Learn how recent tax legislation and proposals impact you, your family, and your retirement savings, and strategies that can help you reduce your tax liability as you plan for a successful retirement. Pure Financial Advisors’ Tax Planning Manager, Amanda Cook, Esquire, CPA, and learn how to take advantage of tax-saving opportunities available to you.
- 00:00 – Intro
- 01:07 – Tax Basics – Tax Terms: Adjusted Gross Income, Standard Deductions, Itemized Deductions, Taxable Income, Tax Credits
- 07:49 – Federal Tax Updates: Proposed Ordinary Income Tax Changes, Tax Rates
- 09:03 – Inflation Reduction Act, Estate Tax
- 18:37 – Beneficiary RMDs, SECURE Act 2.0, Extenders
- 24:49 – Tax Time Bomb: 2022 Taxable Income Rates and Capital Gains Rates
- 26:59 – Tax Diversification: Tax-Free, Taxable, and Tax-Deferred Accounts
- 34:50 – Filling Up the Tax Bracket: The Roth IRA Conversion Strategy
- 38:22 – When Not to Do a Roth Conversion
- 41:57 – Tax Planning Tips: Tax Loss Harvesting, Tax Gain Harvesting, Back Door Roth IRA, Net Unrealized Appreciation (NUA)
- 48:18 – Charitable Gifting Strategies: Donor-Advised Funds
When the Tax Cuts and Jobs Act expires will SALT deductions come back?
What is the SALT deduction?
Is the recent CA gas tax refund taxable?
Is the Standard Deduction for a couple over age 65 an additional $2,800 (2x $1,400 each) added to the $25,900?
For the 10 Year distribution window for inherited IRA, is this anytime during the 10 years from the date of death?
I’ve heard Joe and Big Al say converting from Traditional IRA to Roth IRA up to the top of the 22% or 24% tax brackets will maximize the conversion and limit taxable income for the year. Is this for Marginal or Effective tax rates? My 2021 Marginal Tax rate was 12% and Effective was 6.3%. AGI ~$100,000, Taxable income ~$75,000. How much more could I convert to ROTH going forward to stay under the 22% Effective tax rate?
Can I transfer money directly from my IRA to a charitable organization? What is the tax consequence? Can this be counted as a part of RMD?
I have become a caregiver for a parent. Are there any 2022 or 2023 Federal and/or State (CA) deduction(s) available to my wife and myself?
How do I establish a Donor-Advised Fund?
Andi: Hello and welcome. My name is Andi Last from Pure Financial Advisors. Thank you all for joining us for this end of year tax planning webinar with Amanda Cook, Esq., CPA.
Amanda: Just to give you an idea what the agenda is going to be for today, the kinds of things we’re going to talk about. We’re going to start off with tax basics. Just to kind of give you a framework of what kinds of numbers are on your return, what they mean, what the different thresholds, how they impact your taxes. Then we’ll talk about some of the federal tax updates that have happened so far this year. So that will give you a good baseline information of what’s going on now today. And then we want to talk about how this impacts you going forward into the future. So we have our tax time bomb portion where we’ll talk about how taxes can really increase over time, like a lot of you think that they will even if the rates stay the same. And then we’ll wrap up with some tax planning tips that can kind of help you diffuse that bomb and things you can implement now. So, starting with the tax basics, the first thing we start with is gross income. The way the code describes this is that it’s all of your income from whatever source derives. So the way that I like to think about this is that everything is taxable unless it isn’t, and nothing is deductible unless it is.
So anytime you’re thinking about you got some money and you want to know if it’s taxable, the default answer is yes. And it’s going to go into this gross income number. From there, we can adjust your income with some above the line deductions they’re called. So in the old tax form, it used to be an actual line and the adjustments were above it. That’s why they’re called above the line deductions. It doesn’t work so much with the new forms as they’re laid out, but we still call them that. You don’t have to itemize to take these deductions. The most common ones are traditional IRA contributions, student loan interest, if you have student loans. There’s some self-employed deductions that you can take here for your self-employment tax, self-employed health insurance and things like that.
Once we take your gross income minus those adjustments, we get your adjusted gross income. So one of the few cases where something is really named what it is, and occasionally we’ll modify this and we’ll call it modified adjusted gross income. This number is really the most important number on your tax return. Anytime you’re thinking about something that’s going to phase in, something that’s going to phase out, something that’s going to be capped, we’re almost always working off the adjusted gross income or modified adjusted gross income number. So again, that’s your gross income minus those adjustments. And then from this number we can subtract your deductions. Now, with the Tax Cuts and Jobs Act in 2017, we significantly increased standard deductions for most people. We also limited itemized deductions. So what that’s done is it’s pushed a lot of people into claiming the standard deduction where maybe previously they itemized. So for some people, that’s really helped them. For others, it’s put them in a little bit of a harder position deciding whether they want to do something that would be deductible, like donate to charity or buy a house. The standard deductions for 2022 are $12,950 for single people and $25,900 for married filing joint, somewhere in the middle for head of household as you’ll see with most phase ins and phase outs and different things that affect head of household status. You also get a $1400 increase to these numbers if you are over age 65 and also if you’re blind. So you can double that up if you’re both and then you can up to quadruple it if you and your spouse are both over 65 and blind. If your itemized deductions are more than your standard deduction, that’s where you might want to consider itemizing.
