Increasing Your Return on Life.®

Frank Talk - 3rd Quarter Newsletter

Published: 08/21/2018

Table of Contents

Editorial

Written by: Frank Fantozzi

Happy Summer’s End, Clients and Friends! 

As summer draws to a close, our attention is once again drawn to the annual back-to-school migration with many colleges and universities starting back up in early August and primary and secondary schools in many parts of the country  following suit before and after Labor Day. Even if you don’t have kids of your own in school, it’s hard to ignore the climate shift, marked by ads for school supplies, increased road congestion as vacationers transform once again into commuters, and those familiar yellow school buses back on the roads. It sends a psychological signal as well. Back-to-school season is a time to “settle back in” and tie up any loose ends as year-end approaches. From a planning perspective, it’s a great time to begin thinking about year-end tax strategies and planning.

If you’re eligible to participate in an employer-sponsored or other qualified retirement plan, such as a 401(k), 403(b), Simple or SEP IRA, or a traditional or Roth IRA, now is the time to make sure you’re on track to contribute the maximum amount you can before year-end, including any catch-up contributions if you’re age 50 or over. And if you’re thinking about year-end gifting strategies, you may want to revisit an article we emailed earlier this month, 4 Ways 529 Plans Offer Big Benefits Under the New Tax Law. The article talks about the expanded benefits of 529 education savings plans under the new tax law and strategies for using 529 plans in your tax and estate planning. As always, your experienced team at Planned Financial Services is available to provide the actionable advice you seek across these and other areas of planning throughout the year.

Finally, I want to thank those of you who joined us on June 26, 2018 for our 10th Annual Cleveland Economic Summit. Once again, we had the opportunity to welcome a large group of clients, friends and local business leaders to this annual event which took place at the world-renowned Cleveland Botanical Garden. For those who were unable to join us, we’ve provided a short recap and highlights from our speakers’ presentations under News & Events below.

What’s in It for You?

At-a-glance guide to your 3rd Quarter 2018 Frank Talk newsletter:

  • News & Event
    • 10th Annual Cleveland Economic Summit Recap
    • Upcoming Smart Business Northeast Ohio Family Business Conference
  • Market & Economic Update 

News & Events

2018 Econ Summit LogoFollowing the late afternoon networking and cocktail reception at our 10th Annual Cleveland Economic Summit I had the honor of delivering opening remarks before introducing our two distinguished speakers: John Lynch, Executive Vice President and Chief Investment Strategist at LPL Financial and Greg Valliere, Chief Global Strategist at Horizon Investments.

I highlighted several trends and challenges Millennials face and steps the Planned Financial Services team is taking to help this generation access and embrace wealth-building opportunities. Notably, as a generation, Millennials (generally defined as those born between 1980 and 2000), lag previous generations at the same life-stage when it comes to savings rates, housing ownership, career growth and an overall sense of financial security.

According to PEW Research, 15% of Millennials between the ages of 25 and 35 live at home. Among them, 35% of male Millennials are likely to live with parents vs. a spouse. As a result, many have also delayed saving in all categories (emergency, short-term, and retirement savings) due to the tight job market in recent years, specifically a lack of career opportunities in their chosen fields or fulltime opportunities offering benefits and upward mobility). Many are also saddled with high student loan debt. While the current, low unemployment rate is very positive news for Millennials, wage growth is still needed to drive a significant increase in saving and investment rates for this population.

At Planned Financial Services, we believe that financial education is the key to helping Millennials overcome their fears and gain an understanding of how investment risk can be managed over time to create wealth. This is critical to their future success as they could likely be the first generation solely responsible for funding their own retirement. While they demand easy-to-access online and mobile planning and investment tools, they also desire and value human interaction in the delivery of financial education, advice and guidance. Millennials are projected to make up 75% of the work force by the year 2035. Going forward, their habits, wants, and needs will influence the types of products and services businesses provide, and how businesses deliver those services. Millennials will be a dominant economic force in factoring future economic trends. Helping Millennials prepare for the future by understanding basic financial concepts, overcoming challenges, and creating wealth is a strategic focus of ours at Planned Financial Services. In the coming months we will be communicating additional programs and efforts targeting this next generation of wealth builders with the tools and resources required to help them pursue financial independence and create the wealth required to support their life goals.

