Thursday, December 7, 2017

2017 Year End Tax Planning

2017 Year End Tax Planning

December is always a good time to evaluate your tax situation and see what you can do to lower your taxes.  This year is no different but with the potential tax reform it is more important than usual. With the recent passage of tax reform bills in the house and the senate, Congress is now working on what the final law will be.  We think it is likely that a tax reform bill will pass this year, but there may not be a lot of time to react by the time the final law passes.

Since the senate and house bills have some similarities, we have a sense of what the final law may look like. To prepare for the eventuality of a new tax law, there are several things you can consider now to help make the most of your tax planning for 2017 and 2018.

This article intends to address the most common things that will affect individual taxpayers and their year-end tax planning for 2017.

One of the major changes in the tax law may be the elimination of many itemized deductions that are allowed under current law. However, the standard deduction will likely be doubled for most people. With this change, it is predicted that the number of people who will be able to use itemized deductions in 2018 and forward will decrease dramatically.

Specifically, the deduction for state and local income taxes may be eliminated, the deduction for real estate property taxes may be capped at $10,000, and the deduction for miscellaneous deductions over 2% of your Adjusted Gross Income (“AGI”) may be eliminated (e.g. investment advisor fees, tax preparation fees, unreimbursed business expenses, etc.). In addition, the deduction for medical expenses over 10% of AGI could be eliminated, however, there is talk that this deduction could remain.  The itemized deductions for mortgage interest, a limited amount of property taxes and charitable donations will probably remain.

The standard deduction will probably increase from $12,700 for a married couple to $24,000, and the standard deduction for a single filer will increase from $6,350 to $12,000. Starting next year, many people will not have enough itemized deductions to reach these limits and will take the standard deduction instead.

Another major change proposed in the House bill is the elimination of the alternative minimum tax also known as the “AMT”.

One of the biggest items in the tax reform is lower tax rates. In general, it appears that tax rates will be lowered across the board for all levels of income.

Here are some basic things you should consider doing before December 31, 2017 to prepare for the ultimate tax reform:

·         State Taxes:  Consider paying all of your 2017 state tax liability before the end of this year. This includes your 4th quarter state estimated tax payment and any estimated amount you might owe in April next year for the 2017 tax year.  If you are subject to AMT in 2017, you may not get a federal benefit from paying in 2017, but if the deduction is going away, you wouldn’t get a benefit in 2018 anyway. In addition, you may still benefit from the deduction on your 2017 state taxes.

·         Real Estate Taxes: Considering that there may be a $10,000 cap on the deduction for real estate taxes in the future, you may want to pay any remaining real property taxes for 2017 before year end. If you are subject to AMT in 2017, you may not get a benefit for the deduction on your federal taxes. However, you may get a benefit on your state tax return. It’s best to check with your tax advisor.

·         Charitable Contributions: Increase your charitable deductions in 2017 for future years.  One way to do this is to set up a Donor Advised Fund (“DAF”) for charity.  You can donate as much as you want in 2017, subject to certain tax deduction limits, and then have the DAF disburse funds to your desired charities over the next several years.  If you have appreciated stock that you can donate, this is a double tax savings.  You will be able to deduct the FMV of the stock donated on your tax return and won’t be taxed on the capital gain.

·         Miscellaneous itemized deductions: Consider paying your 2017 advisor fees and unreimbursed business expenses before year end.  These include your unreimbursed business expenses for your job, tax preparation fees, estate planning fees, and investment advisor fees.  If your miscellaneous itemized deductions are over 2% of your AGI, and you are not subject to the AMT, you will be able will increase your 2017 deductions.  

·         Mortgage Interest: Consider paying your January 2018 mortgage payment just before year end to deduct the interest portion of the January payment in 2017.

·         ROTH IRA Conversions: Roth Conversions may be gone in 2018.  If you want to do a Roth conversion or increase your ordinary income in 2017 to match your itemized deductions, you will have to do the conversion before 12/31/17.

·         Business expenses: If you own your own business consider accelerating your 2017 business expenses by prepaying some of your 2018 expenses before year end.

·         Income deferral: With tax rates looking like they will be lower next year, you may want to consider, if possible, deferring any income into 2018.

·         Alimony deductions: The alimony deduction may be eliminated for divorces occurring in 2018 and beyond.  Divorce decrees executed before 12/31/17 will be grandfathered and the alimony deductions will continue to be deductible.

·         Incentive Stock Options (ISOs):  In 2018, the AMT may be eliminated.  Under the current law, when ISOs are exercised, the inherent gain on the stock is income for the AMT if held for long term purposes. If there is no longer AMT, this will no longer be an issue.  So it would be best to wait until 2018 or later to exercise your ISOs.