So the typical itemized deductions are state and local tax. That’s limited to $10,000. Note, that’s a federal limitation. So in a lot of states, like in California, for example, if your property taxes exceed $10,000, you can still deduct that additional amount. But for federal purposes, state and local income tax, property tax, and personal property tax, like what applies to your car, are all capped at $10,000. You can also deduct your mortgage interest, that is capped at a $750,000 mortgage limit. It used to be $1,000,000, and it used to include home equity loan for an additional $100,000. Those went away with Tax Cuts and Jobs Act. So that really limited the amount of itemized deduction that people could claim for mortgage interest. One important piece of information is that a home equity loan is not necessarily a home equity loan from the bank. What they call a home equity loan, it means a loan that you took out to use for a purpose other than to buy, build, or substantially improve your home. So if you take out a home equity loan with the purpose of building an addition or something like that, it’s still going to fall under that $750,000 cap, but it will be deductible interest. You can also deduct medical expenses. They have to exceed 7.5% of your AGI. So using that number, your adjusted gross income, if your medical expenses are more than that, that’s when they start to be deductible. And then you can deduct your charitable donations. So when you add all those up, if they’re more than your standard deduction, which is these amounts here, then you may want to consider itemizing. From your adjusted gross income, you subtract those deductions, and that’s how we get to your taxable income number. This is the number that is used to determine what your actual tax is. So in a way, all of those subtractions that came off of your gross income were sort of like not taxed, right? They’re in the 0% tax bracket. And then whatever the number is here we start at the 10% tax bracket, and we kind of go up from there. This is the number that you’ll look up on the tax table or when you do the tax calculation or anything like that. There are some caveats to this, which we’ll talk about later with capital gains and things like that, but for the most part, this is the number that you’re going to use. This will give you your tax number, and then you still have an opportunity to reduce your taxes further on a dollar-for-dollar basis using tax credits. So credits are different than deductions because deductions lower your income, but then you pay the rate on them, whereas credits lower your tax directly. So if you have a $3000 deduction, you save the tax on $3000. If you have a $3000 credit, you save $3000. There’s no additional calculation to that. So that kind of wraps up the basics of how your income is going to look on your tax form. Hopefully that gives you a little bit more clarity to what you’re looking at, why there’s these different additional calculations that happen. And so let’s talk about some of the things that are happening now. The current tax rates, ordinary income rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. These rates are the ordinary income tax rates that apply based on your taxable income. In 2025, the Tax Cuts and Jobs Act expires and terminates. So in 2026, we’re going to revert back to the old tax brackets, which are the numbers below. So for those 82% of you who thought that the tax rates are going to go up, it’s already on the books that they’re going to go up to these levels. Okay, we’ll see if anything gets extended, if any of these rates get extended, that’s been known to happen. But for right now, the status quo is that these rates are going to increase in 2026.
This year, we’ve had a ton of inflation, record breaking inflation, as a matter of fact. And there’s a lot of provisions in the tax code that are adjusted for inflation each year. So I just kind of want to touch on some of those that really make a big difference. The standard deduction is going to go up $900 for single people this year and $1800 for married filing joint. So that’s a big increase to the standard deduction, much larger than we’ve seen in recent years. The starting points for each of these brackets is going to move up a little bit. So if your income stayed exactly the same this year as last year, you may find yourself in a slightly lower bracket. Medicare adjustments are also increased for inflation. So what income threshold that you’re in determines your Medicare premiums, and that’s been drastically changed, as much as $20,000 of additional income to stay in the same bracket this year. So that’s been a really big one. And then also if you’re in saving mode and you’re putting money into your retirement accounts at this point, traditional IRAs and Roth IRAs are up from $6000 to $6500 next year.
Or if you’re over age 50, they’re going to go up from $7000 to $7500. For employer accounts, the current level is $20,500 if you are under age 50, $27,000 if you’re over age 50. Next year, it will be $22,500 if you’re under age 50, and $30,000 if you’re over age 50. So that gives you a couple thousand extra dollars next year that you can save in your retirement accounts.
Andi: Amanda, we have a real quick question. I wanted to remind people, if you do have questions, you want to type the- tap the Q&A icon, and then type in your questions there. Question from Alex. “When the Tax Cuts and Jobs Act expires in will SALT deductions come back?”
Amanda: Yes, they will. That’s a great question. That is part of the repeal on that.
