Tax Planning for 2018: Tips from a FPA-NJ Seminar

The Financial Planning Association of New Jersey (FPA-NJ) recently held a seminar on the Tax Cuts and Jobs Act of 2017 (TCJA) and associated tax planning strategies. Below are some highlights:

• Not everyone with a high income, even in a high-cost state like NJ, will pay more taxes under the TCJA. The alternative minimum tax (AMT) is basically going away for the great majority of taxpayers (exception: people with valuable incentive stock options) and people who formerly paid the AMT weren’t getting now-limited tax deductions anyway. Those most likely to pay more tax under the TCJA have incomes between $100,000 and $200,000, formerly itemized deductions, and did not formerly pay the AMT.

• People have three months left to adjust their tax withholding or final estimated tax payment (if self-employed). CPAs have software to make 2018 tax projections and many are performing free or low cost projections for their clients. Bring your latest pay stub for this review. Some tax experts believe that tax withholding is too low for many taxpayers and that these taxpayers will get smaller refunds or owe taxes and/or under-withholding penalties next April.

• Required minimum distribution (RMD) distributions from an IRA to a qualified charity by a person age 70½ and older should be done as a direct transfer to the charity. Allow enough time for the IRA custodian to process the paperwork and keep records (in the event of an audit) that provide proof that the IRA withdrawal went to a charity.
   
• It is probably too late to file for a divorce under the pre-TCJA rules where alimony was deductible (payor) and taxable (recipient). Divorces filed now will not get through the courts in time.
   

Below are five specific tax planning strategies that were mentioned at the seminar:

• Track what you do with the proceeds of a home equity loan. Many people did not previously keep records for this and will need to retrace their past transactions. Home equity loan interest is only deductible if the loan was used to purchase or improve a home.
   
• Assess where you are income-wise for 2018 before taking capital gains and losses. Capital gains tax rates are now tied to income ranges rather than marginal tax brackets.

• Consider using a donor advised fund (DAF) to “lump” charitable contributions to get over the standard deduction amount and benefit from itemizing deductions. Two other strategies to benefit tax-wise from charitable contributions are to transfer appreciated securities to a DAF or directly to a charity and, for taxpayers over age 70½, make qualified distributions with withdrawals from an IRA.
   
• Schedule elective surgery in 2018 before the tax deduction threshold for medical expenses increases from 7.5% of adjusted gross income (AGI) to 10% of AGI.
   
• Consider a Roth IRA conversion if you are in your 60s and will have a higher marginal tax rate after age 70½ when RMD withdrawals must begin and current tax rates rise when the TCJA sunsets after 2025.

Planning Ahead for a Hurricane

In 2012, it was SuperStorm Sandy in New Jersey, last year it was Hurricanes Harvey, Irma, and Maria, and today it is Hurricane Florence in several southeastern states. Each year at this time, hurricanes occur. It is just a question of how many, where, and when. Those who get through this experience with the least amount of financial stress often plan ahead. Unlike tornadoes, hurricanes generally come with up to a week of advance notice. Below are five tips to prepare to evacuate and cope with resulting losses:

 

¨     Prepare a Grab and Go Box- Include insurance policies and provider contacts, contact information for family and friends, a cell phone charger, plastic bags (to protect wallet, phone, etc.), toiletries, several days of clothes, snack foods, and bottled water. For a complete list of what to include in a “Grab and Go” box, see https://texashelp.tamu.edu/wp-content/uploads/2016/02/evacuation-grab-box.pdf.

 

¨     Document Your Possessions- Take photos or videos of your most expensive possessions and make a list of these items with make and model numbers and serial numbers. Store this information remotely on a flash drive at a remote location or on a cloud server platform such as Dropbox, iCloud, or OneDrive.

 

¨     Move Things to Higher Ground- Examples include moving a car parked in an area where flooding is predicted and moving personal possessions in the basement or first floor of a house to a higher level.

 

¨     Get Gas and Cash- In the event that debit and credit card networks go down, have small denomination bills available to make purchases. Fill the gas tank for your car and a generator before supplies run low.

 

¨     Find Local Resources- Reach out to the Red Cross for emergency shelter, if needed. If your house is fine but you will have no power for several days, find a place to go during the day for heat, food, and internet access. Examples include libraries and restaurants with wifi (if open) or hospital cafeterias.

