Monthly Archives: December 2017

Thoughts From Willis | Filling Your Grain Elevator: Storing Your Profits for the Years Ahead

Published: December 22, 2017

Grain elevators emerged in North America in the second half of the nineteenth century. As American agriculture shifted from a subsistence-based economy to a cash-market economy, wheat farmers needed to store mass amounts of their crop to meet growing demands. This is where grain elevators helped farmers take advantage of a bumper crop year and prepare for those times when the year’s bounty resulted in less than expected.

 

Before the introduction of the grain elevator, grain was generally stored in bags rather than in bulk quantities. Thus, farmers could not efficiently store mass amounts grain to be distributed in later years. The contraption was designed and built by Joseph Dart and Robert Dunbar in 1842 and was first used in Buffalo, New York. Its use spread across the United States, making the grain elevator a staple of the American landscape and a primary facilitator of American agriculture’s transition to a cash-market production model.  

 

Like those farmers of the 1800s, after a bumper crop in the stock market, it may be an appropriate time to make sure your grain elevator is full and capable of enduring a potential drought or slowdown in the years ahead.

 

Remember, for many, retirement may cover a span of 15 to 25 years, during which you’re likely to face some less than profitable years.

 

At Willis Johnson & Associates, we prepare financial models to determine the probability of success when working to meet your retirement goals. These models are based on different rates of return, with most common assumptions positioned around 6.2%, and then stress tested at low returns. We also run Monte Carlo simulations to study the probability of success.

 

With this as a starting point, it’s fair to assume that based on the overall performance of the stock market in 2017, it is likely many investors may have exceeded the 6.2% rate of return this year. That being said, you should fill your grain elevator before you start spending too freely.

 

You may consider taking one or more of the following steps to take advantage of this particularly profitable year:

 

1)      Make sure your cash reserve/emergency account is full.

2)      If you had planned on making a major purchase in a year or two, set that money aside today.

3)      If you have high interest debt, think about paying it down.

4)      Think about starting education 529 plans for your children or grandchildren.

 

Of course, you should always talk with your financial advisor and review your long-term plan before making any final decisions. If you have any questions, you can reach out to a member of the WJA team for more information.

 

*Investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results. 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.

Financial Fact | Bundling Deductions and Tax Savings: How to Take Advantage of Your Deduction Options

Published: December 18, 2018

What Are Bundled Deductions?

Bundling deductions is a simple way to make the most of your deductible expenses in 2017.  By pre-paying known future expenses today, you can pull forward the deductibility of those costs into the current tax year.  If your income is expected to be lower in 2018, bringing your deductions forward avoids taxes at your highest marginal rate and saving a higher percentage than if those same expenses were spread over two or more tax years.  Bundling may also lower your itemized deductions enough in the next year to gain additional savings from the standard deduction.

 

Final Website Tax Deductions_ Before Bundling (6)

Consider the information in the chart above. Let’s assume the Miller family paid $10,000 in mortgage interest, gave $2,500 to charity, and paid $9,000 in property taxes in 2017.  The Millers will choose to itemize their deductions in 2017, because the sum of their qualifying itemized deductions at $21,500 is more than the standard deduction of $12,700.  The same would also be true in 2018 assuming their expenses are similar year-over-year and the standard deduction does not increase.  The total deduction value over two years would equal $43,000.

 

After Bundling Deductions 2017

Alternatively, the Miller family could bundle their deductions and pull forward known future expenses into the current tax year.  Making one additional mortgage payment would increase their total mortgage interest expense to $10,833 and pre-paying charitable donations and property taxes would double the deductible cost to $5,000 and $18,000 respectively.  After bundling, the Miller’s 2017 itemized deductions will have leaped to $33,833.  As a result, there are few expenses remaining to itemize for the 2018 tax year allowing the Millers to instead take the standard deduction.  The total deduction value over two years would increase to $46,533.

 

Final Website Tax Deductions_ After Bundling (proposed legislation) (3)

However, the ability to bundle deductions may change in the years ahead if Congress raises the standard deduction or alters the current rules for mortgage interest and property taxes. Doubling the standard deduction would further improve the Miller’s net savings from bundling 2017 deductions.  The total deduction value over two years would increase to $57,833.