Andi: All right. Perfect. And then also we have a number of people who are asking, “Will the presentation be available to be viewed at a later date? The answer to that is yes. In the next couple of days, we will be making this available online for replay. You’ll receive an email when it’s ready. And back to you.
Amanda: Thank you. Great. Thank you. The Inflation Reduction Act passed earlier this year. There’s a couple of pieces in there that may or may not affect inflation as we think of it, but they will potentially save you some money on your taxes. One of them is the solar credit, that was phasing out over the course of several years. It was set to be 26% of your solar cost if you install solar this year. That’s back up to 30%, and it will stay at 30% until 2032. And 2033 it’s going to start phasing out again. It will drop to 26% immediately. If you put solar panels on your house in 2021, you’re kind of out of luck. That year was part of that phase out and it was not retroactive to then. But if you already did solar panels in 2022, you are going to get that 30%, even if it was before this bill is passed. The other couple things that are affected by the Inflation Adjustment Act include the Clean Vehicle credits. So that’s the credit for electric vehicles. It’s existed for a while, but it used to be based on how many of that vehicle were manufactured. And they’ve gotten away from that limitation, and they’ve imposed a whole bunch of other ones, mostly that start next year. So income limitations apply next year, value of the vehicle applies next year, and the battery requirements apply next year. That’s where the resources used to make the battery have to come from North America. Right now, the only limitation that is applicable for 2022 is the final assembly in the United States. So if you’re in the market for an electric car, who knows what’s going to qualify in 2023? The last time I checked, almost no cars are below the MSRP value and meet the battery requirement. So this might be the best window between now and December 31st.
Andi: Two more questions real quick, Denise, we should have pointed this out. She said, “What is the SALT deduction?”
Amanda: The SALT deduction is the state and local tax deduction. So SALT is state and local tax.
Andi: Excellent. And then also, Gary said, “Is the recent California gas tax refund taxable?”
Amanda: No, that is a tax refund. That’s a great question. So it’s only considered part of your regular tax refund. There is a slight caveat to what I’m saying, which is if you deducted your state income tax, capped at $10,000, and you’re now recovering some of that, then it might be taxable. But if your state income tax is way over $10,000, that $1000 or $500 or whatever you got for your family, will not be taxable.
Andi: All right, back to you.
Amanda: Okay, great. The last thing I want to say about the Inflation Adjustment Act is that for those of you who buy your health insurance from the Marketplace, the Affordable Care Act subsidies used to be completely eliminated if your income was over 400% of the federal poverty line. And this created a problem, especially as insurance rates were going up where people would be just over 400%. They’d completely lose their subsidy, and they’d have this massive bill now to pay for their health insurance. So during COVID they passed a law that allowed people over 400% to continue to cap their insurance cost at 8.5% of their income. That has been extended under the Inflation Adjustment Act.
Andi: One more question at the moment, William says, “Just to be clear, is the standard deduction for a couple over age 65 an additional $2,800, two times one $1400 each, added to the $25,900?”
Andi: Excellent. Thank you.
Amanda: Okay. Don’t let the size of the bubble fool you. This is not the most important topic that we’re going to talk about, but for estate taxes, a couple of things I want to point out are that the estate tax exemption amount is massive now. It’s $12,000,000 this year. Because of inflation adjustment, it’s going up to almost $13,000,000, because the same percentage of a bigger number is a much bigger number. So we’re going to get a $13,000,000 exemption next year. But I want to bring two things to your attention. One is that gift taxes also apply. When you give a gift to somebody else, you have to file a gift tax return. And that gift tax return lowers the amount that you can give away tax-free on death. So that gift tax return filing requirement is at $16,000 per person and per recipient. So you can give $16,000 to as many people as you want. Your spouse can also give $16,000 to as many people as they want. Same people, different people, doesn’t matter. And you can give that to a child and their spouse. So you can really double this up and give away a lot in gifts without having to file a gift tax return. But when you do reach that threshold that you file a gift tax return, you don’t pay the taxes now, it comes out of your estate tax later. And why do I bring this up? When the Tax Cuts and Jobs Act expires in 2025, the estate tax exemptions are going to be halved. So it’s going to go instead of an inflation adjusted $10,000,000, it’ll be an inflation adjusted $5,000,000 per spouse. So it’ll be about half what it is now per person. If you’re in the kind of situation where this affects you, you can, according to new guidance from the IRS this year, you can give away your whole exemption amount now, and you won’t have to claw that back under the estate tax rules that apply at death.
