Category Archives: Taxation

Convert The Dip…

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Many of you may be familiar with the “Buy the Dip” strategy certain investors use.  It means that when a security or general market takes a dip in price, they use it as an opportunity to invest more money at a lower price – taking advantage of a temporary discount.  In other words, they see it as being on sale.

Deciding whether to convert a traditional IRA or 401(k) into a Roth is often a complex decision.  The decision process must consider current and future projected income, tax rates, deductions, tax preferences and other related programs such as student financial aid and Medicare costs.   Frequently, when a conversion strategy is developed for larger accounts, it will be executed over several years, to avoid moving into high tax brackets and loss of other preferences and benefits.

When a conversion is executed, it is usually done by transferring the current assets from the traditional account into the new Roth account, rather than liquidating the assets and transferring cash.  The income that is recognized is the value of the assets on the date of transfer.  The value being transferred is taxable to the account holder in the year the transfer is made.  Often, the plan will include transferring the assets with the highest short-term appreciation potential first to reduce the income recognized at transfer time.

Now let’s circle back to Buy the Dip.  Once a decision is made to convert a certain value of assets in a given tax year, it is a smart strategy to transfer those assets when their value is low.  That means more assets can be transferred with the Financial Plan’s dollar limit for that year.

Next time your favorite investment in your traditional IRA or 401(k) takes a dip, instead of just buying the dip, Convert the Dip.  When it recovers in price, the gain will be tax free forever.

The Bottom Line:  Convert That Dip.

–Michael Ross, CFP®

I Don’t Know and Neither Do You…

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I Don’t Know and Neither Do You…

On November 5th we will all head to the polls  At stake is control of the Federal government for at least the next two years.  Hopefully, on November 6th we will know the results.

From a Tax and Financial Planning standpoint there are only 3 possible outcomes.  One party controls both the House and Senate and wins the White House (that’s 2), or we get split government.  The outcome will create many predictable events, laws and policies that are likely to affect the Financial Planning of almost everyone. 

Before I break down the different paths, I want to share some facts that are important to know.

 First, the individual portion of the 2017 Tax Cut & Jobs Act (TCJA) will expire on 12/31/25.  This means for 2026 the individual portion of the tax code will revert to the Obama era tax code.  Included in this are higher tax rates, lower estate and gift tax exemptions, higher capital gain taxation, and the elimination of section 199A – Pass through deduction  for small business owners to name a few biggies.

The party controlling the Senate will only need a simple majority to pass budget items (taxation and spending), unlike the usual 60 votes for almost all other legislation.

Regardless of who the winner is, there will always be some horse trading on minor items at the margin, those bi-partisan issues that they find some agreement on.

Now let’s take a look at the 3 possible scenarios and possible strategies:

A Republican Red Sweep.

  • The TCJA will be extended and made permanent.  I will guess pretty much as is.
  • The SALT deduction limitation may be amended, as it is not popular with Republican legislators from Blue states.
  • Tips and Social Security earnings may become tax free.
  • There may be some move to shore up Social Security, but through raising the retirement age (down the road), rather than through higher taxation.
  • Because changes are likely to be minor, most people will not have much planning to do in anticipation of tax code reform.  It is important to remember that personal income tax rates are not likely to decrease from these levels and will still have a future risk of going up from here.

Split Government.

  • The TCJA will expire and higher tax rates will go into effect for individuals and pass though small businesses for 2026.
  • It is not likely that there will be much modification to the reversion other than the aforementioned horse trading.  There could be some trade-offs between taxation and spending as well.
  • As tax rates will be going up, there are some general strategies that could benefit many people although because everyone is different there may be tradeoffs for some.
  • You will have two tax years (24 & 25) to plan implement these strategies.  That is an advantage allowing income acceleration to be spread out avoiding tax bracket creep.
  • Some specifics:
    • Accelerate ordinary income where possible.  Paying taxes at a lower rate will usually be worth more than the time value savings of deferral.
    • Consider recognizing capital gains while the rates are lower.  From a tax perspective, it may be time to sell your business or other assets such as highly appreciated stocks or investment real estate.  Exercise stock options.
    • Convert your traditional IRAs to Roth’s.  Change your 401(k) contributions to a Roth.
    • If you have assets in the $12 Million+ range, you might consider gifting some of them while you can take advantage of the higher gift tax exclusion.  You might also consider selling the assets, paying the lower cap gains rates and gifting the cash, so your heirs don’t have to pay higher rates at a future date.
    • Defer losses.  They will be worth more when rates are higher.
    • Defer charitable donations.  They will be worth more when rates are higher.
    • Analyze whether it may be prudent to convert your closely held pass through business to a C Corporation which will pay tax at 21%, in light of the expiration of the QBI.

