Tax Changes

This holiday season wouldn’t be complete without a quick discussion on the recent Tax Bill passage.  The Tax Cuts and Jobs Act (TCJA) of 2017 promises something for everyone.  For most individuals and couples, this bill is really just a tweak to the current system.  For Businesses and Corporations, this is a major change.

To highlight some of the changes for families.  The Current 7 bracket system remains, but almost every bracket will be lower than last year.  The top marginal bracket will be 37% instead of the current 39.6%.  Capital Gains treatment remains largely in place though no longer lining up directly with the ordinary income brackets.

There are also going to be changes to personal exemptions and the standard deduction.  The current $4,040 per person personal exemption is suspended, however, the standard deduction will be increased to $12,000 for individuals and $24,000 for Married Filing Joint.  This will make it more difficult for many to itemize.

If you can itemize, there are a few significant changes.  You can itemize interest on a residence mortgage of up to $750,000 and the Home Equity loan no longer qualifies automatically as interest unless used for substantial improvement on your home.  There are no longer any Miscellaneous itemized deductions subject to the 2% floor.  This includes tax prep cost, advisory fees on non-retirement accounts, unreimbursed employee expenses and a few others.  Medical deduction and Charitable contributions did make the cut and remain itemizable.

Since it will be more difficult to itemize, Charitable contribution strategies have already emerged.  If you are over 70 ½, you can look at making Qualified Retirement Distributions directly to the Charitable organizations.  This will satisfy your required minimum distribution and not show as taxable income on your return.  There is also the possibility to do some “lump giving”.  Giving multiple years’ worth of gifts in one year to a Donor Advised fund or to the charity directly may make it easier to itemize in one year instead of spreading it out.  If you are currently eligible to collect a Required Minimum distribution, expect more information on these strategies in early 2018.

Estate Tax is still part of the current bill, but the 40% “death tax” doesn’t kick in until $10.98m for individuals or $21.96m for couples.  This almost doubles the current exclusion.

A few other areas that changed include an expanded exemption amount for Alternative Minimum Tax, Unearned income from Children is going to be taxed at Trust rates, and 529 Education accounts can be used for private schools and homeschooling.  Also, families will see an expanded child tax credit.  It has doubled from $1,000 to $2,000 in 2018 for children under 18 with the phase out expanding dramatically from $110,000 to $500,000.  Expect more details on these provisions over the coming weeks.

Finally, there is a lower income tax rate on corporations and the introduction of a 20% passthrough credit on Qualified Business Income(QBI) of pass through entities.  If you are an owner in a Sole Proprietor, Partnership, or corporation (C or S) there could be significant changes headed your way in 2018.  We would encourage you to engage with your advisor as well as your CPA and attorney early in the year to make sure you are positioned to benefit from the new rules.  We are working on a summary that will highlight the changes to business and will publish it to our website shortly.

As always, we encourage you to talk with your advisors.

 

Time is Running out for the SIMPLE Retirement Option

Time is Running out for the SIMPLE Retirement Option 

Are you considering starting a retirement plan for your small business?  Have under 100 people and want to make it easier to get them enrolled?  Then you only have a couple of days left to establish your SIMPLE Retirement plan.  They must be established by October 1.   

When people think of retirement plans, they almost always focus on 401(k)s.  We think the choice for many small businesses is really between a 401k account and a SIMPLE IRA.  We wanted to create a mini primer on some of the differences between the two plans. 

The SIMPLE IRA is the easiest from an administrative perspective, but all contributions are 100% vested as soon as employees contribute.  This makes it more of an employee benefit and less for employee retention.  The 401k has more administrative expense, but has flexibility in the amount, timing and nature of the contributions.  You can also have the employer contributions vest over a number of years (For example, 20% every year you work there…) 

 

For the SIMPLE IRA 

Contributions-

Contributions can be either 2% for everyone regardless of employee contribution or a 3% match.  Sample on employee with $100,000 in income.  If you selected 2%, they get $2,000 regardless of their participation.  On the Match, they get $3,000 but only if they also contribute $3,000.  I have seen more success with plans where employees need to participate in order to get a contribution.  Focuses the benefit on the employees that understand the contribution as a benefit.  Maximum Employee Deferrals would be $12,500/year.  If over 50 years old, they can also contribute an additional $3,000.  

To calculate your maximum company match, just multiply your payroll by either 2% or 3%. 

You can also set eligibility requirements.  You can be as strict as an employee must be with you for 2 years and make at least $5,000/year before they are eligible.  Most common would be employees eligible after the first year.  There isn’t much else available in terms of customization and you need to have fewer than 100 people to participate. 