So it doesn’t affect a ton of people. But it is worth knowing that if you think your estate is going to be more than about $7,000,000, that’s something that you want to keep in mind. One piece of legislation that has made a big impact for a lot of people is the SECURE Act of 2019. So where that comes in for this year is that people who had inherited IRAs after the SECURE Act did not have to take RMDs in 2020. So that was pretty straightforward. And then in 2021, there was this question raised, do you have to take RMDs as a beneficiary if the deceased person was already taking RMDs? That question was resolved by the IRS and proposed regulations early in 2022, and the IRS said, yes, you do have to take those RMDs. However, previously the IRS had said no, so everybody went crazy. It was this whole big thing. The IRS has now gone back to the drawing board to reevaluate these proposed regulations. So for right now, there’s no penalty if you don’t take an RMD from an inherited IRA. Under the SECURE Act, you’re subject to the 10-year rule. So you still have to take all of the distributions within that 10 years for most beneficiaries. But you do not have to take those interim RMDs, at least for 2020, when they were waived because of COVID and ‘21 and ’22 while we have this proposed regulation out there. Whether there’s going to be a catch-up in 2023, we don’t know, how this will ultimately shake out, we don’t really know. But at least for now, there’s no penalty. That’s important, because the penalty for failing to take an RMD is crazy. It’s 50% of the RMD that you were supposed to take, so you definitely don’t want to miss those if you’re subject to RMD requirements, which we’ll talk about a little bit more as we go on. Also, for those of you following the news, there’s a SECURE 2.0 that’s not dead yet. The Inflation Reduction Act is sort of the revival of the Build Back Better Act that was in Congress earlier this year. So just because it hasn’t been in the news recently doesn’t mean that people in Congress aren’t still working on it. Some of the big proposals in SECURE 2.0 are to delay RMDS to age 75. So that would be a big one to increase the savers’ credit. For those of you who are putting money aside in retirement now, that could potentially benefit people. For business owners, you would have to set up and enroll your employees in a 401(k) and automatically increase their contributions to those plans. So there’s a lot of different pieces affecting retirement accounts that are present in the SECURE 2.0. It’s something that I’m paying attention to now that we’re in the sort of lame duck session. It’s got to get passed before January if it’s going to get passed. Otherwise the new Congress comes in, it will be a whole new negotiation. So if we haven’t heard anything by January, I’d say it’s probably dead. But I just want to let you know that in the meantime, it is still very much being negotiated.
Andi: Anne has a question. She said “For the 10-year distribution window for inherited IRAs, is this any time during the 10 years from the date of death?”
Amanda: Yes. So that’s how it was interpreted by the IRS, by the accounting community, by most beneficiaries to begin with, just from the date of death, you have 10 years to pull it out. You can pull it all out in year one, all out in year 10, steadily over time, whatever works the best for you. The proposed regulations that came out in January or February kind of muddied the waters on that. And they said if the decedent was taking required minimum distributions, RMDs, then the beneficiary has to continue those through the 10 years, and then by the end of 10 years take the rest out, if they haven’t already. So that’s the part that’s not really that clear yet. But for most beneficiaries, if the decedent wasn’t subject to RMDs, anytime in that 10 years is fine.
Andi: Excellent. Thank you. As a reminder, if you do have questions, type them into the Q&A, and I will get them to Amanda just as soon as possible.
Amanda: Sounds great. All right, so let’s talk about extenders. Extenders are really not that big of a topic this year. Again, don’t let the size of the bubble fool you, but every year different tax provisions expire. And so the big ones that expired at the end of 2021 include the expanded Child Tax Credit, the expanded Dependent Care Credit, and the Above the Line deduction. So again, this is an adjustment, sort of. It was actually added to your standard deduction, but we’ll call it an adjustment for charitable contributions if you don’t itemize. And also the 100% of AGI limit on cash contributions. All of those ended at the end of 2021. Sometimes they get revived for the next year, towards the end of that year. So we would be looking for that to get revived now or even in the early part of the following year, which doesn’t help you from a planning perspective that much, but may impact your taxes when you file your 2022 taxes. So we’re kind of watching for any of those to be extended. There’s been a lot of murmuring about, particularly the Child Tax Credit if you have children that are under age 17, continuing that expansion, but so far, nothing has really happened here. Okay, so that’s where we are today. Those are the big pieces of information that I want you to know for 2022, going into the filing season of 2023. But let’s talk about the future, right
Because everybody’s got a different situation as you go throughout your life. And so at different points in your life, you might be in different tax brackets.