A Democratic Blue Sweep.

  • The Democrats would likely attempt to raise taxes beyond the pre-2018 Obama rates.
  • Some of their proposals include:
    • Increasing the Medicare surtax from 3.8% to 5%.
    • Eliminating the cap on Social Security taxes (FICA).
    • Eliminating or capping the step up in basis on inherited assets.
    • Taxing some capital gains as ordinary income.
    • Unlike the other two scenarios, raising corporate taxes as well.
  • The strategies would be largely the same as under split government, but even more critical for many taxpayers.

It’s important to remember that today anything is possible.  On November 6th, we will have a good idea about what is probable.

The Bottom Line:  On November 6th, we will all know.

–Michael Ross, CFP®

The American Experiment…

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Earlier this week, I attended the Exchange Conference in Miami Beach.  One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.

He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block.  In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.

He didn’t seem to be able to come up with a reason why.  For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree.  Yet they almost all have slowed down in recent years.  Why not us too?

It made me think.  What is different here?  After pondering a bit, I now have a theory.  The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%.  It is a huge cut by percentage. 

It did a few things.  It brought our corporate tax rates down to levels comparable to most of the rest of the developed world.  No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies.  It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms.  Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology.  This created jobs, efficiency and growth.

Was this the catalyst?  Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency?  This investment has been despite higher interest rates.  Efficiency equals economic growth.

The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect.  This has meant more economic growth, more jobs, and more innovation, such as AI.  This is the real trickle down.  Every American benefits.

The Bottom Line:  Capital serves us better in the private sector than in government hands.

The Clock Is Ticking On Year End Tax Planning

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It appears as I write this that any modifications to our tax laws and system will not be enacted nor take effect until 2022.  Additionally, there is very little likelihood that any tax rates will be lower in 2022 than they were in 2021.  While it’s usually beneficial to defer taxes when possible, it can be even more advantageous to pay taxes at the lowest rate possible.  It is clear that for some taxpayers 2021 will be the lowest rate for the foreseeable future.

So…

It’s not too late to do some year end tax planning.  Based on my assumptions above, some of these actions and strategies may be beneficial for you.

There are three basic strategies in play…

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You Might Want To Wait To File Your 2020 Tax Return

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The $1.9 Trillion Covid Relief Bill (American Rescue Plan Act) appears headed to passing the House and Senate with at least the $1,400 per person direct checks to many Americans remaining in the bill. In the House version, the full payments will go to all filers with incomes under $75,000 Single and $150,000 Joint. The payments would begin phasing out at incomes above that until reaching $100,000 Single and $200,000 Joint respectively.

The Senate version lowers the eligibility numbers to $50 – 75K Single and $100 – $150K Joint. In either case eligibility will be determined by the most recent of your 2019 and 2020 Tax Returns. It recognizes that many people have not filed their 2020 returns yet.

Here in lies a planning opportunity for some people. If your income will allow you to qualify for the payment(s) in only one of those tax years, make sure that the lower income is the latest return you have filed.

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How I See It (Part 2)…

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Predictions For 2021 – Part 2

As a result of the Georgia Senate elections on January 5th, we have regime change. The Democratic Party now controls the White House and both chambers on Capitol Hill. They are free to enact almost any economic, regulatory or fiscal legislation they desire as long as they can agree amongst themselves and pass muster with the Supreme Court. None of what they do will be undone until the Republican Party regains control of all three legs of the stool. In the past 40 years one party has had complete control in only 14 of them, so it could be a while until that happens. Here is what I think we will see from the Federal Government in the coming year from a fiscal and economic perspective.

For the first few months, they will be tied up trying to implement their own Covid plan. We can expect more stimulus money being distributed to almost everyone, unemployment payments being expanded and extended and more aid of some sort being directed at small businesses. This plethora of money chasing fewer goods and services will lead to increased inflation, that’s Econ 101. Sustained inflation will lead to higher market interest rates – the Fed will not be able to stop this over any extended period.

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