Year-End Tax & Financial Planning Strategies for 2022

Dear Clients, Prospects and Friends:

As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and review steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of political attention to tax law changes, inflation and environmental sustainability, political compromise has led to smaller impacts on individual taxes this year.

However, with the passage of the Inflation Reduction Act of 2022, there are new tax incentives for you to consider. There are also several tax provisions that have expired or will expire soon. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

Here's a look at some potential planning ideas for individuals to consider as we approach year-end:

Charitable Contribution Planning

If you’re planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies related to charitable giving. For example, if you give gifts larger than $5,000 to a single organization, consider donating appreciated assets (such as collectibles, stock, exchange-traded funds, or mutual funds) that have been held for more than one year, rather than cash. That way, you’ll get a deduction for the full fair market value while side-stepping the capital gains taxes on the gain.

Because of the large standard deduction, most people no longer itemize deductions. But bunching deductions every other year might give you a higher itemized deduction than the standard deduction. One way to do this is by opening and funding a donor-advised fund (DAF). A DAF is appealing to many as it allows for a tax-deductible gift in the current year for your entire contribution. You can then grant those funds to your favorite charities over multiple years. If you give $2,000 or more a year to charity, talk to us about setting up a DAF.

Qualified charitable distributions (QCDs) are another option for certain taxpayers (age 70.5+) who don’t typically itemize on their tax returns. If you’re over age 70.5, you’re eligible to make charitable contributions directly from your IRA, which essentially makes charitable contributions deductible (for both federal and most state tax purposes) regardless of whether you itemize or not. In addition, it reduces future required minimum distributions, reducing overall taxable income in future years. QCDs keep income out of your tax return, making income-sensitive deductions (such as medical expenses) more viable, lowers the taxes on your social security income, and can lower your overall tax rate. They may also help keep your Medicare premiums low.

Last year, individuals who did not itemize their deductions could take a charitable contribution deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022 (and future years).

Note that it’s important to have adequate documentation of all donations, including a letter or detailed receipt from the charity for donations of $250 or more. That letter/receipt must include your name, the taxpayer identification number of the institution, the amount, and a declaration of whether you received anything of value in exchange for the contribution.

Required Minimum Distributions (RMDs)

Tax rules don’t allow you to keep retirement funds in your accounts indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). The RMD is calculated and based on the value of the account at the end of the prior tax year multiplied by a percentage from the IRS’ life expectancy tables. Failure to take your RMD can result in steep tax penalties--as much as 50% of the undistributed amount.

Retirement withdrawals obviously have tax impacts. As mentioned above, you can send retirement funds to a qualified charity to satisfy the RMD and potentially avoid taxes on those withdrawals.

Effective for the 2022 tax year, the IRS issued new life expectancy tables, resulting in lower annual RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as “any digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value.” Digital assets may include virtual currencies such as Bitcoin and Ethereum, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

Unlike stocks or other investments, the IRS considers digital assets and virtual currencies as property, not as capital assets. As such, they are subject to a different set of rules than your typical investments. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences, which can be quite convoluted.

Energy Tax Credits

From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules are complex, and some elements of the law are not effective until 2023, so careful research and planning now can be beneficial. For example, previously ineligible electric vehicles are now eligible for credits, while other eligible vehicles are now ineligible for credits if they don’t contain the right proportion of parts and assembly in the United States.

Additional Tax and Financial Planning Considerations

We recommend that you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of and maximize health savings accounts (HSAs), which can help you reduce your taxes and save for medical-related expenses.

Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have re-contributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023.

We can work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.

Here are a few more tax and financial planning items to consider and potentially discuss with us:

