Announcer:
It’s time now on KROS for Financial Focus brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual.
Announcer:
Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research, Inc, a broker dealer, member of FINRA SIPC, investment advisor representative, Cambridge Investment Research Advisors, Inc, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate. Joining me today is Andy Ferguson with NelsonCorp Tax Solutions. Hard to believe Andy that we are the last show of October already.
Andy Ferguson:
Yeah.
Nate Kreinbrink:
The month is flying by. We have a big a Halloween night scheduled tomorrow and I think it will be the first one in a long time that I can remember that you may need snow boots and all that stuff to go trick or treating tomorrow night.
Andy Ferguson:
Other places in the country think about white Christmas, we think about white Halloween.
Nate Kreinbrink:
Yeah, it’s supposed to be a little chilly and surprising waking up yesterday morning and seeing it on the ground and although it did look nice out there with the trees, I can’t quite say that I’m ready to be full blown into the wintertime and and having that on the ground and being a regular part of the forecast, which it looks like we got more coming in the next couple days.
Andy Ferguson:
Yeah, it feels like it was a shock to the system a little bit. I feel like I woke up and I’m like, oh man, it’s winter. This is real. This is happening.
Nate Kreinbrink:
So today’s program, we’re going to continue on. We had a workshop up at Rastrelli’s last night talking about some planning, talking about tax planning most specifically and how you can use some of that tax planning strategies to maybe help give more to charities using money that you were earmarked in certain retirement accounts.
Nate Kreinbrink:
Some strategies to put in place that maybe you can give the same amount that you are to charity but do it in a more tax efficient way. I think a lot of it has to do with just understanding a little bit of the current tax code that we’re in and understanding the changes that went into effect how we talked I think numerous shows as far as the tax cut and JOBS Act that went into effect last January, set to sunset at the end of 2025.
Nate Kreinbrink:
But again, the rules that are handed to us over the next several years, we need to understand them and see how that kind of fits. A big part of that is the deductions and understanding the deductions on your tax return, how they were prior to this, what the rules are now and how you can utilize those.
Andy Ferguson:
Yeah, and one thing that’s important to remember when we talk about the tax cuts and JOBS acts is it’s important to remember that we’re talking about federal tax laws. So if you live in Iowa, these deductions and things still are just like they were the year before. But the federal return is where that changes on us.
Andy Ferguson:
One of the things that we talked a little bit about last night that I think is really interesting is the idea that the deductions that we’re used to getting really are no longer impacting our tax return for a lot of people. Those deductions tend to be not as deductible as they were before.
Andy Ferguson:
The way that works is under the old law, the standard deduction was 12,700 for a married couple, which was pretty easy to get to if you were a married couple who had a mortgage and paid property tax and had two cars and you know, gave a couple thousand dollars in charitable contributions to a church or to Salvation Army or to whatever your favorite charity is, it was pretty easy to cross that 12,700 number.
Andy Ferguson:
But under the new tax cuts and JOBS Act, that number is up to 24,000 which means your contributions have to make up a bigger share of that in order to become deductible or in order to impact your taxable income, reduce your taxable income, and really have a significant impact.
Andy Ferguson:
So there’s it’s a harder nut to crack now, a harder hill to climb. It’s a little bit harder to get there and to have enough of those deductions to impact your taxable income. So we talked about that last night. There was several things that can be done to take advantage of those or to take advantage of that lawn and to optimize your opportunity to use those deductions.
Andy Ferguson:
But those are things that you, again, have to talk to a financial advisors to see if it’s something that you can pull off.
Nate Kreinbrink:
Right.
Andy Ferguson:
Things like charitable gift annuities, charitable remainder trusts, or even just combining your charitable contributions all into a donor advised fund or something like that. So, there’s options out there, but you got to make the effort to do your homework and take advantage of them.
Andy Ferguson:
Because like David said last night, the tax code and the changes in the tax code are built to impact the majority of returns. So if you don’t do something extra, you’ll fall into the majority and things will fit just like it does for everybody else, which means you may pay more tax than you need to.
Nate Kreinbrink:
Right. And I think the biggest thing, like you said, is just understanding that deduction that you thought you got from giving to charity, the way it’s not going to count for you anymore is because you’re not going to hit that standard deduction limit.
Nate Kreinbrink:
So, whether you gave that amount to charity or not, you’re still getting the same standard deduction, which is how this kind of fits into as far as not being able to get that deduction.
Nate Kreinbrink:
The one thing you did mention I think was a donor advised funds and then charitable remainder trust are two of the main ones that we kind of see on our end when we sit down with clients and say, okay, how can we utilize this and where is it going to fit with what we’re doing.
Nate Kreinbrink:
The donor advised funds are kind of the most simple, I think to kind of explain here on a quick a radio program. Whereas normally people take money out of their checking savings account and they donate it, for instance, to their church. Hey, they’ve already paid taxes on that money, so they’re donating a dollar. It’s costing them at least a dollar because they’re actually have their tax liability on top of that dollar to be able to give it away.
Nate Kreinbrink:
What we’re looking at doing is taking and kind of lumping kind of multiple years possibly together by putting that chunk if you have the assets to do so into a donor advised fund. So, let’s say you give 5,000 away per year to your charities that you like.
Nate Kreinbrink:
Let’s take, if you have the assets, maybe take three years, take 15,000 in one year, put it into a donor advised fund that will help you get up to that standard deduction limit and now you don’t have to give that all out in one year.