·         Investment gains:  The Senate bill proposes that going forward, investment cost basis will be calculated using the First In, First Out (FIFO) method rather than a Specific Identification method.  You will no longer be able to choose which specific shares will be sold.  If you have stock with lower and higher cost basis, you may want to sell the higher cost basis stock before year end using the Specific Identification method. This will leave only the lower cost basis shares remaining. At least you will have reduced your position in that holding without triggering the much larger taxes due than if you didn’t do this and had to sell some of the holding after 2017. The remaining unrealized capital gains could remain in your portfolio for the long term and your heirs would receive a “stepped up” basis at death.

This article is a summary of our current thoughts on the proposed new tax law and does not necessarily cover everything that may apply. Your individual circumstances will matter, and you should consult your advisors regarding any of the above strategies. This article does not constitute tax or legal advice.

Tuesday, May 2, 2017

Why you should consider a Health Savings Account now

Why you should consider an HSA now

Health Savings Accounts ("HSAs") have been around since 2003; however, based on my observations, these types of accounts are not widely used.  With the focus on health insurance the past few years, now is a good time to consider the use of an HSA.  If you qualify to contribute to an HSA and have the cash flow, they are a really great tax saving and investment vehicle.

What is an HSA?
An HSA is a type of account that you contribute funds to just like an individual retirement account ("IRA"). Many people are not eligible to make tax deductible contributions to an IRA because of income limitations, participation in employer sponsored plans, etc. Those people can consider an HSA as an alternative. An HSA is one way to reduce your taxes, save for retirement, and save for medical expenses at the same time. When you make a contribution to an HSA, a subtraction from adjusted gross income can be claimed on your tax return. This reduces your adjusted gross income and ultimately the amount of tax you owe. Once the funds are in the HSA, they can be invested or left in cash and are available to pay for medical expenses.

In addition, medical expenses usually do not provide much tax benefit as a normal tax deduction. By contributing to an HSA and using those funds for medical expenses, you are able to indirectly deduct your medical expenses.

Who Can Qualify:
The first qualification is that you must be covered by a “high deductible health plan” or “HDHP”. High deductible is defined as a deductible of at least $2,600 per year for a family or $1,300 for a single person.  In general, as long as you are enrolled in an HDHP and eligible for an HSA as of the first day of the last month of your tax year (December 1st for most taxpayers), then you are considered enrolled in an HDHP for the entire year.

The second qualification is that you cannot be enrolled in Medicare. If you are enrolled in Medicare, you are not eligible to contribute to an HSA. However, if you already have funds in an HSA, you can continue to use these funds.

The third requirement is that you cannot be claimed as a dependent on someone else’s tax return.

The fourth requirement is that you have no other health coverage (such as a flexible spending account or “FSA”) except what is permitted. See IRS website for further information on this.

Distributions from the HSA often occur as medical expenses. The custodian of the HSA will usually give the HSA owner a debit card to use at medical service providers.  Distributions and payments from an HSA are not taxable if they are used for qualifying medical expenses.  Qualifying medical expenses are those that generally qualify for a tax deduction as a medical expense such as prescriptions, co-pays, hospital and doctor expenses, etc.  Only certain types of insurance payments are allowed as qualifying distributions, so be sure to look into this further if you are planning to use the HSA for payment of health insurance premiums. 

If the HSA funds are not eventually used for medical expenses, the account is allowed to accumulate and grow tax free.  Once the account holder reaches age 65, the funds can be withdrawn for non-medical purposes without being subject to a withdrawal penalty.  Prior to age 65, non-medical distributions will be subject to a 20% penalty.   After age 65, funds withdrawn for non-medical purposes will be subject to income tax on the growth of the investments.

Contribution Limitations:
HSA contributions are subject to annual limitations. The annual contribution for a family in 2017 is limited to $6,750.  The 2017 annual contribution for a single person is limited to $3,400. Those age 55 or older can contribute an extra $1,000.

Where can you setup an HSA?
Many local banks as well as online banks have the ability to establish a health savings account for you. As with anything, you should compare the different banks to determine which one is best for you. In addition, your health insurance provider may provide the ability for you to establish an HSA.

HSAs are a great vehicle for saving taxes on your medical expenses and possibly saving for retirement at the same time. If you are eligible and can afford to put the money into an HSA, then a health savings account is something for you to seriously consider.

Disclaimer: This article is necessarily general in nature. It is meant to cover the general rules and not the entire details. If you are considering the use of an HSA, be sure to consider all the details and consult your tax professional. The IRS website and HSA websites are also a good source of info

Monday, February 8, 2010

Top 10 Wealth Management Ideas for the Successful Entrepreneur

If there is one theme that I see in working with entrepreneur clients, it is their struggle to manage their business while properly structuring their business and financial plans. When I use the term "Wealth Plan," I am not just referring to how you invest your money. As a wealth manager, what I mean by "Wealth Plan" is the integration of the business structure, income taxes, retirement plans, personal investments, insurance and estate planning.