• Life changes –– Let us (or your current financial planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant capital expenditures (such as real estate purchases, college tuition payments, etc.).
• Capital gains/losses –– Consider tax benefits related to harvesting capital losses to offset realized capital gains, if possible. Net capital losses (the result when capital losses exceed capital gains for the year) can offset up to $3,000 of the current year’s ordinary income (salary, self-employment income, interest, dividends, etc.) The unused excess net capital loss can be carried forward to be used in subsequent years. Consider harvesting some capital gains if you have a large capital loss from the current or prior years.
• Estate and gift tax planning –– There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. While you can give much more without incurring any gift tax, any total annual gift to one individual larger than $16,000/$32,000 requires the filing of a gift tax return (with your form 1040). Note that the filing of a gift tax return is an obligation of the giver, not the recipient of the gift. The annual exclusion for 2023 gifts increases to $17,000/$34,000.
• State and local taxes –– Many people are now working from home (i.e., teleworking). Such remote working arrangements could potentially have state or local tax implications that should be considered. Working in one state for an employer located in another state may have unexpected state tax consequences. Also, ordering merchandise over the internet without paying sales or use tax might obligate you to remit a use tax to your home state.
• Education planning –– Consider a Section 529 education savings plan to help save for college or other K-12 education. While there is no federal income tax deduction for the contributions, there can be state income tax benefits (full or partial deductions) for doing so. Funds grow tax-free over many years and can be distributed tax-free when used for qualified education purposes. Lower-income taxpayers (less than $85,800 if single, head of household, or qualifying widow(er); $128,650 if married filing jointly) can redeem certain types of United States savings bonds tax-free when redeemed for college.
• Updates to financial records –– Tax time is the ideal time to review whether any updates are needed to your insurance policies or various beneficiary designations (life insurance, annuity, IRA, 401(k), etc.), especially if you've experienced any life changes in the past year.
• Last Call for 401(k), 403(b) & Other retirement Plan Contributions –– Once the calendar turns to 2023, it’s too late to maximize your employer plan contributions. It may not be too late to make sure that you’ve contributed the $20,500 maximum (plus $6,500 for those age 50 and older) to the plan. Review your last pay stub and check with your human resources or retirement plan website to see if you can still increase your current year contributions (don't forget to reset the percentage in early 2023). Remember, if you’ve worked for more than one employer in 2022, your total contributions via all employers cannot exceed the annual maximum, so you must monitor this. For IRAs, you have until April 18, 2023, to make up to a $6,000 contribution for 2022 (plus a $1,000 catch-up contribution for those age 50 and older)
• Roth IRA conversions –– Depending on your current year's highest tax rate, it may be prudent to consider converting part of your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts. A conversion is nothing more than a taxable distribution from your IRA which is immediately deposited into your Roth IRA (while income taxes apply, no early withdrawal penalty applies). Roth conversions can help reduce future required minimum distributions and help keep future Medicare premiums lower.  The ideal time to consider Roth conversions is after you retire and before you start collecting your pension or social security checks (or whenever your income is much lower in any particular year).
• Estimated tax payments –– Review your year-to-date withholding and estimated tax payments to assess whether a 4^th quarter 2022 estimated tax payment might be required. An easy way to do this is to compare the total tax line on your 2021 income tax return with your total withholding and estimated payments (total payments) made to date. If your total payments made to date are at least 110% of your 2021 total tax, chances are, you are adequately paid in. While you may owe some tax with the filing of your 2022 return (due on April 18, 2023), you likely won’t owe any penalties for underpayment of estimated tax. Similarly, you may not need to pay 110% of last year's tax if your income has decreased substantially versus the prior year.

Year-End Planning Means Fewer Surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here to help. As always, planning can help you anticipate and minimize your tax bill and position your family and you for greater financial success.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Some Cures For Your “Social InSecurity”

Some Cures For Your “Social InSecurity”

 One of the most common questions I hear from clients and prospects concerns the viability of the social security system and the likelihood it will be solvent enough to pay their benefits when they eventually reach retirement age. Their default instinct is to draw social security at the earliest possible age in case benefits were to run out prematurely. As you’ll read below, the Social Security program has many possible tweaks to help extend the payment of benefits for many decades to come and should help alleviate much of your Social InSecurity.

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern. According to the Social Security Administration, Social Security isn't in danger of going broke — it's financed primarily through payroll taxes — but its financial health is declining, and future benefits may eventually be reduced unless Congress acts.

Each year, the Trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and outlook of this program. The most recent report, released on June 2, 2022, shows that the effects of the pandemic were not as significant as projected in last year's report — a bit of good news this year.

Overall, the news is mixed for Social Security

The Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability     Insurance (DI) program. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.

Money that's not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits.

In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year's report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Disability Insurance Trust Fund is projected to be much healthier over the long term than last year's report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096. Last year's report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook.

According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year's report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program's taxes and     reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security's financial status.

You can view a copy of the 2022 Trustees report at ssa.gov 

Many options for improving the health of Social Security

The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Many options have been proposed, including the ones listed below. Combining some of these may help soften the impact of any one solution:

• Raising the current Social Security payroll tax rate (currently 12.4%). Half is currently paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24 percentage points to 15.64% would be needed to cover the long-range revenue shortfall.
• Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
• Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
• Raising the early retirement age beyond the current age of 62.
• Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
• Changing the benefit formula that is used to calculate benefits.
• Calculating the annual cost-of-living adjustment (COLA) for benefits differently.