Coping With Unemployment- Part 2

Coping With Unemployment- Part 2

This post continues last week’s discussion of action steps to take as a result of unemployment. Below are four recommendations to consider:

¨      Negotiate With an Employer- Find out if a soon-to-be-ex-employer provides severance pay, which is money paid to employees who are dismissed for reasons beyond their control (e,g., as the result of company downsizing).  Set aside about 30 percent of severance pay for estimated income tax payments. Another option to discuss might be remote telecommuting. Many jobs today can be done anywhere in the world.

 

¨      Contact Your Creditors- Explain your job loss and request reduced payments or an extension of time to pay bills if you anticipate difficulty paying debts and/or household expenses. If you own a home, you may be able to arrange a forbearance agreement with your mortgage lender that enables you to pay nothing, or make partial payments, for a set period of time.  A forbearance gives homeowners time to get “back on their feet” financially and bring their mortgage current.

 

¨      Contact a Credit Counselor- Reach out to a non-profit credit counseling agency that can provide budget counseling and negotiate with creditors on your behalf for concessions such as waived fees or reduced interest rates. Many of these counseling agencies are affiliated with the National Foundation for Credit Counseling (NFCC), which has an “agency locator” search function on its web site.

 

¨      Keep Retirement Savings Tax-Deferred- Try not to cash in tax-deferred retirement plan assets to pay living expenses while you are unemployed. A job loss is usually a temporary situation while retirement can last for decades. If you must tap this money, repay it within 60 days to avoid income taxes and the 10 percent penalty on premature withdrawals before age 59 ½. In addition, withdraw only what is truly needed.

 

The NC State Extension Publication What to Do If You Lose Your Job has additional information about coping with unemployment.

Coping With Unemployment- Part 1

There is nothing as financially unsettling as unemployment. Just when a family is used to having a higher income, it is scaled back and spending must be adjusted accordingly. There is also the issue of having to find a new job.

Below are five recommendations to consider:

¨      Reach Out for Help- Take advantage of available benefits and services such as state unemployment assistance, college and university career counseling offices, non-profit agency job training programs, and support groups for unemployed persons. Set aside about 30 percent of unemployment benefits for estimated federal and/or state income tax payments.

 

¨      Save a Surplus- Try to save at least 3 months expenses and reduce household debt and discretionary spending if you sense a PCS or job layoff coming or have time until an announced downsizing takes effect. Learning to live on less income when you still have an income will make it easier to live without it later on.

 

¨      Live on Less- Consider lifestyle adjustments, such as selling a second car or other valuable property and trimming household expenses. There is no “right” way to do this. Some families prefer to trim a number of small expenses (e.g., coffee) while others focus on large recurring ones (e.g., cable bill and mortgage).

 

¨      Build a Back-Up Fund- Apply for a home equity line of credit (HELOC) while both spouses are still employed, to have in case you need it. The cost to apply should be nominal and there is no cost unless funds are actually borrowed. In addition, the interest rate will be lower than most credit cards.

 

¨      Take Care of Your Health- Set up health care appointments while coverage is still available, if a soon-to-be unemployed spouse’s job provides benefits such as medical and dental coverage.

 

Handling Financial Windfalls

The Financial Planning Association (FPA) and Association for Financial Counseling and Planning Education (AFCPE) recently held a webinar called What to Do When Your Ship Comes In. Below are five key take-aways:

¨      Windfalls can be defined as any unexpected receipt of money that is larger than what someone is accustomed to dealing with. By this definition, windfalls are fairly common. Windfalls of varying dollar amounts can be viewed differently depending on a recipient’s income and assets.

 

¨      There are many sources of windfalls including tax refunds, insurance and legal settlements, divorce settlements, inheritances, the lottery, stock options, proceeds from the sale of property, and more.

 

¨      Windfalls can provide a sustainable source of long-term wealth if handled properly. Unfortunately, many people lack financial knowledge and experience to handle them properly.

 

¨      Many people who receive windfalls experience a range of emotions including euphoria (which can lead to overspending), depression (feelings of unworthiness or guilt), anger (e.g., rage from being injured in an accident), grief (e.g., mourning the death of a loved one), and distrust (e.g., wondering if people want you for your money). These emotions can lead to poor money decisions.

 

¨      Windfall recipients need time to accept their “new reality.” They also need to develop long-term plans for the use of their windfall that are consistent with their values. It is okay to “park” money in a cash asset (e.g., money market fund) until long-term plans are fully fleshed out.