 

In light of this information, what actions can one take in the last month of this year to maximize tax savings ahead of proposed tax changes?  Outlined below are a few of the most common tax deductions and examples of how tax payers can bundle these expenses in a manner that maximizes long-term savings.  

 

Mortgage Interest Payment Deductions

Like clockwork, we make our mortgage payment twelve times a year on the first of every month.  But, what if you paid your January 1st, 2018 mortgage a few days early?  If you decided to pay your mortgage in late December, a 13th payment cycle would be included in your 2017 tax-year and allow you deduct an additional months’ worth of mortgage interest on your 2017 tax return.

 

Medical Expense Deductions

Taxpayers can deduct medical expenses that exceed 10% of their Adjusted Gross Income (AGI). However, this 10% threshold can be difficult to reach if you have yet to incur a large amount of medical expenses. If a taxpayer’s 2017 AGI is $100,000, they may only deduct medical expenses that exceed $10,000.  Consider bundling medical costs by prepaying dental and orthodontic services, insurance premiums, lab tests and supplies ahead of time. 

 

Charitable Giving Expense Deductions

Charitable giving is an easy way to decrease your taxable income, especially if you already have a favorite cause.  Let’s consider a couple who gives $250 per month to their local church.  Instead of spreading that donation over time, it would be advantageous to make a larger donation in December and skip the first few months of giving in 2018.  We also recommend asking if a Donor Advised Fund (DAF) may be right for you.  Similar to donating appreciated stock to charity to avoid capital gains tax, a DAF account can receive donations of appreciated securities creating an immediate tax deduction while also allowing you to spread the distribution of funds across multiple years in the future.

 

Congress and the Future of Bundled Deductions

It’s all but certain your property taxes will be the same or higher in the years ahead, but recent developments on Capitol Hill have called into question whether property taxes will continue to be deductible. Instead of waiting until next year to find out, why not prepay your tax bill (or some of it) before year-end?  For those living in the Harris County, your 2017 property tax is not typically due until January 31, 2018.  However, we recommend searching for your property tax bill online via the Harris County Tax Assessor-Collector’s website and making your payment this year to pull the deduction forward.

 

These are just a few ideas we have helped clients execute in the past and might be useful in maximizing your 2017 tax deductions.  As tax reform inches closer to becoming law, keep in mind that the benefits of itemized deductions may change in the years ahead.  It’s important to review your unique tax situation before deciding if bundling deductions is right for you.

 

 

Willis Johnson & Associates is a registered investment advisor. Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed. This material is intended for informational purposes only and should not be construed or acted upon as individualized advice. Willis Johnson & Associates does not offer tax or legal advice. Federal tax laws are complex and subject to change. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

 


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Tyler Baker, CFP®

Tyler Baker is an associate wealth manager at Willis Johnson & Associates.Tyler enjoys guiding individuals and their families through the financial planning process, and he specializes in uncovering new opportunities that work to minimize client expenses, while increasing their savings.
Tyler graduated from the University of Georgia with two degrees, a Bachelor of Science in financial planning, and another in housing management and policy. 

 

What Nick’s Reading | How to Compare: Roth Contribution vs. Roth Conversion vs. Roth Re-Characterization

 Published December 13, 2017

There are three common investment terms all involving Roth IRAs that we have found to be frequently misunderstood by the corporate professionals we work with.

 

The terms may sound similar, but they can have a drastically different impact on your long-term financial position, depending on how and when they are implemented.

 

Roth Contribution

A Roth contribution occurs when you put money directly into a Roth IRA from an after-tax source. For example, writing a check from your checking account and depositing the funds into your Roth IRA would be considered a Roth contribution.

 

Age and Roth Contribution Limits:

· If you are under age 50, you can contribute $5,500 to a Roth IRA.

· If you are age 50 or older, you can contribute $6,500 to a Roth IRA.

 

Income and Roth Contribution Limits:

· For single tax filers: phase out of the allowable contribution amount begins at $120,000 of AGI and contributions are not allowed at all above $135,000 of AGI (For the 2018 year).

· For married couples with joint filing, the phase out begins at $189,000 of AGI and contributions are not allowed at all above $199,000 of AGI (For the 2018 year).

