA of $94,500.  If you were to convert the $5,500, you would likely be surprised to learn that 94.5% of the $5,500 conversion ($94,500 (amount of taxable IRA) divided by $100,000 (total balance of all IRAs) would be taxable.  That is why it is important if you use this technique either not to have other retirement funds or to have all your other retirement funds in Roth IRAs or qualified plans.  Married couples can often use spousal IRAs when one spouse does not have a rollover IRA and is not currently working or is working somewhere that does not have a qualified plan to utilize this technique.

Please do not hesitate to contact me at (412) 521-2732 or send me an email at the link below if you are interested in creative ways to increase your Roth IRA holdings.

 

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Unprecedented 2018 Roth IRA Conversion Opportunities

A For Sale sign showing Roth IRA Conversions For Sale

The 2018 Tax Cuts, Jobs Act of 2017 and Roth IRA Conversions

At first glance, the Tax Cuts and Jobs Act of 2017 would have seemed to reduce the desire for individuals to make Roth IRA conversions for the 2018 tax year and beyond because of the inability to recharacterize Roth IRA conversions as non-conversions by your tax return filing date.  However, the historic low tax rates created under the Tax Cuts and Jobs Act of 2017 only last under current law through 2025 so many taxpayers have been willing to take the risk that the market could decline and have been converting their IRAs to Roth IRAs. The creation of the 22% and 24% tax brackets for 2018 effectively replacing the 25% and 28% tax brackets for 2017 along with an elongation of the tax brackets in 2018 have made a compelling case for Roth IRA conversions.

Roth IRA Conversions – The Benefits of Being Married and Filing Jointly

For example, suppose that you are married filing jointly and had $100,000 of taxable income in both 2017 and 2018.  Further, suppose that you were comfortable making a conversion if your marginal tax rate did not exceed 25%.  In 2017, you could make a $53,100 conversion at 25% and then the next dollar would be taxed at 33%.  In 2018, you could convert $65,000 at a 22% rate and then another $150,000 at a 24% rate.  In this example, a married filing jointly taxpayer can convert an additional $161,900 at a rate of 25% or less in 2018 compared to 2017.

In effect, the current tax law is the equivalence of a “tax sale” so families (grandparents, parents, children, etc.) should collaborate to reach the best strategic Roth IRA conversion answer for their family. Please do not hesitate to contact me at (412) 521-2732 x211 if you would like to discuss a coordinated Roth IRA conversion strategy for your family or;

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Planning For The End: Why Your Will Is Important by Matt Schwartz

 

Image used for Pay Taxes Later blog. Blog post written by Matt Schwartz

Why Have a Will?

Perhaps one of the most common answers to the above question is that a responsible adult should have a Will. However, the benefits of a Will go far beyond satisfying an internal sense of responsibility to your family and loved ones.

Some of the benefits of a Will are expected. Perhaps the most common benefits that come to mind are the opportunity to state who should be in charge of the distribution of your probate assets (it is important to remember that Wills do not govern the distribution of joint assets or assets such as retirement plans and life insurance that pass by beneficiary designation) and how should those assets be distributed to a beneficiary (outright or in trust). Beyond those common benefits are the opportunities to address subtleties such as which beneficiaries should pay the inheritance taxes due on the transfer of your assets. Should those taxes be paid by the residuary beneficiary even if assets are being distributed as specific bequests to friends whom will likely pay inheritance tax at a higher rate than the residuary beneficiary (that is at least commonly the case in Pennsylvania). Additional considerations include determining which assets should be distributed to which beneficiaries. For example, a Roth IRA should never be distributed to a charity and it is far better to use a traditional IRA or retirement plan to fund a charitable bequest than funding that charitable bequest with after-tax assets under a Will.