Following my remarks, Mr. Lynch and Mr. Valliere provided in-depth analysis and keen insight on key factors impacting both business leaders and individual investors, including the recent tax cuts, where the economy and financial markets are headed, and the political landscape as we make our way through the second half of the year. Below are key take-aways from both speaker’s presentations.

Speaker Highlights: John Lynch1

As Executive Vice President and Chief Investment Strategist at LPL Financial As chief investment strategist, John Lynch leads the market and economic analysis for LPL’s Research team and is responsible for the firm’s strategic and tactical investment advice. Mr. Lynch joined LPL in 2017 with more than 30 years’ experience in the financial services industry. Previously, he held roles that included senior vice president and chief investment officer for the Mid-Atlantic region of Wells Fargo Private Bank, chief equity strategist with Wells Fargo Asset Management, and chief market analyst for Wachovia and Evergreen Investments. Earlier in his career, he honed his investment skills while working in New York in the securities industry, focusing on equity strategy and portfolio management.

  • The current Federal Reserve Chairman, Jerome Powell, is anticipated to take a gradual approach to interest rate increases, consistent with the approach taken by former Fed Chair, Janet Yellen.
  • The directional shift away from accommodative global central bank policy, together with companies’ increased need to focus on growth, has resulted in a new dynamic for business leaders and investors.
  • Look for a coordinated fiscal response—in terms of government spending, reduced regulation, and tax cuts—to provide added support for businesses.
  • An economic environment marked by trade tariffs and higher taxes are the same conditions that elongated the Great Depression. The $120 billion in tariffs needs to be viewed relative to the $300 billion in repatriated assets from U.S. corporations that are bringing money back into the U.S. under the Trump administration, the $120 billion in consumer trade, and $80 billion in business trade – resulting in a $500 billion fiscal tail wind. These conditions are expected to help offset the tariffs by almost a 5:1 ratio.
  • Better business fundamentals—revenue, earnings, and future growth prospects—should spur further growth in the economy and stock market.
  • Earnings growth will be key if stocks are going to produce attractive returns in 2018.
  • The S&P 500 may be well positioned to generate double-digit earnings growth in 2018 thanks to a combination of better economic growth and potentially lower corporate tax rates.
  • Expectations for valuations to hold relatively steady, together with our earnings projection, support the LPL Research stock forecast of 10–12%.
  • Our forecast is $152.50 in S&P 500 earnings per share for 2018.
  • Expect the fixed income market to be under pressure in 2018 given gradually higher interest rates, the total return for the Bloomberg Barclays U.S. Aggregate Bond Index may be within the range of flat to low-single-digits.
  • In our view, bonds remain an important element of a well-balanced portfolio, serving to help manage portfolio risk should we experience equity market pullbacks.
  • Given the modest pickup in growth and inflation, we would expect the 10-year Treasury yield to end 2018 in the 2.75–3.25% range.

Speaker Highlights: Greg Valliere1

For more than three decades, Mr. Valliere has followed Washington for investors. In his role as Chief Global Strategist at Horizon Investments, he specializes in coverage of the Federal Reserve and analyzing the impact of policy and politics on the markets. A graduate of George Washington University, Mr. Valliere co-founded The Washington Forum, linking Wall Street with Washington. He is the former Director of Research at the Charles Schwab Washington Research Group, and a frequent guest on CNBC, Bloomberg TV and radio, CNN, Fox Business News and CBS radio. Mr. Valliere is also frequently quoted in The Wall Street Journal, Barron’s, and The New York Times.

  • China – has hacked into every one of the Fortune 100 and S&P 500 corporations. They counterfeit everything and steal U.S. intellectual capital and technology.
  • The Federal Reserve is anticipated to tighten up more, resulting in more interest rate hikes in 2018.
  • There is the potential for a government shutdown one month before the midterm elections if President Trump does not receive funding for his border wall.
  • As history has shown, impeachment and indictment of President Trump is likely, but conviction is unlikely.
  • Michael Cohen taped everything, and he may be more damaging to Trump than Robert Mueller.
  • Trump may use his pardon power to pardon everyone – his family, his staff, himself. While this may lead to his impeachment, he will be able to remove legal accountability.
  • Suburban women (notably, younger women voters of color who live in the suburbs) will have a major impact in the next set of elections.
  • Independent voters will play a major role, as 90% of Republicans still support Trump.
  • The best case of Trump not running for a second term is his health. He has an awful diet (fried food and fast food), he only sleeps 4 hours a night, doesn’t exercise (riding his golf cart while playing golf – even driving onto the greens), and he has the most stressful job in the world.
  • Possible competitor to Trump – Michael Bloomberg who really is a billionaire (proven to be worth $50 billion).

