December 30, 2016
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Did you know that there is a more tax-efficient way to save for your children’s and grandchildren’s future educations?
If you are interested in saving money to pay for educations, you should consider a 529 plan, otherwise known as a “Qualified Tuition Plan.” A 529 plan essentially functions like a Roth IRA if used for education expenses. You can make after-tax contributions to a 529 plan and invest the funds in the plan. The funds will grow tax-deferred and if you withdraw the funds to use for post-secondary qualified education expenses, you will not pay any taxes or penalties on the withdrawals. There are a few questions that clients often ask us about 529 plans:
With the holidays quickly approaching, many of you may be thinking about what to give your children or grandchildren as gifts. While that new video game or new car may be exciting now, giving them the opportunity to have an education is a gift that continues to give and can be their most valuable long-term investment.
Alexis Long is an associate wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. Understanding what is truly important to a client is key to good financial planning, along with providing solid technical advice.
Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.
December is here, which means it’s time for year-end tax planning. For year-end 2016, the complexity of tax planning is greater than in years past. As United States President-elect Donald Trump enters the White House with a Republican-controlled Congress, we can expect tax reform. Paul Ryan and Donald Trump have similar goals but have yet to come to an agreement. What does this mean for us? We need to make decisions in regards to our tax-planning based on what may or may not be passed by Congress. What should you do? Below are three thoughts to consider based upon the expectation that we get tax reform:
Expectation: Lower tax rates in the future
Recommendation: Defer income where possible until next year
Under the expectation that tax brackets may be lower in 2017 compared to 2016, people should consider pushing their income into 2017 as opposed to 2016. For many of us, this is hard to do; we get a paycheck when we receive it and that’s it. Consultants, small business owners, and executives are often the types of individuals that are given a choice of when to receive income and when to retire, which also determines termination payouts. For these individuals, deferring income can be as simple as not billing consultant work or small business income until January 2017 as opposed to December 2016 this year.
Furthermore, another option for our clients that are taking their first RMD (Required Minimum Distribution) this year is to defer their RMD till next year. This will allow the income to be received in a potentially lower tax year.
Expectation: Higher standard deductions along with new caps and phaseouts
Recommendation: Bring them forward
Paul Ryan and Donald Trump’s tax plans disagree on what to do about itemized deductions. Trump is proposing a cap on deductions while Ryan’s tax plan would eliminate many popular deductions altogether. Taking into consideration that marginal rates are expected to decline overall next year, our thought process is that our clients should consider bringing forward any tax deductions and utilizing them in 2016 instead of putting the tax deductions on their 2017 tax return.
For example, consider paying 2017’s Texas property tax in 2016 of December. For charitably inclined individuals, consider a Donor-Advised Fund. This can allow you to front-load deductions in 2016 and spread out the money to charity over time. For individuals with large medical expenses, consider paying these expenses before year-end or front-loading costs in 2016 this year.
Expectation: Lower future capital gains taxes
Recommendation: Harvest capital losses and defer capital gains
Given the expectations that marginal and capital gains rates will decrease next year, we believe capital losses that reduce taxable income this year can be even more beneficial than normal. We review our clients’ taxable accounts in mid-to-late December to determine if any capital losses are available to harvest. If you see a trade in your account that appears to rotate from one position to another position in the same asset class, it means that we are most likely realizing capital losses and avoiding the wash sale rule.
Likewise, we believe it may be worthwhile to defer taking capital gains into 2017 in order to potentially pay a lower future capital gains tax rate. Of course, taxation is not the only consideration when making investment decisions. Often, it can be better to simply pay the taxes and get out of an investment that has run up but is now overvalued.
Ultimately, tax reform is still an unknown. There are significant differences between Trump’s proposals and Ryan’s plans that will need reconciliation. The Democrats still have enough votes in the Senate to filibuster any legislation, which may mean that nothing will get done without some level of bipartisan compromise.
Despite all of this, the initial template for tax reform is tempting enough to begin considering tax planning today anticipating lower rates tomorrow. As 2017 approaches and the discussion around tax reform gains more attention, we will follow up with you with several planning strategies we are encouraging our clients to consider.
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 a 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.
The economy picked up the pace in November, as did the stock market. After getting off to a sluggish start during the early part of the month, equities soared following the results of the presidential election. Each of the indexes listed here reached record highs during the month. The Russell 2000 posted the largest monthly gain, reaching double digits. Energy stocks jumped at the end of the month following OPEC’s agreement to cut production. Investors seemed willing to sell bonds and buy stocks as evidenced by the yield on 10-year Treasuries, which jumped 56 basis points by the end of the month and now exceeds their 2015 closing yield. Gold lost value, closing November at $1,174.80, down $103 from its October closing value of $1,277.80.