Preparing or Updating a Will Should Give You Peace of Mind

Despite the above stated positive benefits of a Will, I believe the best benefits of preparing a Will are organizing your affairs. The exercise of preparing a Will should force you to do a formal inventory of your assets and cause you to ask questions such as Am I on track for retirement?, Will my assets last for my lifetime?, How do I want to be remembered? Would my loved ones be able to continue my investment philosophy if I pass away? Could my loved ones find all of my important papers and, if they can, would they know whom to contact first to take care of the administration of my estate?
When we complete estate plans at our office, our goal is not nearly to document your wishes but rather to leave detailed instructions to leave your family prepared to handle the distribution of your assets and to give you peace of mind. Why go through the hassle of meeting with an attorney, sharing some of your most private thoughts and thinking about your mortality if you cannot have true peace of mind as an outcome?

Call me to discuss, revisit, or develop your Will at 412-521-2732 x211 or:

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Best wishes,

Matt Schwartz

What Happens If You Don’t Have A Will?

New Blog by Lead Estate Attorney Matt Schwartz of the Lange Financial Group

Other than getting a tooth pulled, most people would tell you that there are few things that are as unpleasant to them as talking about their future death and wills. Death is an emotional and difficult topic for many people because it forces them to assess their legacy and their life purpose. So what happens if you don’t have a will?

How Are My Assets Distributed at My Death?

To help clients get over their discomfort of discussing their mortality, I explain to clients what will happen if they do not have a Will. Certain assets such as retirement accounts, life insurance policies and joint accounts pass to the successor owner irrespective of whether you have a Will. All other assets that do not have a joint owner or a beneficiary designation would be distributed in accordance with Pennsylvania intestacy law if you pass away without a Will. Examples of such assets are individually owned real estate and individual financial accounts without beneficiary designations.

Who Controls the Distribution of my Assets? Advice from an Estate Attorney

If you are married, it is quite possible that all of your assets are either jointly owned with your spouse or will pass to your spouse by beneficiary designation. If so, it will not be necessary to use a Will to transfer any assets at the first spouse’s death because all of the assets will pass to the surviving spouse independent of any Will. However, if assets are individually owned without a beneficiary designation, then the distribution of those assets will not be permitted until an administrator is appointed for the estate. Although the initial choice for administrator would be the spouse, how will the children decide who should be administrator if your spouse predeceases you or does not have capacity to serve as administrator? Will a majority of the children agree on one of them to serve as administrator?

Who Receives My Assets if I Don’t Have a Will?

Finally, how are individually owned assets without a beneficiary designation distributed if you do not have a Will? Contrary to what most people think, the individually owned assets will be split at the first spouse’s death between the spouse and the children. The surviving spouse is already upset enough about losing their spouse. Finding out that they might not inherit all of the assets of their spouse (this result can be common with families that own real estate or closely held businesses) only adds insult to injury for these surviving spouses.

In future blog articles, we will focus on positive benefits of having a Will. Please do not hesitate to send me an email or give me a call at 412-521-2732 x211 if you would like to have a discussion to revisit your current Will or to develop an initial Will.

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Simplify Your Life After the New Tax Act and Terminate that Irrevocable Life Insurance Trust

Matt Schwartz Blog Photo

Is It Time to Terminate Your Life Insurance Trust?

As a result of the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption is now $11,180,000 per person and $22,360,000 per married couple. How many of you purchased life insurance in a trust in the last 15-20 years when the federal estate tax exemption was $600,000 or even at $2,000,000? If you fall into that category, then you are like me. As the federal estate tax exemption has increased, I started asking myself; ‘Why am I going through all of this work to maintain the insurance trust? Especially since the insurance proceeds would not cause any taxation in my estate, because of the high federal estate tax exemption.’ In addition, I realized that I was inconveniencing my sister as Trustee by asking her to deposit my check for the premium into the insurance trust and then write a check from the trust to the insurance company to pay the policy as well as preparing the Crummey withdrawal notices.

How Does The Process of Paying My Insurance Premiums Change?

A few years ago, I became aware of an opportunity under the Pennsylvania Uniform Trust Act, either to modify or to terminate, an insurance trust without court approval. I decided to utilize this opportunity to terminate my life insurance trust and return the ownership of my life insurance to myself so that I had full autonomy over the life insurance and did not have to inconvenience my sister anymore. It was also crucial that I have full trust in my wife, Beth, of over 20 years and knew that she would make sure that our wishes were honored with the life insurance proceeds if she survives me. So, my insurance premium payments are much simpler each year without the involvement of the insurance trust.