We hope you will plan to join us in 2019 for the 11th Annual Cleveland Economic Summit. Watch for our “Save the Date” email and social media posts early next year.


Smart Business: Family Business Conference and Family Business Achievement Awards

PFS will once again participate as a sponsor of the Smart Business: Family Business Conference and Family Business Achievement Awards on Thursday, September 6, 2018. The interactive workshop and awards program, presented by Cuyahoga Community College, will feature a dynamic line-up of keynote speakers and panelists, including Frank Fantozzi,  who will share real life examples of what separates success stories from failures. Attendees gain perspectives from both industry experts and actual family business owners to address the real issues facing family-owned businesses every day.   

SBFBAre you a NE Ohio business owner? Consider joining us at the Smart Business Northeast Ohio Family Business Conference on Thursday, September 6th.

Visit Smart Business online to register for the event. 

Visit our online Newsroom to learn more about recent PFS news, awards and recognition.


Market & Economic Update

*What Happened to ‘Sell in May’? The S&P 500 Index is up approximately 8% since May when we were bombarded with warnings to “Sell in May and Go Away.” Remember, the worst six months of the year historically have taken place from May through October, while the other six months are the best.

As we noted at the time, there were many clues that suggested selling stocks in May and waiting until October to move back into equities may not work in 2018. There is still plenty of time for some usual pre-midterm election year volatility, but the reality is the bull market has surprised many by gaining each of the past four months during this seasonally weak period.

‘Sell in May’ has many bears pulling their hair out in frustration. Here’s the catch: history says when ‘Sell in May’ doesn’t work right away, the rest of the year can be quite strong. In fact, when April, May, June, and July are all higher for the S&P 500 (like in 2018), the final five months of the year have gained each of the past 10 times.

As the chart below shows, the S&P 500 added nearly 10% on average over the final five months of the year when each month from April until July were higher. While August still tends to see some seasonal weakness, the bottom line is that this suggests higher prices may be likely before 2018 is all said and done.

2018_3rdQ_FrankTalkEditorial_Graphic

Closing Remarks

We continue to watch the financial markets, economy, and geopolitical factors closely and adjust our portfolios in response to market activity to ensure our clients’ investment strategies are aligned with their stated investment objectives. We’ve always been firm believers that a personalized wealth management strategy that incorporates tax planning is critical to helping you capture opportunities and avoid unintended consequences. So, please don’t hesitate to reach out to your experienced team of wealth advisors if you or someone you know has questions or concerns about your personal or business finances at 440.740.0130 – your Return on Life® is always our top priority.

We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Real People. Real Answers.

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder
CPA, MST, PFS, CDFA, AIF®
Frank@PlannedFinancial.com 

To review our privacy policy, ADV Part A and ADV Part B, please visit our website at http://plannedfinancial.com/contact-us/.


*Research sources provide by LPL Financial August 2018.

IMPORTANT DISCLOSURES

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor and separate entity from LPL Financial.

Securities offered through LPL Financial, Member FINRA/SIPC

Planned Financial Services and SME Cleveland are separate entities.

 


Kiddie Tax: New Hazards, New Opportunities

Written by: Dan Goldfarb

money-1885540_1920Despite its name, the “kiddie tax” is far from child’s play. And a recent change made by the Tax Cuts and Jobs Act (TCJA) puts some new adult teeth into the tax. Now, children with unearned income may find themselves in a higher tax bracket than their parents. At the same time, the TCJA creates new opportunities for family income shifting.

Income shifting discouraged

At one time, parents could substantially reduce their families’ tax bills by transferring investments or other income-producing assets to their children in lower tax brackets. To discourage this strategy, Congress established the kiddie tax in 1986. The tax essentially eliminated the advantages of income shifting by taxing all but a small portion of a child’s unearned income at his or her parents’ marginal rate.