Without proper integration of these components, you might be paying much more in taxes than necessary. You might be subjecting your family to financial risk in the case of a death or taking on too much investment risk. Following is a list of top planning ideas to be addressed in preparing your Wealth Plan:

  1. Consider your business structure. If you are still in the formation stages, should your business be an LLC, S Corporation, partnership or C corporation? If your company is already formed, should it be converted to a different type of entity? In addition to liability protection, entity structure affects many issues such income taxes, administrative operations and ultimately the tax consequences of the future liquidation or sale of the business.
  2. Minimize your taxes. Consider your business and personal taxes together. This goes hand in hand with your business structure. Use accounting methods and tax elections for the business to minimize income taxes. The tax picture for business owners can become quite complicated. In most cases, a good CPA is required to make sure that all tax compliance issues are taken care of timely and accurately and all available deductions are being claimed. Consider techniques to defer income and accelerate deductions for both the business and personal taxes.
  3. Fully utilize retirement plans. Most successful businesses have excess cash flow. Consider utilizing defined benefit, profit sharing, SEP-IRA, or 401(k) plans in order to minimize current income taxes and provide retirement assets for the owner and employees. In addition, many business owners, especially doctors are concerned about asset protection. In most cases, retirement plan assets will be protected from creditors.
  4. Investment Allocation. Monitor your asset allocation. Entrepreneurs already take a lot of risk in starting up and funding a business. Taking on additional undue risk in many instances doesn't make sense. This issue should be considered in developing a well diversified investment portfolio. The time horizon and future retirement of the entrepreneur must be considered to ensure a steady source of income once the entrepreneur retires or sells the business. A well diversified portfolio will contain asset classes and investments that don't move in lock step with the stock market. Thus, creating a less volatile and more stable investment portfolio. The goal is to minimize risk and maximize return.
  5. Life insurance. Most people don't like to talk about it, but life insurance is very important. Especially to a hard working successful entrepreneur with a family and business to support. Life insurance is often what allows the business to survive the death of an owner. If there are multiple owners, the life insurance proceeds can be used to buy out surviving family members which provides them the needed liquidity to pay estate taxes and future financial support.
  6. Operating and Buy-sell Agreements. If you are co-owner, Operating Agreements and Buy-Sell Agreements put the agreement in writing so there are no misunderstandings. A Buy-Sell Agreement is important when one owner dies or wants to sell out. The Agreement specifies how the business shall be transitioned to the remaining owners.
  7. Estate Planning. While the estate tax lapsed at the beginning of 2010, most planners believe it will come back in some shape or form. Depending upon what Congress does or doesn't do with the current state of the law, we will either have the estate tax system back as it was in 2001 or we will have a new system. With the uncertainty of the law and the complexity, estate planning is a must for individuals with large estates. Successful business owners should have wills, revocable trusts, living wills and healthcare powers of attorney at a minimum. These documents will not only provide proper planning upon death but will also save estates taxes. For large estates, advanced estate planning should be considered to utilize strategies which shift wealth to younger generations and setup a structure for wealth succession.
  8. Asset Protection Planning.
    Asset protection involves planning for the unforeseen event well in advance of it developing. Let's face it, in today's litigious society; it doesn't take an egregious act to have a lawsuit filed against you or your business. Business owners should take action to not only adequately insure themselves, but also to structure their affairs to minimize the potential damages of claims. This process can easily be integrated with the typical estate plan.
  9. Charitable Planning. Proper charitable planning can allow business owners to decrease current income taxes and future estate taxes. There are many different ways to accomplish charitable objectives. By using private foundations, charitable trusts, donor advised funds or direct gifts, donors can accomplish their charitable objectives during life and at death.
  10. Integration. This is the hardest part. I see many people address the separate pieces of their Wealth Plan above but rarely do I see a plan that ties it all together. Without integrating the various parts of the plan, a well formed plan can fail because of the piece that wasn't considered important. Consider the business owner that sells his/her business at the top of the market and reinvests the money in risky investments or the doctor who spends years building a significant medical practice and nest egg only to be hit with a frivolous lawsuit. This is why it pays to work with advisors who can assist with not just parts of the plan but who can work together to make sure the plan is integrated and cohesive.

One of my favorite quotes is, "Most people don't plan to fail, they fail to plan.

©Vestpointe Wealth Management, LLC (February, 2010)

Thursday, February 4, 2010


Welcome, to our new Blog which will focus on your Wealth Plan.

Developing a Wealth Plan goes beyond financial planning and considers all aspects of your financial life such as taxes, college saving, life insurance, estate planning, etc. We intend to provide information here which is relevant to integrating your financial plan, taxes and estate taxes.

If you ever have questions or comments on our blog, feel free to email them to

Thanks for reading!