Am I Able To Help You With Your Needs?

As I started to share this story with my clients, they became interested in this idea as well. Please do not hesitate to send me an email or give me a call at 412-521-2732 x211 if you are interested in terminating your insurance trust and making your life simpler.

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Protect Your Social Security from Cyber Criminals

Social Security Fraud Blog for PayTaxesLater.com
As many of you know, I am a strong proponent of waiting until age 70 to apply for Social Security, because I want both you and your surviving spouse to receive the highest benefit possible during your lifetimes. And one of the technical points about Social Security that I’ve never covered in detail in my books – because it’s only been in rare cases that I have recommended that my clients do it – involves applying for benefits retroactively. But in order to make you understand how your future Social Security benefits could be at risk from cyber criminals, I find myself in the strange position of having to give you a quick lesson on how retroactive benefits work.

Suppose that you could have applied for Social Security at your Full Retirement Age (FRA) of 66, but you took my advice and waited so that you can receive the highest benefit possible at age 70. When you turn 67, you go to your doctor for your annual physical. There, the doctor gives you some terrible news – you have six months to live! Now you’re cursing at me because you missed out on all of this Social Security money that you could have collected since you were 66 – or did you? Not necessarily. In certain instances, Social Security will allow you to apply for retirement benefits retroactively. If you qualify, Social Security will send you up to six months of retroactive benefits, paid as a lump sum.

A True Horror Story of a Social Security Fraud Victim

I won’t waste time telling you how you can qualify for retroactive benefits because it’s a complicated topic, and I will not recommend you do it because it will result in lower monthly benefits for the rest of your life. I am going to tell you something very important that you need to understand about retroactive benefits: if you are at least Full Retirement Age but are waiting until age 70 to file for Social Security so that you can earn Delayed Retirement Credits, your account may be compromised by cyber criminals who are trying to get their hands on any lump sum retroactive benefits to which you might be entitled, but have no intention of ever claiming. Here’s a real-life example of what I’m talking about:

I have a client who received an unexpected letter from the Social Security Administration. She and her husband had intended to hold off applying for benefits so that they could earn Delayed Retirement Credits. The letter they received, however, stated that Social Security had approved their request for a lump-sum retroactive benefit payment, which amounted to almost $12,000. Immediately my client and her husband went to their local Social Security office, and in the several hours spent there, discovered that the criminal(s) had called the office and pretended to be her husband. During the conversation, which was on a recorded line, the criminal simply said that he had changed his mind and wanted to apply for benefits retroactively! And the Social Security office complied with his request!

It Seems to Have Become Easier for Criminals

I found this situation to be so unbelievable that I called the Social Security office myself and asked how it could happen. What I learned might shock you. In order to access my client’s Social Security account, the criminals had to provide them with only the husband’s full name, date and place of birth, mother’s maiden name, and his current address and phone number. Personal information like this is widely available online through sites such as Facebook and Ancestry.com, not to mention what is available on the dark web thanks to the infamous Equifax hack in 2017.

My client spent hours at the Social Security office trying to put a hold on the “lump sum withdrawal,” and were assured that everything had been resolved. We thought that the criminals had been thwarted and everything was fine, but yesterday they received a 1099 from the Social Security Administration saying that they had received $12,000 in benefits that they needed to report on their tax return! So now we’re back to square one, and are still trying to get this mess sorted out. It’s bad enough that the IRS has been notified that they need to pay tax on money they never received, but now I’m wondering whether my client is still earning Delayed Retirement Credits after these criminals filed for benefits under his name!

How Can You Protect Yourself?

The bottom line is that you need to treat your Social Security account like a bank or investment account. Even though you might not think of it as being an asset, it is – because if a criminal manages to take control of it, the consequences could be costly and far-reaching. One way to protect yourself is to open an account with Social Security online, at this website: https://www.ssa.gov/myaccount/. Even if you do not plan to file for benefits in the near future, this action can prevent someone else from opening an account in your name without your knowledge. For your security you will be required to create a user name and password, and they’ll send a one-time security code to your email or phone.