Cost:

You have a lot of flexibility when it comes to providers and Cost.  You can Hire a Registered Investment Advisory firm to conduct in person enrollment and offer ongoing education and investment management or you can work directly with a fund provider.  Think of the fees like layers and make sure you understand the fees at each layer and the services that will be provided. 

Layer 1.  Tax filing and Administration:  Good news here.  Generally, there is no cost.  You want to make sure and establish a proto-type plan document, establish written authorization to deduct from employee’s paychecks…but you generally don’t need a lot of professional help.  If you are the owner, you will want help calculating your maximum contribution, but this is generally in the realm of your CPA.   

Layer 2 The investments: The Funds themselves have an annual expense ratio.  This is the percentage of the fund that is being used to manage the funds.  When you look at returns, they are generally referenced after this cost has been taken into account. 

Layer 3 Custody:  The funds need to be held somewhere and the company responsible for this is the custodian.  Some charge an IRA custodial Fee, usually flat rate per account or per fund.  Some also charge for transaction charges as a percentage of the account balance or per trade.  Employers have the ability to pay for many of the costs at this level. 

Layer 3 Investment Management:  When you want to give your employees the option of using a professional investment advisory firm to help allocate, manage and report on their accounts.  This often starts with an enrollment meeting and continues to establish an investment objective and manage accounts to conform to that objective.  Fees are either flat rate or expressed as a percentage of assets under management.  Be sure to find out how much employee education and financial planning is available at this level.  The employer can pay for the fees at this level as well.    

Layer 4 Employee Education and Financial Planning:  Many companies are not just offering these benefits, but ensuring that their employees have the resources to use them.  This can be in the form of Employee enrollment meetings, or one on one financial planning discussions.  This is generally either included in the investment management or defined in a separate consulting agreement based on a flat rate package or hourly commitment.  To get the most use out of your plan, don’t overlook the importance of educating and motivating your employees to take control of their own future.    

 

401K 

Customization:

There is a lot of customization available at the 401k level.  You can do flat contributions, matching contributions and profit sharing contributions.  You can set eligibility requirements similar to the SIMPLE, but you can also set vesting requirements.  Sample 6 year vesting requirement would be 0% the first year, followed by 20%, 40%, 60%, 80%, 100%.  You can always chose something less restrictive as well. You can even set your plan up so employees have to Opt-out instead of opt in. 

Contributions.

Employees can defer up to $18,000 of their salary pre-tax plus an additional $6,000 if over the age of 50.  Employee match depends greatly on customization options.  

Cost:

Since there is so much customization available, there are testing requirements and IRS filing requirements every year.  A Sample plan would include the following costs:  I won’t go into too much detail repeating above. 

Layer 1.  Tax filing and Administration: You will need a recordkeeper to make sure and keep accounts separated and a Third-party administrator to ensure testing, compliance and reporting.  There is usually a flat rate cost plus a certain dollar amount per participant.  The larger the plan, the costlier.     

Layer 2 The Investments:  This is the same as in the SIMPLE.  Make sure you are paying attention to the share class.  Some funds are offered at multiple cost ranges.  You want to see if you have access to the lowest cost institutional share.  Some providers obscure some of their costs in the expense ratio.  Hypothetically, you might have a Fund with an R2, R3, R4, R5, or R6 designation or N, L, G lettering.  Cost differences between the share class may exceed 1% so make sure you are getting the lowest cost share for your plan. 

Layer 3 Custody:  The funds need to be held somewhere and the company responsible for this is the custodian.  Most custodians will offer funds from multiple fund families and make it reasonably easy to change them.  You may also want a self-directed brokerage component for some employees. 

Layer 3 Investment Management: When you think of Investment management for your plan, it can be at the plan level or the employee level.  Minimally, the plan level should have an investment policy statement in place documenting the investment process for selecting and if need be, replacing the investment line up.  At the participant level, you can also set up models that can be managed by a professional and eligible as “one size” investment options for employees.  Most of these are generally offered as a % of the funds being managed though you may encounter minimums if you are starting a plan up from scratch. 

Layer 4 Employee Education and Financial Planning:  Same as the SIMPLE.  Consider an employee education plan to address not just Investment management, but budgeting and use of credit.   

So there are Many choices .  For more detail, check out the IRS Website on SIMPLE IRAs https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan  or 401K plans https://www.irs.gov/retirement-plans/401k-plans or contact a qualified Financial Advisor or CPA.   

Content may be re-distributed with reference and link.
 