A comprehensive list of potential solutions can be found at ssa.gov.

As for when Congress will act to fix the system, in my opinion, it will probably be at the last minute when it becomes a crisis. But make no mistake-Congress will act, and any rumors or stories that social security won’t be around for the long term are simply false. Any member of Congress who votes against fixing and extending the system’s heath won’t be re-elected, and therefore you know they eventually will.

As for when you should consider drawing your own social security benefits, the unsatisfying answer is: it depends. Whether you should draw benefits at your early retirement age (usually 62), full retirement age (usually 67) or latest retirement age (70), depends on your financial situation, your spending needs, expected longevity and other factors. Only working with a financial planner or a comprehensive social security optimizer can help you figure out the optimal timeframe to claim social security. The right or wrong decision can increase or decrease your lifetime benefits by five or six zeroes---it’s worth the time and effort to do the analysis. We can, of course, help.

If you would like to review your current investment portfolio or discuss your social security benefits, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Minimum Distribution, Maximum Confusion

Summary: The RMD 10-year rule substantially reduces the ability of most non-spouse beneficiaries to stretch distributions from an inherited defined contribution plan or IRA after the death of the original owner.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the rules for taking distributions from retirement accounts inherited after 2019. The new so-called "10-year rule" generally requires inherited accounts to be emptied within 10 years of the original owner's death, with some exceptions. When no exception applies, the entire account must be emptied within 10 years of the beneficiary's death, or within 10 years after a minor child, beneficiary reaches age 21. This reduces the ability of most beneficiaries to spread out, or "stretch," distributions from an inherited defined contribution plan or an IRA.

In February 2022, the IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules. Unless these proposals are amended, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period. Account owners and their beneficiaries may want to familiarize themselves with these new interpretations and how they might be affected by them.

RMD Basics

If you own a traditional IRA or participate in a retirement plan like a 401(k), you generally must start taking RMDs for the year you reach age 72 (age 70½ if you were born before July 1, 1949). If you're age 72 or older and still working for the employer that maintains the retirement plan, you may be able to wait until the year after retiring to start RMDs from that account. No RMDs are required from a Roth IRA during your lifetime (beneficiaries are subject to inherited retirement account rules). Failing to take an RMD can be costly: a 50% penalty generally applies to the extent an RMD is not made.

The beginning date for the first year you are required to take a lifetime distribution is no later than April 1 of the next year. After your first distribution, annual distributions must be taken by the end of each year. (Note that if you wait until April 1 to take your first-year distribution, you would have to take two distributions for that year: one by April 1 and the other by December 31. This has the potential to spike your tax rate, so discuss this with your financial or tax planner before deciding to defer your first RMD.)

When you die, the RMD rules also govern how quickly your retirement plan or IRA will need to be distributed to your beneficiaries. The rules are largely based on two factors: (1) the individuals you select as beneficiaries of your retirement plan, and (2) whether you pass away before or on or after your required beginning date (RBD). Because no lifetime RMDs are required from a Roth IRA, Roth IRA owners are always treated as dying before their required beginning date.

Who Is Subject to the 10-Year Rule?

The SECURE Act does still allow certain beneficiaries to continue to "stretch" distributions, at least to some extent. These eligible designated beneficiaries (EDBs) include your surviving spouse, your minor children, any individual not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs are able to take annual required distributions based on their remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.

Most importantly, though, the SECURE Act requires that if your designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.

What If Your Designated Beneficiary Is Not an EDB?

If you die before your required beginning date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.

If, however, you die on or after your required beginning date, the newly issued regulations clarified that annual distributions based on the designated beneficiary's remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.

What If Your Beneficiary Is a Nonspouse EDB?

Here’s where it can get more complicated. After your death, annual distributions will be required based on remaining life expectancy. If you die before your required beginning date, required annual distributions will be based on the EDB's remaining life expectancy. If you die on or after your required beginning date, annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary's remaining life expectancy. Also, if distributions are calculated each year based on what would have been your remaining life expectancy, the entire account must be distributed by the end of the calendar year in which the beneficiary's remaining life expectancy would have been reduced to one or less (if the beneficiary's remaining life expectancy had been used).

After your beneficiary dies, or your beneficiary who is your minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the tenth year.

What If Your Designated Beneficiary Is Your Spouse?