Once you’ve established your account, you should check it periodically to make sure that information such as your name, address and phone number is correct. They also have a feature called “Block Electronic Access,” which prevents anyone (including you) from changing your personal information online or over the telephone. If you block access to your account and then change your mind, you have to ask Social Security to unblock it for you.
Years ago, the fear of Social Security theft was largely confined to the possibility of armed thugs waiting outside the bank for retirees who had just cashed their monthly checks. Unfortunately, criminals are constantly looking for ways to liberate you from your money, and their creativity can be surprising. Remember, protect yourself and your spouse by making sure that your benefits are safe – even if you don’t plan to apply in the near future!

Are you interested in learning more about Social Security maximization strategies? Visit our Social Security section of our website here for more information.

How Does the Tax Reform Affect Retirees?

How does the Tax Reform Affect Retirees? Read More on https://paytaxeslater.com/how-does-the-tax-reform-affect-retirees/

How does the Tax Reform affect Retirees?

I was able to spend some time reading over the holiday, and of course much of my efforts were devoted to finding out how people were reacting to the new tax reform bill. In quick succession, I came across three articles published by three different media outlets. The first said that the tax reform would hurt poor people; the second insisted that the tax reform would hurt the middle class, and the third swore that the tax reform would hurt the rich. Many of our clients are retired, and they are asking “how will the tax reform affect me?” So I thought I would give you some ideas about how the tax reform might affect retirees.

One concern for retirees involves the changes made to the rules affecting Schedule A, Itemized Deductions. Will the tax reform affect you if you are retired, and you have been able to itemize? The short answer is that, depending on what and how much you deduct, the tax reform may affect you because some of the itemized deductions were reduced or even eliminated. Let’s look at specifics.

Tax Reform and Medical Expenses

Many retirees have high medical costs – and the good news is that medical expenses will still be deductible in 2017 assuming that they exceed a certain threshold. What makes this statement less than straightforward, though, is that there were two different thresholds when you did your taxes last year. Prior to the tax reform, individuals who were younger than age 65 had to have medical expenses that exceeded 10% of their adjusted gross income in order to be able to use the deduction.

If you or your spouse were 65 or older, though, the threshold was lower – only 7.5%. And whatever your age, you could only deduct the medical expenses that were in excess of your threshold. The bottom line for retirees? If you itemize, tax reform shouldn’t affect your medical deductions unless both you and your spouse are younger than 65 years old. The tax reform may actually benefit younger individuals who have high medical costs because, starting in 2017, everyone regardless of their age will have to meet a threshold of only 7.5% before they can deduct any medical expenses.

Tax Reform and Property Taxes

Many retirees could be affected by the changes in state and local tax (or, SALT) itemized deductions. Through 2017, you can deduct all of your state, local, real estate, sales and personal property taxes on Schedule A if you itemize. In 2018, those deductions will be capped at $10,000. How does this affect retirees? It depends. If you didn’t deduct these expenses because you used the standard deduction last year, this provision in the tax reform won’t affect you at all.

But if your income is high enough that it is subject to state and local tax, or if you own a home on which you pay high property taxes, any deduction that you might be able to take after the tax reform could be reduced. If this sounds like you, you will need to check the Schedule A on your prior year return to see exactly how much of the taxes you paid were deductible in the past. The tax reform could affect you negatively if you’ve been able to deduct more than $10,000 because, starting in 2018, your deduction will be limited to that amount.

Tax Reform and Mortgage Interest

Many retirees prefer to have the mortgages on their homes paid off before they leave the work force. If that’s you, the changes to the mortgage interest deduction rules, by themselves, shouldn’t affect you. Prior to the tax reform, married couples could deduct the interest they paid on mortgages that were less than $1,000,000. Under the tax reform, that mortgage limit is lowered to $750,000 – which means that individuals who have large mortgages may not be able to deduct as much of the interest as in the past. If you are retired, this change should not affect you unless you are planning to buy a new home in 2018 or later. If you do buy a new home and finance more than $750,000 (and you itemize) you will not be able to deduct as much as you would have prior to the tax reform.