When the kiddie tax was first enacted, it applied only to children under 14, but in 2007 Congress raised the age threshold to 19 (24 for full-time students). Note that the kiddie tax doesn’t apply to children who reach 19 (or 24, if applicable) by the last day of the tax year. In addition, the tax doesn’t apply to children who either 1) are married and file joint returns, or 2) are 18 or older and have earned income that exceeds half of their living expenses.

Tax bite bigger

Starting in 2018, the kiddie tax applies according to the tax brackets for trusts and estates, rather than the parents’ marginal rate. In previous years, the kiddie tax essentially undid the benefits of shifting investment income to one’s children. By applying the parents’ marginal rate to that income, the tax result was about the same as if the parents had retained ownership of the assets. But the TCJA’s approach can push children into a higher tax bracket than their parents in many cases. That’s because the highest marginal tax rate for trusts and estates — currently, 37% — kicks in when taxable income exceeds $12,500. For individuals, that rate doesn’t apply until taxable income reaches $500,000 ($600,000 for joint filers).

Suppose that a married couple filing jointly has taxable income of $250,000 per year, placing them in the 24% tax bracket. If they transfer investments generating $30,000 in ordinary taxable income to their 17-year-old daughter, she is taxed as follows: Assuming she has no earned income, the first $1,050 is tax-free and the next $1,050 is taxed according to the regular individual income tax rate (10%, for a tax of $105). The remaining $27,900 is taxed at the rates for trusts and estates. In 2018, that means the first $2,550 is taxed at 10% ($255 in tax), the next $6,600 is taxed at 24% ($1,584 in tax), the next $3,350 is taxed at 35% ($1,172.50) and the remaining $15,400 is taxed at 37% ($5,698), for a total tax of $8,814.50. Had the parents retained the investments, the tax would have been $7,200 ($30,000 × 24%). In other words, income shifting increases the family’s tax bill by more than $1,600.

Note that the calculation of the kiddie tax will be different if a child has earned income or if the assets generate long-term capital gains.

Planning opportunity

Although the new kiddie tax rules can lead to harsh consequences for many families, it may create tax-saving opportunities for higher-income taxpayers. Because the tax is now applied using the progressive rate structure for trusts and estates, rather than the parents’ marginal rate, parents can shift a limited amount of investment income to their children at lower tax rates. For example, parents in the 37% tax bracket can shift income up to $14,600 (the $2,100 unearned income threshold plus $12,500) before the 37% rate applies.

There are several ways to shift income to your kids without triggering kiddie tax issues. For example, you can:

  • Transfer investments that emphasize capital appreciation over current income, allowing the child to defer income until the kiddie tax no longer applies,

  • Transfer tax-deferred savings bonds,

  • Transfer tax-exempt municipal bonds,

  • Contribute to 529 college savings plans (see “How 529 plan benefits are expanding”), and

  • Hire your kids.

Employing your children can be beneficial because earned income isn’t subject to kiddie tax; plus, your business can deduct the expense.

Look before leaping

Depending on your circumstances, shifting income to your children may reduce your tax bill. But given the risk that income-shifting may increase it, look closely at the kiddie tax before you attempt this strategy. 

Sidebar: How 529 plan benefits are expanding

A 529 college savings plan offers tax-free withdrawals of contributions and earnings used for qualified educational expenses. It’s an effective way to fund a child’s educational expenses without raising kiddie tax concerns. Here are two reasons:

  1. Qualified distributions are tax-free.
  2. The plan typically is owned by the parents, not the student — which also provides a financial aid advantage.

Until recently, 529 plans could be used only for higher education expenses. But starting this year, under the Tax Cuts and Jobs Act, you can use a 529 plan to pay elementary and secondary school expenses as well.


Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 


How to Transition into a Comfortable Retirement

Written by: Cynthia Yang

live-your-dream-2045928_1920You’ve been planning and saving for decades, and now retirement is looming on the horizon. As the time to implement your retirement plan approaches, there are several steps you should take to ensure that the transition is smooth and that your money will last as long as you do.

Action plan

Ideally, you should check the following items off your task list before your last day of work.