About the Author 

Ben Rickey is co-Owner of Leonard Rickey Investment Advisors PLLC.  www.bestpathforward.com  Their practice focuses on family businesses.  He holds the Certified Financial Planner(CFP®) , the Certified Investment Management Analyst(CIMA®),  and the Certified Private Wealth Advisor Designations(CPWA®).   

 

NAPFA Conference

Last year, I joined the National Association of Personal Financial Advisors (NAPFA).  It is the country’s leading professional association of fee only financial advisors.  It requires substantial continuing education as well as adherence to a Code of Ethics and a yearly attestation to a Fiduciary Oath. It has been a tremendous resource for our entire Firm.  When they announced their National Conference was going to be in our backyard (Bellevue), I didn’t think I could pass it up.

The first day was dedicated to investor behavior.  We had professors from Kansas state and the University of Georgia run a workshop on how our behavior can get in the way of making good money decisions.  It was no surprise to me that they listed money as the number one stressor in America since 2007.  Felt good to know that the number one way to cope with that stress is to create a plan and number two is to implement it.

I had a great educational session on College planning and the benefits of deeply integrating tax planning with your investment management.  While neither of these topics are new by any means, it is always beneficial to sharpen the mental saw and stay on top of new developments.  There was also an excellent session on cyber-security.  We are planning on adapting it to a classroom session we intend to offer to clients and post on our website.

My favorite key note speaker was Vivek Wadhwa.  His talk centered on how America is re-inventing itself through innovation.  He spent time talking about the concept of exponential growth.  It is hard to think of things getting twice as good at the same time that they get half as expensive, but the examples are numerous – from computer memory to cell phones.  A very exciting look at the future with implications in the investment world as well as the economy in general.

I also like to take these opportunities to deepen my peer group.  By sharing ideas, we not only have the ability to have better outcomes for our clients, but we also have the ability to help advance the whole industry.   I was certainly not disappointed.  It is refreshing to see so many folks committed and truly passionate about offering fiduciary financial advice.  People committed to not just disclosing conflicts of interest, but doing everything they can to avoid them.  I had some great conversations on different tools and techniques to keep Leonard Rickey Investment Advisors at the forefront of the financial planning community.

For more information about criteria for NAPFA membership, please visit NAPFA.org

LRIA becomes a member of NAPFA

There have been a lot of changes going on at Leonard Rickey Investment Advisors this summer. The one we are proudest of is our decision to become an Advisory Only Financial Planning firm. As part of this change, we have become members of the National Association of Personal Financial Advisors (NAPFA), an organization that represents the less than 2% of advisors nationwide that agree to work only under the Fiduciary Standard.

Being a fiduciary means we sit on the same side of the table as our clients. We believe you’ll see the clear benefit of working with someone whose interests align with yours. We don’t accept commissions or sell any products. We have made a commitment to our clients to put their interests first and operate with transparency. We are proud to be the only NAPFA registered firm in the Yakima Valley, and one of 47** firms in Washington State.

To learn more about NAPFA and the fiduciary standard, visit www.napfa.org.

**Post originally read 16 in error.  Updated 8/8/16 to reflect count based on NAPFA website.

Please Note: The information being provided is strictly as a courtesy.  When you link to any of the web sites provided here, we make no representation as to the completeness or accuracy of information provided at these web sites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.  When you access one of these web sites you assume total responsibility and risk for your use of the web sites your are linking to.  The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investment Advice offered through Leonard Rickey Investment Advisors, PLLC (LRIA), a Registered Investment Advisor. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LRIA is not an affiliate of and makes no representation with respect to such entity. Past performance is no guarantee of future results.

Brexit

Last week the United Kingdom (UK) voted to leave the European Union (EU), leading to Prime Minister David Cameron’s resignation and swift reactions in the financial markets. As a result of the political uncertainty, stocks, bonds and currencies reacted strongly. Financial markets had priced in the UK staying in the EU, so the vote took investors by surprise and added to the strong price movements. European equities, as measured by the Stoxx Europe 600 Index[1], fell over 6%. U.S. stocks didn’t get hit as hard, falling over 3%, as measured by the S&P 500[2]. Currency was particularly impacted. At one point, the British pound was down over 10% relative to the U.S. dollar. On the other hand, safe haven assets, like treasury bonds and gold, were up strongly on the day.

This is going to start a 2-3 year process of negotiations as the UK figures out how to re-establish trade with Europe. The UK will continue to exist under EU law throughout the withdrawal process. The longer term implications are still unclear but the precedent set by the Brexit vote may compel other EU members to withdrawal.

From an economic standpoint, the overall uncertainty of the new political landscape may act as a short term headwind to growth in Europe. However, economies and businesses are resilient. UK companies will adapt to life outside of the EU and continue to seek profits, produce goods and employ people.