Tax Reform and Miscellaneous Deductions

How about miscellaneous itemized deductions? The big ones for my clients are their investment account fees and, in some cases, employee business expenses, but includes smaller deductions such as tax preparation fees and safety deposit box fees. The new law temporarily repeals all of those, so if you itemize and have taken advantage of them in the past, the tax reform may hurt you in this area of your return.

Tax Reform and Charitable Contributions

What about charitable contributions? The tax reform will not affect charitable contributions at all. If you don’t itemize, your charitable contributions weren’t deductible in prior years and so nothing has changed for you. If you do qualify to itemize, contributions that you make to legitimate charities will still be deductible in 2018.

This leads me to my big finale! My theme throughout this post has been, “assuming that you qualify to itemize”. Even if you were able to itemize in the past, you may not need to itemize after the tax reform because the standard deduction (or, the amount that the government gives to everybody with no strings attached) has almost doubled. In 2017, the standard deduction for married couples filing jointly is $12,700 but in 2018 it will be $24,000. So even if you fall into one of the categories where you believe the tax reform might initially hurt you – for example, if you have a significant amount of investment account fees that are no longer deductible – it might be a moot point if the government is going to just give you more than what you would have gotten by itemizing anyway.

Confusing? You bet! So please bear with us during tax season as we try to sort this out!

Stop back soon!

-Jim

Learn how Jim Nabors saved $4.8 Million by marrying his husband.

Jim Nabors Saved $4.8 Million in Taxes By Marrying His Husband

How Jim Nabors saved $4.8 Million in taxes by marrying his husband. Courtesy of PayTaxesLater.com

 

Jim Nabors: Actor, Singer, and Comedian

On November 30, 2017, Jim Nabors, perhaps most famous for his role as Gomer Pyle, died at the age of 87.  Jim is survived by his husband Stan Cadwallader, whom he married in 2013. Their marriage came one month after same-sex marriages became legal in Washington State.

It is quite eye-opening to look at the tax consequences of their decision to get married; Mr. Nabors died with a $13M estate.  The terms of his will are not public, but for the sake of argument let’s assume he left his estate to his husband. Because of the marriage, no Federal or Hawaiian estate or inheritance taxes are due at death because of the unlimited marital deduction.

Smart Estate Planning

If Jim and Stan had remained unmarried partners the payout to the Government would have been astronomical. A $3,000,000 payment in federal estate taxes alone is bad enough. A payment of over $1,800,000 in Hawaiian inheritance taxes would add a total of $4,800,000 in total taxes. These numbers don’t include the income taxes that will be saved because of the longer “stretch” a spouse receives on an inherited IRA or retirement plan.

The moral of the story is that for many life-long partners, gay or straight: Get Married for the Money.  Obviously the decision to marry hinges on more than whether marriage is a financially strategic move. But if you are simply avoiding the formalities, it might make sense to think about the long-term tax consequences on your financial security—for both you and your partner. Marriage is usually a big plus for purposes of Social Security, especially if one partner has a much stronger earnings record than the other partner.

More Information Is Always Available

For more information visit www.paytaxeslater.com.To schedule an appointment with Jim Lange, please call his office at 412-521-2732. You can always contact Jim at jim@paytaxeslater.com.

James Lange, CPA/Attorney of Lange Financial Group, LLC, is the author of several books on retirement and estate planning, including Live Gay, Retire Rich.  His books on retirement strategies have been endorsed by Charles Schwab, Larry King, Jane Bryant Quinn, Ed Slott, and many more.  He hosts a weekly financial show on KQV News Radio in Pittsburgh. PA.

 

The Essence of Lange’s Cascading Beneficiary Plan

The Essence of Lange's Cascading Beneficiary Plan

Learn how Lange’s Cascading Beneficiary Plan can help ease your worries for your family’s financial future.

Somewhat tongue-in-cheek, I refer to “Leave it to Beaver” families as the perfect candidates for the Lange Cascading Beneficiary Plan (LCPB). Just to be clear about what I mean by that, I am showing you a basic version of the family tree for that type of family. Blended families with children from different unions sometimes need to have estate planning with more complicated beneficiary designations. It is not that the LCBP cannot work, but it is not as straightforward. With that in mind, let’s look at the essence of Lange’s Cascading Beneficiary Plan.