Build an emergency cash cushion. If you haven’t already done so, set aside enough to cover at least two or three months of living expenses. This is a good idea at any stage of life, but it’s particularly important at retirement because there may be a time lag after you leave your job and before you begin receiving pension, Social Security or other payments.

Pay down debt. If possible, accelerate your mortgage payments and reduce your credit card debt. The less debt you have at retirement, the more manageable it will be. Plus, reducing debt will limit your need to tap tax-advantaged retirement accounts, allowing the funds to continue growing as long as possible.

Adjust your asset allocation. At retirement, as in other stages of your life, it’s a good idea to review your asset allocation in various investments. Work with a financial professional to make adjustments that reflect your changing circumstances, time horizon and risk tolerance.

Review health insurance options. This is critical, since health care will likely be a major expense as you get older. Once you reach age 65, Medicare will cover most of your routine expenses, but you’ll probably need supplemental coverage for nonroutine expenses and separately to cover long-term care.

Create a budget. Carefully analyze your expected retirement expenses and make adjustments to your preliminary budget if necessary. Developing a realistic budget is the best way to minimize the chances that you’ll outlive your savings.

Make a Social Security plan. You have a lot of flexibility in determining when to begin Social Security payments. For example, you can start collecting as early as age 62 or as late as age 70. But remember that the timing can substantially affect your financial plan. The later you start receiving benefits, the greater the monthly benefit. So it’s generally best to wait as long as possible.

However, you may need to start sooner if you have health issues or require funds for living expenses. It’s particularly important to delay Social Security if you continue working. If you collect Social Security benefits before you reach full retirement age and your earnings exceed certain thresholds, your benefits will be reduced.

Develop a retirement income timeline. Determine the timing of your income during retirement and the sources from which it will come, factoring in expected retirement expenses. If you have traditional IRAs or other retirement accounts, you’ll need to take required minimum distributions (RMDs) from these accounts starting when you reach age 70½, whether you need the money or not. If RMDs don’t cover your expenses, it’s generally best to withdraw funds from other sources in this order:

  1. Taxable investment accounts,

  2. Tax-deferred accounts, such as traditional IRAs or 401(k) accounts, and

  3. Tax-free accounts, such as Roth IRAs or Roth 401(k) accounts.

Withdrawals from taxable accounts generate mostly capital gains, which are taxed at a lower rate. This withdrawal plan allows funds in tax-advantaged accounts to continue growing as long as possible.

Start now

It’s best to begin working on the transition several years before your planned retirement date. The sooner you begin, the more time you’ll have to make necessary adjustments. But if you get a late start or are unexpectedly forced to retire, a financial planning expert can be particularly helpful in getting you on track to a secure post-work life.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 


Intrafamily Loans Offer Family Value

Written by: Brian Klecan

legal-1302034_1920When children or other family members need financial assistance, it may be tempting to simply hand them a check. But lending — rather than giving — money to your loved ones offers several advantages.

Count the benefits

Why might loans be better than gifts? For starters, if you’re concerned about whether you’ll be able to save enough for a comfortable retirement, lending allows you to help family members without losing the funds permanently. Also, loans can help teach financial responsibility. If you feel that your children — or even adult family members — aren’t as prudent with their money as you’d wish, a regular repayment schedule may instill the kind of discipline they need.

Also, if you’re concerned about estate taxes, intrafamily loans can be an effective vehicle for transferring wealth tax-free. The amount by which the borrower’s investment returns exceed the interest paid on the loan is essentially a tax-free gift.

The recently enacted Tax Cuts and Jobs Act (TCJA) doubled the estate, gift and generation-skipping transfer (GST) tax exemptions to $11.18 million ($22.36 million for married couples), so only a much smaller group of families are subject to these taxes. Nevertheless, intrafamily loans may still make sense. Exemption amounts are scheduled to revert to their pre-TCJA levels in 2026, and there’s no guarantee Congress won’t reduce them even further in the future. Intrafamily loans and other estate planning vehicles can help protect your wealth against future transfer taxes by preserving your exemptions.

Make it official

To avoid unwelcome tax consequences, you’ll need to structure your intrafamily loan as a legitimate, arm’s-length transaction. Most important, charge interest at or above the current applicable federal rate (AFR). Otherwise, you’ll be subject to income tax on imputed interest — the excess of the AFR over any interest you actually collect. Imputed interest also may be treated as a taxable gift to your borrower.