In a global economy, there are always ripples throughout the world. These short term swings trigger big emotion. We are not experts on the UK economy and despite what the TV is telling us, neither are most of the people on the news. We have a process that keeps accounts diversified and invested with an emphasis on the long term. We will be reviewing allocation risks given these changes.

[1] The STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It cannot be invested into directly.

[2] The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

It’s Dad Time!

In honor of Father’s Day the team at Leonard Rickey collected wise words of wisdom from our Dads:

“The best liked people in a room are the ones who talk about themselves the least.”  Kelli
“Stay humble, help others, and always give something back” – Susan
“No matter what, tell the truth. It’s much better to face the problem head on then to hide it” – Ben
“Work hard and life isn’t always fair.” – Matt
“If you need to loosen a screw, just remember: righty tighty, lefty loosey.” – Dana
Growing up my Dad always said, “Don’t touch it unless you’re going to buy it.” It puts a smile on my face to say that now as a Dad – Dirk
“In life, you only have control over yourself and your emotions. Trying to control others or thinking they cause your reactions are a waste of time. You choose how you react and how good your life can be.” – Joy
When I was diagnosed with cancer, my Dad told me “Molly, do the chemotherapy. It saved my life and it will save yours.” I took his advice and 11 years later I’m still here. – Molly

What was the best piece of advice you ever got from your Father or Grandfather?

Where Your Durable Power of Attorney Won’t Work

You’ve seen a qualified attorney and drafted up a Durable Power of Attorney so your loved ones can act on your behalf if you become incapacitated or disabled. You think everything’s set. But is it? A DPOA is a widely recognized and useful legal document, but it may not work in every situation.

Social Security Administration:

The SSA does not recognize DPOAs. Instead, it has its own classification called “Representative Payees”, who are responsible for managing and spending the beneficiaries Social Security payments.

Needing to become a representative payee may seem daunting but the process is relatively simple. You must be interviewed face-to-face at a nearby Social Security office and then complete a form. To learn more, visit www.SocialSecurity.gov/payee/index.htm  or call 800-772-1213.

Internal Revenue Service

The IRS will accept a durable power of attorney when the document authorizes the named decision-maker to handle tax matters. But, the authorized agent will be required to execute IRS Form 2848 and file an affidavit before being recognized by the IRS. Luckily, the affidavit needs to be only a couple of sentences. To learn more, see IRS Publication 947, which you can get online at http://www.irs.gov/pub/irs-pdf/p947.pdf or call 800.829.1040.

Banks and Financial Institutions:

While your bank should accept a DPOA, many have rules about how recently the DPOA needs to have been drafted. For example, many will not accept a DPOA that is more than 2 years old. You may need to call each bank or financial institution to get their exact requirements.

 

Please Note: The information being provided is strictly as a courtesy.  When you link to any of the web sites provided here, we make no representation as to the completeness or accuracy of information provided at these web sites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.  When you access one of these web sites you assume total responsibility and risk for your use of the web sites your are linking to.  The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.   Investment Advice offered through Leonard Rickey Investment Advisors, PLLC (LRIA), a Registered Investment Advisor. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LRIA is not an affiliate of and makes no representation with respect to such entity. Past performance is no guarantee of future results.

2016 Changes Coming to Social Security and Medicare

The budget bill signed by President Obama in November included significant changes to the Social Security program. The changes have left many pre-retirees scrambling to make sense of the new rules. Here’s a breakdown of some of the changes coming:

The Good News

*No COLA. Existing Medicare beneficiaries won’t see an increase in their Medicare Part B premiums. And because of the new budget bill, new enrollees will see a smaller increase  (16%) than originally proposed (over 50%).

*Say Hello. More online services and longer office hours may make it easier to reach someone at the Social Security Administration.

The Bad News

*No Raise. There wasn’t enough inflation in 2015 to trigger a cost-of-living adjustment. That means your Social Security check won’t get any bigger in 2016.

*Goodbye Claiming Strategies. Two popular claiming strategies (file and suspect and restricted application) will end next year. Couples have until April 2016 to enter into a claiming strategy before the loopholes are closed.

What other changes are coming?

What’s the Difference? Time Weighted Return versus Internal Rate of Return

A common question we hear from our clients is “what is my rate of return?” The true answer is: there is more than one way to look at returns. Understanding the differences can help you make better informed financial decisions.