There are many special rules if your spouse is your designated beneficiary. The 10-year rule generally has no effect until after the death of your spouse, or possibly until after the death of your spouse's designated beneficiary.

What Life Expectancy Is Used to Determine RMDs After You Die?

Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).

When your life expectancy is used, the applicable denominator is your life expectancy in the calendar year of your death, reduced by one for each subsequent year.  When the non-spouse beneficiary's life expectancy is used, the applicable denominator is that beneficiary's life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this "subtract one" method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.

The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to us to understand how the rules, and the new proposed regulations, apply to your individual situation.

If you would like to review your current investment portfolio or discuss your RMDs, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

'Tis the Season to Be Thinking about Charitable Giving

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help potentially increase your gift.

Example(s): Assume you want to make a charitable gift of $1,000. One way to potentially enhance the  gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 - 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 - 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

For 99% of the population, this limitation is never a problem.

Nonetheless, for 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don't itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).

Make sure to retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. A copy of a canceled check is no longer enough to substantiate your deduction. If you make any non-cash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

If you want to "turbo-charge" your charitable deduction, consider donating appreciated securities (stocks, bonds, mutual funds, etc.) Not only do you get a deduction for full fair market value of the security, you also escape capital gain taxes on the appreciation you donated. If you want to donate securities that have gone down in value, it's always better to sell them first, capture the capital loss, then donate the cash (there's no inherent advantage in donating depreciated securities).

If you give more than $1,000 a year to charity, it may be time to consider a Donor Advised Fund (DAF). A DAF allows you to "bunch" your charitable deductions to allow you to itemize deductions when you might otherwise only qualify for the standard deduction. By funding the DAF with an amount large enough to put you over the standard deduction, you can make charitable "grants" over several years while getting a full deduction in the year that you fund the DAF. Keep in mind that money transferred into a DAF can never be removed, and the only beneficiaries of the DAF are qualified Section 501(c)(3) charities. You can set up a DAF with most major brokers at no cost, and some have no minimums. Talk to us if you'd like more information about setting one up.

A word of caution

Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the "Tax Exempt Organization Search" tool. And never send cash; contribute by check or credit card and be wary of those asking for cash donations, unless perhaps they're standing in front of a red kettle.

If you would like to review your current investment portfolio or discuss charitable giving or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Tax Proposals in Congress Not as Bad as Feared

The latest tax bill advanced in Congress is notable in its absence of provisions that were expected to be "game changers" (see below). And that's a good thing for taxpayers.

On Saturday, September 25, 2021, the Congressional House Budget Committee voted to advance a $3.5 trillion spending package to the House floor for debate. The House Ways and Means Committee and the Joint Committee on Taxation had previously released summaries of proposed tax changes intended to help fund the spending package. Many of these provisions focus specifically on businesses and high-income households.

Expect these proposals to be modified; some will likely be removed and others added as the legislative process continues. As we monitor progression through the legislative process though, here are some highlights from the previously released proposed provisions worth noting.

Corporate Income Tax Rate Increase

Corporations would be subject to a graduated tax rate structure, with a higher top rate.

Currently, a flat 20% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:

• A 16% rate would apply to the first $400,000 of corporate taxable income
• A 21% rate on remaining taxable income up to $5 million
• The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.

Personal service corporations (professionals providing services as a regular sub-chapter C Corporation, not an S Corporation) would pay tax on their entire taxable income at 26.5%.

Tax Increases for High-Income Individuals

Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022, and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)

Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.

New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).

3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.

New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.

Retirement Plans Provisions Affecting High-Income Individuals

New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000,  $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.

New required minimum distributions for large aggregate retirement accounts.

• These rules would apply to high-income individuals (same income limits as described above), regardless of age.
• The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
• To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
• The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.

Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or defined contribution plan account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]

Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make "back-door" contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.

Estates and Trusts

• For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
• The proposal would generally include grantor trusts in the grantor's estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
• Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of non-business assets.

Notable Absence of Certain Provisions

As mentioned above, what was just as notable is that many feared changes to longtime rules were not included in the proposal:

• No increases to the current estate and gift tax marginal rates
• No changes to the current step up basis regime at death
• No limitations on like-kind exchanges
• No required realization of gain on gifts or at death
• No required realization of gain on assets held in trust, partnership or non-corporate entity after being held in trust for 90 years
• The top capital gains rate for high-income taxpayers going up to "only" 25% instead of the expected 39.6%

Of course, things are quite fluid and much will change before the ultimate passage of the final tax bill. We're following developments closely and will post and send updates as things approach passage.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.