The way that these work is, let’s say you’re married and you’re making $50,000- well, we’ll say $100,000 minus your deductions brings you to a taxable income right around $80,000. So you’ll be hovering right in that 12% to 22%. When you’re in that range, you pay the 10% range on the first $20,000 of taxable income, then you pay 12% on the next $60,000. And it’s just those last dollars that you pay 22% on. So just so you know, whatever bracket that you find yourself in, if you’re looking at your tax return and you’re trying to figure out what tax bracket are you in, you’re not just going to pay that number on your taxable income. There’s a calculation that gives you the benefit of each of these brackets as you go down. This is the rates on ordinary income. On capital gains, the rates are 0%, 15% and 20%. So these percentages are based on your taxable income, and then your capital gains sit on top of that. So you add up all the items that you have of regular ordinary income. In my example, we had $80,000, and then say you want to realize some gains or sell a property or something like that, that’s going to give you some capital gains income. You would see which of these buckets that you’re in, and then you would be straight into that rate. So you don’t get the benefit of the 0% rate if you’re over the 0% level. And why does this matter? If we bring this all together, I’m going to turn on my marker here- So why does this matter? We have these different pools of money that you can accumulate your funds in over the course of your life. And what most people do is they put most of their money they save for retirement and they put it in their 401(k), their traditional IRA, their 403(b)s, all these different retirement accounts that you’re typically offered at work. And the way that that works is if you think about your taxes over time, you’re going to expect that while you’re working, you’re going to pay taxes up here, whereas while you’re retired, you’re going to pay taxes maybe down here. You get a deduction while you’re working at this higher tax rate. And then you pay tax at ordinary income rates when you’re retired. So these are ordinary income assets. What we find with our clients a lot of the time is that their tax rate doesn’t do this. Their tax rate goes like this because this account down here, this tax-deferred account, has a bunch of requirements to it that affect what your freedoms are with it. So first you put the money in here and it’s locked, until your age 59 and a half. If you take it out early, there’s a 10% penalty. So you have to accumulate this money in this account for an extended period of time. It’s invested, it grows, and when it comes out, it comes out at these ordinary rates, which are going to be whatever they are in the future, right? I mean, earlier we said we think they’re going to go up. We know they’re going to go up somewhat in 2026 with some reasonable certainty. So that’s where you’re going to pay these taxes. If you hold onto them too long, we talked about, you’re going to have required minimum distributions. Those currently kick in at age 72. And then you have to start taking a set percentage of your account out. It starts out about 4%, and then it goes up from there. So whether you need this money in this account at that time or not, you have to take it out. Okay? So you’re kind of forced into this. And why is that? Because the IRS allowed you to defer this money for all this time. And so you’ve essentially built a partnership with them. Now, you’re subject to these rules and their control on when you can take out the money and when you have to take out the money.
Also what happens is that sometimes one spouse dies and then the other spouse still has the same RMD requirement. But now their taxes go way up, right? Because now they’re in the single tax rates, which if we remember from earlier, the single tax rates are higher, more aggressive than the married filing joint rates are. Or the person dies and this does not get a step-up in basis, it becomes income in respect of the decedent, and it’s taxable to the beneficiary at their ordinary rate. So if the beneficiary is in this part of their life, then they’re going to pay that higher rate of tax. There’s nothing wrong with this account. You know, it’s a really important tool for saving. It does defer any tax on the gains, but it’s just really important to recognize that this is going to be taxed at the highest rate when it comes out. So there’s these other accounts that you can use. We have the taxable account. This is a brokerage account, usually. Pardon my handwriting. These are taxed at 0%, 15% and 20% like we talked about. There’s also, for some higher income people, there’s a 3.8% net investment income tax that gets added to that. These accounts are called a taxable account because every year as they generate income from sales or from dividends or anything like that, it’s taxed. But it’s taxed at these lower rates. So you can accumulate some assets there that will allow you to control your taxes to an even lower amount. And then the third pool of money is the Roth account. So I’m from Delaware. Bill Roth is from Delaware. That’s kind of like my claim to fame. It’s a small state. I’ve had lunch with Joe Biden. This is just kind of funny thing about being from a small state. So Bill Roth created this account. It was originally going to be called the American Dream account. Perhaps it would have taken off better if it was, but it was named after him instead. And the characteristic of this is you pay the tax when the money goes in and then when it comes out, it’s taxed at 0%. So that’s for both the money that you put in, taxable money that you put in, and also for the earnings that it generates inside of the account. So particularly if you have a long timeline, you know, let’s say you think you’re going to be invested 20, 30 years, your account might double. That half that is attributable to gains in your account will never be taxed. So we love this account. This offers you the most flexibility in terms of managing your tax rate over your life and making sure that your taxes can kind of come down here and maybe do this. Or maybe they’ll go up and then they’ll come way down right, and they’ll follow that pattern that we’re expecting. So how do you get money into this account? The two ways are you can contribute the money. Those contributions are limited. They’re limited based on your income. And as for Roth IRA, they’re limited based on your income. And they’re limited to only $6500 next year, $6000 this year. You get an additional $1000 if you’re over age 50. Or the other way that you can do it is you can move money from here to here. So this is one of the big strategies that we’ll use to kind of help you diversify your tax situation. You’ve heard of diversifying your investments? This is diversifying your tax. Because now, at any given year, if you have money in all 3 of these accounts, you have the ability to really choose your own tax rate. You can stay in these lower ordinary income buckets. You can maybe focus on staying in the 0% rate from this account. And then this one, you can supplement the difference at 0%. So this is a really powerful concept and hopefully it’s clear what those different accounts are.