*Note: You have until the tax filing deadline (April 17th for 2017) to make a contribution.* 

 

Roth Conversion

A Roth conversion transfers funds from a pre-tax retirement account (like an IRA or 401k) to a post-tax Roth IRA. The converted funds originate from a pre-tax retirement account, meaning there were no taxes paid on the IRA (or 401k) contribution, thus when the pre-tax funds are moved to a post-tax Roth IRA there are taxes due on the conversion. If you were to withdraw funds from a pre-tax account, you would pay taxes on the amount you take out. Similarly, individuals are required to pay ordinary income taxes when converting the pre-tax funds to a Roth IRA. Unlike a Roth contribution, there are no earnings limits that may prevent you from doing a Roth conversion.

 

Consider that you decide to convert $50,000 from your pre-tax IRA to a Roth IRA. You would process a conversion to move the entire $50,000 of pre-tax funds to the Roth IRA. Thus, when you file your taxes (for the tax-year the conversion was made), the $50,000 will be added to your ordinary income. In other words, your taxable ordinary income for the tax-year of the conversion will increase by $50,000.

 

 Therefore, it may be more tax-efficient for an individual to complete a Roth conversion during a lower-income year.

 

While you can withhold taxes from a Roth conversion, it’s not always the best option to optimize tax-savings. Generally, it’s more advantageous to pay taxes from a non-retirement account because if you maximize the amount of funds that are moved into the Roth IRA, then you keep a larger amount of money growing tax-free in a retirement account, which received tax preferential growth. For most people that decide to convert, the value is in moving money from a pre-tax retirement account to a post-tax retirement account in a low tax year, thus it often makes sense to convert the largest amount possibly. However, each person’s situation is unique and you need to assess all facets of your long-term financial plan before you can make a sound decision.  

 

Roth Re-characterization

A Roth re-characterization is essentially a reversal of a Roth conversion. When you process a Re-characterization, you are sending funds that you converted to Roth back to a pre-tax IRA and the amount of re-characterized funds will not be added to your ordinary income for that year.

 

Consider that you completed the Roth conversion of $50,000 in the aforementioned example. As the year comes to a close, your annual income is higher than you predicted it would be at the time the conversion was made. Thus when you file your tax return for that year, you’ll be placed in higher income tax bracket, and the converted funds will be subject to a higher tax rate than you originally intended.

 

In such a situation, you would likely process a Roth re-characterization, which will prompt the transfer of the converted $50,000 (along with any applicable earnings or loss) from your Roth IRA back to your pre-tax IRA as if it never happened. It’s important to remember that Re-characterizations must be completed by the tax filing deadline or by the specified deadline for any applicable extensions you receive. In addition, current tax reform proposals may do away with the Roth re-characterization option in the near future, which may affect how such financial decisions will impact your long-term financial plan.

 

While Roth contributions, conversions and Re-characterizations are all great planning tools, they’re accompanied by their own specific rules and tax forms. It is important for you to consult with your CPA or Financial Advisor before deciding on a strategy. If you want to learn more about how each of these strategies compare, our team is available to answer any questions you may have via phone or in person. Click here to request more information or schedule a phone call with a WJA representative.

 

Willis Johnson & Associates is a registered investment advisor. This material is intended for informational purposes only and should only be relied upon when coordinated with individual professional advice. Please speak to an investment professional before implementing any advice here. Willis Johnson & Associates does not provide tax or legal advice.

 


nickNick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


 

Market Update | The Markets (as of market close November 30, 2017)

The Dow soared over 300 points on the last day of November to close above 24000 for the first time in its history. Hopes for a tax overhaul may have contributed to investor confidence in equities. Each of the benchmark indexes listed here posted favorable monthly gains. The Nasdaq continued its strong performance in 2017, gaining over 2.0% in November, while the small caps of the Russell 2000 climbed close to 3.0%. After gaining 2.8% for November, the S&P 500 joined the Dow in posting its eighth consecutive month of positive returns. With stocks climbing, it’s not surprising that long-term bond prices fell, as evidenced by the yield on 10-year Treasuries, which jumped 4 basis points over October’s end-of-month yield.

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By the close of trading on November 30, the price of crude oil (WTI) was $57.39 per barrel, up from the October 31 price of $54.54 per barrel. The national average retail regular gasoline price was $2.533 per gallon on November 27, up from the October 30 selling price of $2.488 and $0.379 more than a year ago. The price of gold increased by the end of November, closingClick Here for Full Article.

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