Lange Cascading Beneficiary Plan example photo

It is important to think long-term with financial planning using the Lange Cascading Beneficiary Plan.

In previous content of the Lange Cascading Beneficiary Plan series, I have discussed the tax and long-term estate planning benefits of leaving your IRA and retirement accounts, when possible, to the youngest members of your extended family to get the longest stretch possible. Remember, keeping money in the tax-deferred environment (traditional IRAs and retirement plans) or the tax-free environment (Roth IRA etc.) for as long as possible works to your heirs’ advantage.

But, let’s be realistic. Even if you understand that the tax benefits are greater when you leave your IRA to your grandchildren, most couples want to ensure that their surviving spouse will be financially sound with enough discretionary money to lead a happy and fulfilling life. So, if we take that attitude, it might seem that the simplest and safest route is to simply leave all your money to your surviving spouse.

Or, you make some calculations and decide your surviving spouse will probably be fine with most of your IRA but some of it could go to the kids upon the first death. Maybe your plan works out perfectly, but maybe it doesn’t.  Let’s look at an example. You have a two-million-dollar IRA, and you think, based on future calculations that your spouse will only need about $1,500,000.

You could make your children the beneficiaries of $500,000 at your death. Conducting your estate planning in this manner could provide your children with some inheritance after the death of the first parent. It might be very useful to them, especially if they have children of their own that will be needing money for school or facing other monetary challenges associated with raising a family.

The financial market is in constant flux, keep that in mind when making plans.

That sounds like a great plan but what happens if the market takes a big dive? The two million you thought was going to be there has dropped to 1.5 million, and you have designated $500,000 of that to go to the children. Now, your surviving spouse has less money to live on, and you fail to meet your objective of providing for your spouse. That would be horrible. Divvying up an estate appropriately is one of the biggest hurdles of estate planning.

So, you go back to square one, and leave everything to your surviving spouse outright.  Down the road, your family will likely have to give up more in taxes. Furthermore, if changes in the tax code modify the advantages of the stretch IRA, you could potentially forfeit the tax advantages that might be offered to compensate a bit for the loss. There was talk, for instance, of allowing $450,000 of an Inherited IRA to be stretched over a lifetime, and this exemption allowance would be available to both spouses.

If your estate planning leaves everything to your spouse, you forfeit one $450,000 exemption. Whereas, if the first spouse to die leaves $450,000 to the kids (giving them the advantage of the stretch), then when the second spouse dies, the children can take advantage of the second exclusion and stretch another $450,000. That is a big difference.

This is why the Lange Cascading Beneficiary Plan is right for you.

What we come back to time and again, is that we don’t have a crystal ball that allows us to plan for the future with any confidence that we are making decisions that will be appropriate for the circumstances at that time. That is precisely why the LCBP is so effective. You can draft the documents in such a way that your surviving spouse (with the help of an advisor and perhaps the grown children) can make good decisions about allocating the estate that are both tax-savvy and in the best interest of the family.

Picking up on our previous example where the stock market took a dive and there is less money overall for the surviving spouse. Under the terms of the LCBP, he or she could say, “Hey, I’d love to help the kids out, but I need all the money.” End of story, surviving spouse just keeps everything and we get a good result.

The essence of the LCBP will put you at ease.

Alternatively the surviving spouse has more than enough money for long-term security and a comfortable lifestyle, so he or she decides that money should go to the kids. So, with the cascade in place, divided among the children equally, and with disclaimers available, the surviving parent can look at each child’s situation and help them in the way that makes the most sense. Perhaps one child has a bright financial future, and it would make more sense to pass money onto their children (the grandchildren). In that instance, the first child could disclaim their portion directly to their children via well-drafted trusts.

Second child would love to do the same, but actually, he or she could use the money.  So, he or she accepts the inheritance, and does not disclaim to his or her children. Flexibility works. And, a further advantage is that none of these decisions must be made quickly. The family has nine months after the first death to finalize all decisions. A little breathing room after a crisis can be very welcome.