Nate Kreinbrink:
We can give out 5,000 this year. Next year we’ll give out 5,000 again. The year after that we’ll give out 5,000 again. So we’re giving the same amount of monies to charity, it’s just in a more tax efficient way to the individual when they’re looking at doing that to be able to hit some of these deductions and take advantage of some of those things that are looking at in the tax code that are present and utilize them to the best of their advantage.
Nate Kreinbrink:
So again, as Andy said, it’s not something that we can just sit down and say, yep, I want to do that. We need to make sure that it fits you, that you have the other assets to make sure that this works. But again, we are seeing a lot of people go this route.
Nate Kreinbrink:
I know you and I were talking also on the way up here. Some of the things that you’re looking at doing with people is kind of minimizing the income that they have in certain brackets to be able to do some of these tax efficient strategies. Roth conversions is a big one. When you take money from tax deferred accounts, your traditional IRAs, your traditional 401Ks, willingly paying taxes on it to get it over to a Roth account, which is tax-free coming to you.
Nate Kreinbrink:
So again, very powerful stuff, but if we can do some, put some things in place to reduce our income, to have more room in these smaller brackets, it just makes it all that much more beneficial to you and more impactful with what you’re doing.
Andy Ferguson:
Absolutely. Yeah, we’ve seen it a lot the last couple months as we’ve been talking to people. We want to do some of these Roth conversions. And one of the problems that we run into is when we have people whose taxable income is right up at the top of a bracket.
Andy Ferguson:
The biggest obstacle usually comes when they’re at the top of the 12% bracket because the next bracket is 22%. So, it’s hard to stomach that pill when you’re doing a Roth conversion when it’s going to cost you 22% at the federal level and probably 5% at the state level. I mean that’s a big tax bill to pay as compared to 12% that you’re paying on your other income.
Andy Ferguson:
So, sometimes there’s opportunities to use these tools to reduce your taxable income. So we think about the donor advised fund. If in one year you could get, you know, your itemized deductions up $10,000 or $12,000 or $15,000, you can create a gap there that it gives you some more room in that 12% bracket.
Nate Kreinbrink:
That you wouldn’t have otherwise had if you didn’t do that.
Andy Ferguson:
Absolutely, yeah. If you went and did your regular charitable contributions across that three or five years that you’re talking about, you’d never have any space in that bracket and you’d never be able to make that conversion. So, there’s just things that should be looked at, things that should be considered, strategies and opportunities because if you can make that gap in the 12% bracket, paying 12% on a conversion, plus your 5% on the state, you’re paying 17% instead of 27 that’s a pretty big difference.
Nate Kreinbrink:
That’s big savings, right.
Andy Ferguson:
Yeah. And so if you can figure that out, if you can pull the strings at the right times and do the right things, you can make an impact and you can take advantage of the tax law and better your situation just by timing.
Nate Kreinbrink:
Right, and I think a lot of times this is the time that you see that planning really take hold because individuals were getting towards the end of the year. They have a pretty good idea as far as what their income is going to be throughout the course of the next two months with what they’ve already made so far in 2019.
Nate Kreinbrink:
So we can have that base as far as what our income is. They’ve done taxes with you before. You can plug that into the system and give a pretty good idea as far as what we can utilize.
Nate Kreinbrink:
So again, now between the end of the year, there’s still some time where people can come in, sit down, go over these things with you and still have time to kind of put some of these strategies in place.
Andy Ferguson:
Yeah. Another thing that we do for people as we get towards the end of the year is we say, you know, pile some money into your 401K. You know, up your 401K for the last two months of the year.
Andy Ferguson:
And again, create that gap because by putting the money into the 401K, you reduce your taxable income. And again, you’ve created that gap in taxable income at the top of the bracket. And that it can be a difference maker.
Andy Ferguson:
10% is a lot of money, you know, and it’s worth doing if you can figure it out.
Nate Kreinbrink:
So again, a lot of stuff we kind of just hit on here, stuff that kind of has layers to it as far as let’s do this to impact this, that’s going to do this later on.
Andy Ferguson:
Yeah.
Nate Kreinbrink:
So again, it’s a lot for people to kind of grasp, but it’s the type of planning that you want to start doing as soon as possible. Not wait a year before retirement or in retirement to do these type of things.
Nate Kreinbrink:
We want to make sure that we have a plan in place, understand that there’s different layers that goes into this and it’s not just having blinders on doing yeah, I want to do a donor advice on it, or yeah, I want to do a Roth conversion or yeah I want to lower my taxable income.
Nate Kreinbrink:
You have to have the reasons behind it to know how it’s going to impact everything and I think that’s where the planning really comes into play and being able to maximize the assets that you have heading into retirement.
Nate Kreinbrink:
So great stuff as always, Andy. We are running short on time, but again I appreciate you joining me today.
Andy Ferguson:
Absolutely.
Nate Kreinbrink:
I did want to mention real quick that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of October will be donated to the Special Olympics of Eastern Iowa.
Nate Kreinbrink:
Again, appreciate you joining me this week on the Financial Focus. Thanks for tuning in and enjoy the rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual.
Announcer:
Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research, Inc, a broker dealer member of FINRA SIPC, investment advisor representative, Cambridge Investment Research Advisors, Inc, a Registered Investment Advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.
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