The two most acceptable methods to calculate returns are Time-Weight Return (TWR) and Internal Rate of Return (IRR). Here are the key differences:

Internal Rate of Return (also called Dollar Weighted Return)

IRR is the measurement of your portfolio’s actual performance between two dates, including all cash inflow and outflows. Because of this, the IRR of a portfolio can be significantly affected by both the timing and size of any contribution or distribution. Luck in the timing of your inflows or outflows can drastically swing numbers one way or the other.

Using this method can be appropriate to determine how your portfolio has performed relative to your financial goals. However, it’s not an effective measurement tool for analyzing the long term performance of your portfolio’s underlying assets or comparing your investment manager to another manager or index. This is where TWR becomes useful.

Time-Weight Return (TWR):

This method compounds the daily returns of your account from the time it was initially funded until the present. The big difference it that TWR does NOT consider when you deposit or withdraw cash from the account. Simply stated, the TWR is the return on the very first dollar invested in the portfolio. Because of this, TWR represents a more accurate reflection of manager performance.

To really hammer home the difference, let’s look at an example. Say you invest $10,000 in an account on January 1st of this year. Your account increases in value 50% from January to June. You’re so pleased with performance that you put another $100,000 dollars into your account in June. Your account goes down 10% between June and the end of the year.

Graph2

Since your account went up 50% for the first half of the year and then down only 10% the second half, your time weighted return is 35%. In contrast, your internal rate of return is a 5% loss. Why the difference? Most of your money was not invested until the middle of the year and missed the 50% rise. That money then declined and you ended up with less money than your total investment. Clearly, the timing of that $100,000 contribution was significant.

When looking at the performance of your accounts, it’s important to note how your returns are being calculated so you can understand what they are really telling you.

 

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.   Investment Advice offered through Leonard Rickey Investment Advisors, PLLC (LRIA), a Registered Investment Advisor. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LRIA is not an affiliate of and makes no representation with respect to such entity. Past performance is no guarantee of future results. Copyright © 2015* Leonard Rickey Investment Advisors – All rights reserved.

Big Changes to Washington’s GET Program

Earlier this month, changes were made to the Guaranteed Education Tuition (GET) program. The changes were in response to the recent reduction in tuition for Washington’s public colleges and universities. Tuition will be reduced at UW & WSU by 15% over the next two academic years.

In addition, beginning in 2017-18, resident undergraduate tuition will not be allowed to grow by more than the state’s average annual growth rate in the median hourly wage as determined by the Federal Bureau of Labor Statistics.

These changes are important because GET’s payouts are based on tuition at UW & WSU. The drop in tuition has reduced the payout value for GET units to $117.82, meaning those who remain in the program may not recover all of their initial purchase price. Should a student decide to attend school at a private or out-of-state school when they reach college age, GET units may not provide the purchasing power once anticipated.

What does this mean for you?

In response, the GET program has provided the following three options for your existing units:

  1. The current payout value of the GET program will now be $117.82 per unit. If you choose to remain in the program, you will receive this payout value.
  2. If you wish to move your GET funds into a different 529 plans, including a 529 savings plan, the GET program will waive all state program refund fees and the two-year hold requirement.
  3. If you wish to cash out your GET funds, you will receive a refund of your contributions or the payout value, whichever is greater. Be aware that this option may have tax consequences. In addition to the changes above, customers who purchased units between 5/1/2011 and 6/30/2015 will be due a refund of the amortization fee originally paid when units were purchased. Moving forward, this amortization fee will not be charged to new units purchased. You will not need to take any action to redeem your refund. Customers should expect to receive these refunds by December.

The deadline to exercise options 2 or 3 is December 1, 2016, however the Washington State Institute for Public Policy is currently conducting a study to look at growth factors moving forward. This report will be available by December 1st, 2015 so you may wish to wait until this deadline in case there are more favorable options presented.

The table below gives the refund amount per unit you should expect:

Year Unit Purchased

Refund Amount Per Unit
5/1/11 – 6/30/12

$18.70

7/1/12 – 6/30/13 $19.73
7/1/13 – 6/30/14 $20.82
7/1/14 – 6/30/15

$20.82

We recommend waiting to take any action until after the December 1st, 2015 meeting, in the event more favorable options are presented. We encourage you to review your individual situation and meet with your financial advisor if you’d like to discuss your options.

Here are the links to the  GET Refund Cancellation Policy and Refund Form.

http://www.get.wa.gov/sites/default/files/documents/GET-Refund-Cancellation-Policy-09-02-2015.pdf

http://www.get.wa.gov/sites/default/files/documents/GET-Refund-Form-09-02-2015.pdf

 

Please note: prior to investing in a 529 plan investors should consider whether the investor’s or designated beneficiaries home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.