With documents that offer flexibility, you don’t have to predict the future to provide for your family in a way that makes sense for the time. Lange’s Cascading Beneficiary Plan allows for terrific post-mortem planning that can make an enormous difference for the family.

Next week, we will examine estate planning with the potential $450,000 exclusion in more detail.

See you soon!

P.S. If you want to do a little advanced study on this topic before the next post and video, go to https://paytaxeslater.com/estate-planning/.

Tax Cuts and Jobs Act of 2017: Ten Huge Take-Aways

Ten Huge Take-Aways from the Tax Cuts and Jobs Act by Jim Lange

 

Ten Huge Take-Aways from the Tax Cuts and Jobs Act of 2017

by James Lange, CPA/Attorney

The first thing to consider about the proposed Tax Cuts and Jobs Act is that it is just a proposed tax bill.  It is possible it will face stiff resistance in the Senate and possibly get no votes from the Republicans.  Jeff Flake, John McCain, Bob Corker, and Lisa Murkowski might be on that list of Republican “no” votes. So, like health care it is possible, and even likely, that nothing will happen this year and maybe not in the foreseeable future.

Depending on your personal circumstances, the Tax Cuts and Jobs Act of 2017 could be good or bad for your family.  Critical factors like how many children you have, whether you live in a high-tax state and itemize your deductions or take the standard deduction, whether you own a home or are looking to buy one could sway you from benefiting from these changes or suffering from them.

In fact, there are so many variables to consider that it is difficult to make a blanket statement that the proposal will offer you tax relief.  Corporate America is a clear winner. Reducing the corporate tax rate from 35 to 20 percent, Speaker Paul Ryan argues, will create more jobs and drive up wages.  But critics, even Republican critics, say it is not a given that companies will pass their savings on to workers vs. shareholders through higher dividends.

However, the bill as it stands now is far from becoming law.  Ultimately, the Senate will introduce more changes and what we will end up with and whether it will pass are still great unknowns.  But, going forward it will still be helpful to understand some of the main provisions the bill advances so you can begin to assess the impact on you and your family.

Champions and underdogs in the Tax Cuts & Jobs Act of 2017:

  1. This doesn’t appear to be an overall tax-cut for the middle class, as promised. What we see in this bill is a tax cut for some, and a tax hike for others.  As usual, it all depends on how much you make, how you earn your living, where you live, the mortgage on your home, your property taxes, student loans, etc.  The Tax Policy Center commented that the bill wasn’t really tax reform but rather it was more of a complicated tax cut.  We have compared differences for different hypothetical clients and the results were less dramatic than we thought.  In one case, the elimination of the alternative minimum tax was helpful, but the dis-allowance of state and local income taxes netted out to a tax increase for one client.
  2. The bill reduces the number of tax brackets from seven to four. Currently the brackets are 10-15-20-28-33-35-39.6%.  Under the new provisions there will be a zero bracket (in the form of an enhanced standard deduction according to the bill), and from there the brackets will be 12-25-35-36.9%.  Here is how they break down:
2017 Single Filer2017 Married Filing Jointly2017 Head of Household
$0- $9,325 – 10%$0-18,650 – 10%$0- $13,350 – 10%
$9,326- $37,950 – 15%$18,651- $75,900 – 15%$13,351- $50,800 – 15%
$37,951- $91,900 – 25%$75,901- $153,100 – 25%$50,801- $131,200 – 25%
$91,901- $191,650 – 28%$153,101- $233,350 – 28%$131,201- $212,500 – 28%
$191,651- $416,700 – 33%$233,351- $416,700 – 33%$212,501- $416,700 – 33%
$416,701-$418,400 – 35%$416,701- $470,700 – 35%$416,701- $444,550 – 35%
$418,401 + – 39.6%$470,701+ – 39.6%$444,551 + – 39.6%

 

Proposed Single Filer Proposed Married Filing JointlyProposed Head of Household
$0-$44,999 – 12%$0-$89,999 – 12%$0-$67,499 – 12%
$45,000-$199,999 – 25%$90,000-$259,999 – 25%$67,500-$229,999 – 25%
$200,000-$499,999 – 35%$260,000-$999,999 – 35%$230,000-$499,999 – 35%
$500,000+ – 39.6%$1,000,000+ – 39.6%$500,000+ – 39.6%

Additionally, the bill would eliminate the alternative minimum tax (AMT), a second tax calculation for people earning about $130,000 which reduces the impact of many tax breaks.