Andi: We do have a couple of questions real quick. First of all, we have a few people who have actually mentioned that the red marker is a little bit difficult to see on the blue background. Is it possible to actually switch that to white or yellow for the rest of your writing?
Andi: So this is a two-part question, so I ask the first part first and then I’ll follow up with the rest of it. “For tax planning purposes, when converting traditional IRA funds to Roth IRA funds, I’ve heard Joe and Big Al recommend converting funds up to the top of the 22% or 24% brackets, thus maximizing the conversion and limiting taxable income for the year. Is this the marginal or effective tax rates?” So that’s part one.
Amanda: It’s the marginal tax rates. That’s exactly what we’re going to talk about.
Andi: Perfect. And then the next part of the question is “Looking at my tax return for 2021, my marginal tax rate was 12% and effective rate was 6.3% on an AGI of about $100,000 and taxable income of $75,000. How much more could I have converted to Roth going forward to stay under the 22% effective tax rate?”
Amanda: That’s a really good question. It’s a lot of math for me to do in my head, and it’s also very contingent on your actual circumstances. Because for one thing, we’re going to want to look at, what is your tax rate going to be in the future? Is your income continuing to grow? Is it going to be higher? lower? What tax bracket do we expect you to be in? Also, what’s your capital gains makeup in that? Potentially, you’re taking advantage of some of that 0% capital gain rate. And if we do a conversion, it might push those capital gains which are on top, into the 15%. So there’s a lot of different pieces to a question like that. And that’s where you really want to work with an advisor to decide what’s the perfect amount. Which really leads into this. So this is kind of that idea, right? If you’re already in the 22%, you’ve got these buckets, right? And when Joe and Big Al recommend the 24% or the 22%, it’s assuming that your tax rates are going to be higher than this in the future. These are the rates that are going to go up to 25% and up to 28%. So it might make sense to do this now too, where in the future it might be a little bit of a different calculation. But let’s say you’re going to be in a 24% going forward. You could fill up this 22% bucket and maximize your tax rate at this level so that you can maybe prevent how much of your money is taxed at 24% at a later date. So that’s kind of the idea. That’s one strategy to look at. But as I mentioned, there’s other factors that may impact this. What’s your Medicare rate, what’s your capital gains makeup? Just different things like that. So this isn’t cut and dry, it’s just for an illustration that you can maximize your lower rate when you think you’re going to be in a higher rate later. As I mentioned, it’s not always the most perfect strategy to use, and particularly not in any given year. So you really want to look each year at what’s the best thing for you to do. If you’re taking advantage of that 0% capital gains rate, you don’t necessarily want to push yourself into 15% because it’s almost like you’re getting double taxed, right? You’re going to pay ordinary tax and then you’re going to turn some of your 0% tax into taxable. So that’s kind of a no go for a lot of people. You don’t have a lot of capital gains because you don’t have a lot of money in that taxable account. Maybe this isn’t as much of a concern. Under the Tax Cuts and Jobs Act, there’s a QBI deduction. That’s the qualified business income deduction. It applies to some rentals and it applies to Schedule C income and passthrough income from an S Corporation or a partnership. It’s up to 20% of your business income. So if you’re getting this, this is subject to some phase outs, particularly if you’re in a specified service trader business. So that’s any business where your reputation is really important. Everything that I do, right, financial advice, attorneys, CPAs, all are in that group. Actors, they’re in that group as well. Certain architects, consultants, people like that who have a very reputation-based business, those people are all going to get phased out of certain levels, so we don’t want to phase them out artificially. Also, there’s a phased in limitation for all other kinds of businesses that’s dependent on how much do you pay your employees and how much assets that you have in the business. So depending on that, you may want to calculate whether or not the phase in is something that you want to avoid. I mentioned this just a second ago. This is your income related monthly adjustment amount, IRMAA for Medicare premiums. If you’re 63 or older, so within two years of enrolling in Medicare and up, your Medicare premiums are going to be based on your income from two years ago. So if you do a conversion that’s too much, you may end up with really high Medicare premiums that then affect your cost of living, require you to take more money out, increase your taxes and so forth, right? And it’s a cycle. So to avoid that, we’ll want to manage your premiums. And then this last note