In addition, you should:

  • Memorialize the loan with a promissory note,

  • Establish a fixed repayment schedule,

  • Ensure that the loan is actually repaid when due, and

  • Obtain adequate collateral or other security, if possible.

In other words, treat your intrafamily loan like a loan to a stranger.

Bank on it

Finally, to ensure the desired tax treatment of intrafamily loans, affluent families might consider establishing a “family bank.” This is a family-funded entity, such as a trust or limited partnership, designed to make loans to family members. By “professionalizing” the lending process, a family bank can help ensure that loans satisfy IRS requirements and meet lending objectives.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.


Make Your Charitable Contributions Count Under the TCJA

Written by: Frank Fantozzi

Business MeetingThe Tax Cuts and Jobs Act (TCJA) will likely reduce the tax benefits of your charitable contributions. However, that doesn’t mean you should stop giving or reduce the size of your gifts. After all, the availability of tax deductions isn’t the reason you give. But it does affect the after-tax cost of charity. So it’s important to incorporate tax considerations into your charitable giving plan.

Price of charity

The after-tax cost of a charitable contribution is the amount of the gift less the tax you would have paid on that amount if it weren’t for the charitable deduction. For example, Ian and Eileen, a married couple filing jointly, had $300,000 in taxable income in 2017. This placed them in the 33% tax bracket. If they donated $30,000 to charity in 2017 (and assuming they itemized their deductions), the after-tax cost would be $20,100. However, in 2018 the same amount of taxable income would place Ian and Eileen in the 24% bracket, so the after-tax cost of a $30,000 charitable contribution would increase to $22,800.

The TCJA also reduces the tax benefits of charitable giving by nearly doubling the standard deduction to $12,000 for single filers and $24,000 for joint filers and limiting itemized deductions. Under the law, the itemized deductions left are mortgage interest (now limited to interest on up to $750,000 in acquisition debt for newly purchased homes), state and local taxes (capped at $10,000), medical expenses and charitable contributions. Because of these changes, a substantially greater number of taxpayers are likely to take the standard deduction, which provides no tax incentive for charitable giving.

One change that does boost the benefits of charitable giving for a limited number of taxpayers is a higher annual limit on gifts to public charities and certain foundations — from 50% to 60% of adjusted gross income (AGI). As before, other types of contributions are limited to 50%, 30% or 20% of AGI and disallowed contributions may be carried forward for up to five years.

Strategies to consider

Suppose you’re a joint filer with $10,000-plus in state and local taxes, $7,500 in deductible mortgage interest, $5,000 in charitable contributions and no deductible medical expenses in 2018. Since these deductions total $22,500, you’re better off taking the $24,000 standard deduction, so your charitable contributions generate no tax benefits. A potential strategy for increasing your tax benefits is to “bunch” your contributions into alternating years. For example, instead of contributing $5,000 per year to charity, you might contribute nothing this year and $10,000 next year. That way, you would take the standard deduction in 2018 and $27,500 in itemized deductions in 2019. This would increase your total deductions by $3,500 for the two-year period.

If you’re 70½ or older, another possible strategy is to make a qualified charitable distribution (QCD) from an IRA. The tax code permits you to transfer up to $100,000 per year tax-free directly from your IRA to a qualified charity and to apply that amount toward your required minimum distributions for the year. Because the distribution isn’t included in your income, you don’t have to pay tax on the amount and it lowers the odds that you’ll be affected by unfavorable adjusted gross income rules. If you itemize deductions, this may provide little or no additional benefit, but if you don’t itemize, it’s a powerful planning tool.

Review your plan

If you’re philanthropically inclined, be sure to evaluate the impact of the TCJA on your charitable giving plan. If the act will substantially increase the cost of your charitable gifts, consider adjusting the size of your gifts or implementing strategies that will increase your charitable deductions.

Please note that legislation has been introduced in Congress that would allow taxpayers to deduct contributions even if they don’t itemize deductions. The proposed law would also eliminate the current caps on charitable contribution deductions. Please contact your tax advisor for information about the proposal and its current status.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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