  1. The bill doubles the current standard deduction, giving $12,000 to single filers, $24,000 for married filing jointly, and $18,000 for heads of household.
  1. But before you get too excited about a larger deduction, they’ve decided to repeal the personal exemption—currently $4,050 per person—and the deductions for state and local taxes. So, it isn’t as much of a break as you think it is.
  1. They are taking away one of our favorite, and edgiest strategies. No more recharacterization of Roth IRAs. If you’ve heard me talk about Roth IRAs, you’ve probably heard me mention recharacterization.  The ability to recharacterize, basically undo the Roth conversion, adds enormous flexibility in our Roth IRA conversion planning.  This will mean that the days of do-it-yourself Roth IRA conversion calculations will be highly risky.  Having a professional you can trust, who knows the system in and out, and who has the experience to get it right will become incredibly important.
  1. Taxpayers with a net worth of $10 million or more (and their children) have a reason to cheer as the plan almost doubles the current federal estate tax exemption from $5,490,000 to $10,000,000 per individual, with spouses exempt from any limits. The Joint Committee on Taxation has commented that this provision, while being a boon for business owners and wealthier Americans will reduce the federal revenue by around $172 billion over 2018-2027.  Oh, yeah…and after 2023, the estate tax will be repealed all together.  Compensating for that loss of revenue is a huge stumbling block for the proposed tax reform.  Though hard to confirm, rumor has it that originally they were going to eliminate the estate tax entirely but put this provision in to secure the support of Alaska.
  1. While the bill does simplify many areas, it also complicates many areas. It is not a major tax simplification.  I do not fear that our CPA firm will lose business because clients will find it so easy to complete their tax returns.
  1. While corporations and businesses will see a reduced corporate tax rate—from 35% to 20% – it will come with a price¾a much more involved and complicated filing process. New anti-abuse rules, complicated multi-national corporation rules, new tax treatments on interest, and changes in international income rules will make navigating your business tax return much more difficult.  Shareholders of pass through entities, like Subchapter S corporations will get a big break, but the complications for claiming that break are considerable.
  1. The Act is silent on the Death of the Stretch IRA. We still aren’t sure if and when this will happen.  It is very possible that they are holding it in reserve to for future negotiations pertaining to reducing the deficit.  The tax cuts in this bill will massively reduce federal revenue.  We’re talking in the trillions of dollars here.  To get any version of this to pass, it is very likely that the GOP will have to come up with ways to offset some of the deficit.  Killing the ability to stretch IRAs and retirement plans for generations is one way to do that.
  1. Even the Republican’s admit that this bill will increase the deficit by $1.5 trillion dollars over the next ten years, and that is a huge issue. Critics on both sides see increasing the deficit as unacceptable.  Further, the Tax Policy Center and other tax policy commentators on both sides of the aisle think that this estimate is too low or too high, and many do not believe that this bill will provide the economic growth or tax-relief promised to the middle class.

If you want to read an excellent 82-page summary of the bill, check out The Fiscal Times online:

http://www.thefiscaltimes.com/2017/11/02/Read-House-GOPs-Tax-Bill-or-Summary-Key-Points

If you are looking for more of a brief overview summary, these are excellent resources:

https://taxfoundation.org/details-tax-cuts-jobs-act/

http://www.taxpolicycenter.org/taxvox/house-gop-tax-bill-mostly-business-tax-cut-will-create-new-winners-and-losers

As I mentioned above, this bill is simply the first iteration of what the final bill might look like, and it isn’t clear that anything in it is going to become law.  But it bears some scrutiny since some of the main points are likely to provoke debates.  We will continue to watch as the process evolves.  We might even have to interrupt our series on Lange’s Cascading Beneficiary Plan once again!  If that happens, I hope you will bear with us.  But unless there is major news, we will see you next week as we continue exploring the advantages of the LCBP

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017.