here when we talk about backdoor Roth IRAs, it’s going to make a little bit more sense. But sometimes your distributions, if you have after-tax money in an account, your distributions will be partly taxable and partly non-taxable. So if you put after-tax money into a traditional IRA with the intent of rolling it over immediately, you don’t actually get to just pull that after-tax money out, you have to pull it out pro rata with the rest of the funds. So with that, let’s segue into some ways to diffuse the bomb. I mean, we talked about one of the big ways, which is the Roth conversion. But also this year has been a rough year in the markets. A lot of people have lost a lot of money in their taxable accounts and maybe you don’t think that this is going to be a long-term situation. You want to just ride through and let the money grow again in time as things recover. One strategy that you can take advantage of, but you kind of have to be careful, is called tax loss harvesting. So the way that this works is that when you sell a stock or any kind of holding in your brokerage account at a loss, you have to wait 30 days before you can buy it again. Otherwise that loss is disallowed, it just gets rolled into the repurchase. So one way to tax the loss harvest is to buy or is to sell the shares at a loss and then to buy something different that keeps you invested in the market and also manages your risk in the same way so that you’re effectively over the course of your portfolio staying status quo. But you get to realize some of these losses and then carry them forward to future years where you might offset them with gains. If you do have gains in your portfolio, you may want to gain harvest, right? You can sell your shares and immediately rebuy them at a gain with no limitations. So sometimes rather than let a stock just go up and up and up, it makes sense to harvest a piece of that and then repurchase it or to rebalance your portfolio periodically to manage your risk and keep yourself well diversified. You can choose which shares that you want to realize to hopefully maximize your 0% capital gains rate if you’re in that rate. Also, if you’re really high income you may want to go up to the top of the 15% rate just to stay out of the 20%. The backdoor Roth IRA. I mentioned this very briefly, but if you have an employer account offered or your spouse does, there’s income limitations to deducting your IRA contribution. So normally a traditional IRA contribution would be one of the adjustments that would lower your gross income before you get to AGI. But for medium to high income people who have an employer plan offered, that deduction is not allowed. And what happens is that this creates basis in a traditional IRA. So if you don’t have any money in a traditional IRA right now, and you put money into it on an after-tax basis, you can immediately roll that over into a Roth tax-free. Now, why would you do that? Why wouldn’t you just let it stay in the traditional IRA and then grow there and then just take it out whenever you’re ready? Because your basis will stay tax-free within that traditional IRA, but the earnings over time will not. And so if you put in $6000 today and in 20 years it’s $12,000 and then you want to take that $12,000 out, $6000 of it will be taxable. In a Roth, you do the exact same thing, you put in $6000 of after-tax money and it grows to $12,000. You take it out, it’s taxed at 0%. None of it is taxable. So this is a really important tool for people who don’t have access to a deductible traditional IRA and also are over the income limits for a Roth IRA. This is one of those tools that it’s on the radar of Congress. We don’t know how long it will be allowed, but for now it is. And this is just a really small conversion. So what I talked about earlier, moving the money from the tax-deferred account over to a tax-free account, that’s a conversion. This is just a very small annual conversion. Another strategy for those of you who are nearing retirement and work at publicly traded companies. A lot of times you’ll have that company’s stock in your retirement plan. This is a really unique opportunity. It’s very complex, it’s very difficult to actually do. The paperwork is onerous, the process is difficult, but effectively this will move your money from your tax-deferred account over to your taxable account. And it does this by taxing your basis in your employer stock at ordinary rates. And then all that appreciation in your employer stock is taxed at capital gains rates whenever you sell it. So for example, if you worked at a company where you have $100,000 of stock in your retirement account, but your retirement account paid like $15,000, then $15,000 will be taxed at ordinary rates. The remaining $85,000 would be taxed to capital gains rates. So it’s a really cool strategy. It’s not available to everybody. Usually you’ve worked at a company for a pretty extended period of time and you’ve been buying that company’s stock within your 401(k), or you’ve been required to, or the company matched using their own stock. And then that stock price has gone up, especially over these last 10 years.
And finally, as we kind of wrap up on some of these strategies, I want to talk about charitable gifting. So I mentioned earlier that the $600 above the line deduction has gone away and not everybody qualifies or it makes sense to itemize because their standard deduction is so high. So if you’re really charitably inclined and you give a lot of money to charity each year, you might be finding yourself in a situation where you’re effectively wasting some of that contribution from a tax perspective. Of course, it’s not wasted, the charities are going to use it to further their charitable goals, but from a tax perspective, you’re not getting a benefit from it. So in order to mitigate that, there’s a couple of strategies that you could use. One is the qualified charitable distribution. You can take a distribution from your IRA. It satisfies your RMD requirement if you’re subject to RMDs, and you can give it directly to the charity. To do this, you used to have to be RMD age, but now the RMD age is 72. You’re still able to do the charitable distribution at age 70 and a half. So the old RMD age still qualifies for this purpose, and then it’s just tax-free. So you just take it right off your gross income, right off your AGI, everything, and donate directly to the charity from your IRA. Another thing that you can do is you can group your deductions. And so what that means is that you take deductions for multiple years. You pay them all in one year, itemize that year, and then the next year take the standard deduction. So what can you group? In California, where I am, you can pay 3 property tax bills in one year. So if you’re not maxing out that $10,000 limit, you could pay one installment from the prior year and then both installments from the current year. So that will give you 3. You can max out that $10,000 more easily that way, if you’re not already. You can also pay your mortgage like that. You can pay your January in January, and then you can pay next year’s January in December, and that will double up one month’s worth of mortgage interest. But the big one is you can group your charitables. So if you consistently give a certain amount of money to your favorite charities, you can just do it all in one year and then skip the next year, two years, whatever makes sense for you. So let’s say you’re giving $10,000 and you decide you’re going to do the next 3 years of gifting this year, so you’re going to give $30,000. What’s going to happen next year? The charity is going to call you and say, please give us $30,000 again, right? So it can kind of mess with your flow. One way to avoid that is called a donor advised fund. And in this, you can contribute your money to the fund, and then the fund will invest it and distribute it to the charity over time. So you can put,, in my example, $30,000 into the fund, and then the fund will distribute $10,000 a year to your charity. That way you maintain your flow. One of the great things about this type of account is it’s a rare chance for you to get a double tax benefit, so you get the benefit of the charitable contribution at full value. But if you contribute appreciated stock or other capital assets, you also don’t pay the capital gains tax on that. So if you have highly appreciated stock, for example, let’s say you bought a stock for $5000, now it’s worth $30,000. You can give your
$30,000 to charity, take a deduction for $30,000, and not pay the tax on that $25,000. So it’s a really powerful tool. If you’re charitably inclined, it’s a really cool way to save yourself some taxes and also do some good.
Andi: Got a couple of questions that have come up. Just as a reminder, we’re coming to the end of the webinar. If you have not gotten your questions in yet, go ahead and put them into the Q&A. We’re going to do our best to get to all of them, but there are a number of people, so we may not be able to get to all of your questions, which means it’s a perfect opportunity for you to reach out to an advisor. I believe you already answered this one.
“Can I transfer money directly from my IRA account to a charitable organization? What is the tax consequence, and can that money be counted as part of the RMD? So if somebody is of required minimum distribution age, that would apply for the QCD? If somebody is not yet of RMD age, would they be able to directly transfer money from their IRA to the charitable organization?”
Amanda: To do the direct transfer and have it count as a qualified charitable distribution, you have to be at least 70 and a half. So that’s the old RMD age. When they changed the RMD age to 72, they did not change the requirement for this. So you can do it when you’re 70 and a half. If you are RMD age, though, it does count as your RMD. So it’s a really effective way to do that, and it’s just completely out of your income. Andi, we just have time for a few more questions. And I know we’ve covered a lot of information today, and it can be very overwhelming to try to implement all these different things by yourself. So we have good news. You can sign up today for a free tax reduction analysis with one of our experienced professionals at Pure Financial Advisors. You’ll learn how to legally pay fewer taxes over the course of your life, and you’ll learn the benefits of a Roth IRA. Plus, you can learn tax loss harvesting techniques and tips for reducing your taxes on investments, and how to generate tax efficient income in retirement. This is a no cost, no obligation, one-on-one tax reduction analysis tailored specifically to your financial situation. Pure Financial is a fee only financial planning firm. We don’t sell any investment products or earn commissions. And Pure Financial is a Fiduciary, meaning we’re required by law to act in the best interest of our clients. Pure Financial Advisors has 4 offices in Southern California and new offices in Seattle, Denver and Chicago. But no matter where you are, you can meet with one of our experienced professionals from anywhere online via Zoom. Just click the link and choose the day and time that works the best for you. Andi has put a link in the chat. The window of opportunity is getting smaller as we get closer to the year-end deadlines. Get your tax reduction analysis booked ASAP while there’s still time on the calendar. Just click the link to schedule your tax reduction analysis now. And back to you, Andi.
Andi: And then the next question is, “Recently I’ve become a caregiver for a parent. Are there any 2022 federal and/or state of California deductions available to my wife and me? Any deductions for the 2023 federal and or state?”
Amanda: Yeah, that’s a pretty broad question. There’s a couple that I can think of off the top of my head. I mean, if you get IHFs payments, they’re tax-free. You can potentially claim your parent as a dependent. Also, their medical expenses. If you claim them as a dependent, you can itemize their medical expenses if it exceeds more than 7.5% of your income. A lot of this depends on your parents’ situation, how much they have in assets and have available to them. Because if their income is too high, then you can’t claim them as a dependent. So there’s more evaluation that needs to be done for your particular situation, but those are the main pieces.
Andi: Another question “How do I establish a donor advised fund?”
Amanda: That is a great question. And you just go to a financial institution that offers it and make your contribution through them.
Andi: Excellent. I believe that might be just about all the time that we have for questions. Amanda, thank you so much for this. This has been an incredible presentation. It covered a great deal of information. It’s been really, really informational for us.
Amanda: Right, yeah. Glad to be here.
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