Center Clients Donate over $1 Million in Tax-Savvy QCD Strategy in 2023

Contributed by: Lauren Adams, CFA®, CFP®

We are proud to announce that The Center assisted clients in donating over $1,000,000 to charities using the Qualified Charitable Distribution (QCD) strategy in 2023!

The QCD strategy allows clients with assets in an IRA account and who are over age 70.5 to donate funds directly from their retirement account to a charity. Giving directly from an IRA to charity results in those dollar amounts not being included as taxable income for that year. That usually results in a lower tax bill for clients and can have positive downstream effects like lowering the amount they may pay for Medicare premiums and the portion of Social Security that is taxable to them, depending on their situation and income level. For those 73 or older, QCDs also count towards the distributions they need to take each year for their Required Minimum Distribution.

Now, there are some caveats for QCDs – for example, you need to be at least 70.5, and the charity must be a 501c3. There are also limits on how much you can give each year through this method, but that number is relatively high at $105,000 per person per year currently.

The Center’s mission is to improve lives through financial planning done right, and we are proud to be able to help clients make such a positive impact on the world (bonus points for it being in a tax-savvy manner!). 

Did you know that QCDs are only one of many charitable giving strategies our team helps clients deploy? Check out this video to learn more about ways our clients make their charitable dollars stretch further for the causes they care about while also potentially lowering their tax burden. 

As always, we recommend that you work with your tax preparer to understand how these strategies can affect your situation. If you want to explore these strategies and more, contact your Center financial planner today! 

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Is My Pension Taxable in Michigan?

Contributed by: Kali Hassinger, CFP®, CSRIC™

In 2023, a tax relief bill many are calling “Lowering MI Costs” was signed into law that will eventually phase out state tax on pensions (both public and private) and other retirement income for many Michigan residents! As with many laws, however, the timeline for implementation and how and when this law will affect everyone can be confusing. Ultimately, the amount that can be deducted depends on when you were born and is adjusted incrementally over the next few years. I’ve outlined below what you can expect based on the year you were born. 

First, it’s important to note that there is no change for those born in 1945 and before. The maximum allowed deduction can still be claimed each year. The bill will also allow those taxpayers collecting a pension for service as a public police or fire department employee (including corrections officers and state police) to claim the same full deduction as those born in 1945 and prior. For 2023, that amount is $61,518 for single filers and $123,036 for joint filers.

For those born after 1945, however, the amount that can be deducted varies based on the year you were taken. By 2026, everyone will be allowed to deduct the full amount, just as those born before 1945 do now. 

2023 

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or, under the new law, they can deduct up to 25% of the max 2023 deduction amount (Single Filers: $61,518 x .25 = $15,379.50; Joint Filers: $123,036 x .25 = $30,759).

• For those born between 1953 and 1958: Single filers can deduct up to 25% of the 2023 amount of $61,518 ($15,379.50), Joint Filers can deduct up to 25% of the 2023 amount of $123,036 (30,759). Under previous law, there was no deduction allowed. 

• For those born 1959 and after:  No deduction allowed.

2024  

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 50% of the 2024 maximum deduction amount.

• For those born between 1953 and 1962:  Can deduction up to 50% of the maximum deduction allowed in 2024.

• For those born in 1963 and after: No deduction allowed.

2025

• For those born between 1946 and 1952:  Taxpayers will get to choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 75% of the 2025 maximum deduction amount.

• For those born between 1953 and 1966:  Can deduct up to 75% of the maximum deduction allowed in 2025.

• For those born in 1967 and after: No deduction allowed.

2026 

• For all taxpayers: Full Deduction will be allowed for everyone!

The Bill noted that as it is currently, the deduction available for joint returns will be based on the older spouse’s date of birth. If you have any questions about your pension or how this law will impact you, we are here to help! 

Source: House Bill 4001 (2023): http://legislature.mi.gov/doc.aspx?2023-HB-4001

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

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Raymond James does not provide tax advice. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the Lowering MI Cost plan.

Avoid Common Inheritance Mistakes with These Tips

Contributed by: Sandra Adams, CFP®

If you are like most of our clients, anticipating an inheritance likely means something is happening or has happened to someone you love. This often means dealing with the pain of grief and loss in addition to the potential stress of additional financial opportunities and responsibilities. Combining your past money experience and your relationship with the person you are losing or have lost can cause varying degrees of stress.

Approximately 15% of American adults expect to receive an inheritance in the next decade, according to the New York Life Wealth Watch survey — a shift of wealth being called the "Great Wealth Transfer." The adults who anticipate receiving an inheritance expect it from a parent, spouse, family member, or another individual. On average, adults expecting an inheritance anticipate receiving over $700,000. Only 42% of adults who expect to receive an inheritance feel very comfortable financially handling the new wealth that will be passed down to them - and nearly twice as many women who expect to receive an inheritance (23%) feel uncomfortable managing their inheritance than men who expect to receive an inheritance (12%).

The statistics are not kind. Studies show that roughly 33% of all inheritors have a negative savings balance within two years of receiving an inheritance. After five years, that number jumps to over 70%. Sadly, only about 30% of inheritors take their inheritance seriously and use it to plan for their future. It is important to be aware of and understand the typical habits of inheritors to avoid the risks.

Navigating grief, discomfort with handling finances, and family dynamics can make it hard to know what to do when it comes to anticipating an inheritance. What steps can you take to ensure that you avoid the potential risks that lie ahead and use your possible inheritance to help you make the best use of any funds for your current and future financial goals?

1. Don't Rush to Make Any Big Decisions. Often, when one receives an inheritance, it is hard to resist the urge to splurge on big purchases that you haven't been able to afford in the past (a fancy new car, an exotic international vacation, etc.). A best practice is to avoid major purchases until you can take the time to do some intentional planning. We recommend taking a proactive time out from decision making (we call this a "Decision Free Zone") to process the reality of having a new financial situation and to determine how you would like that to impact your current and future financial plans, including retirement and other financial goals.

This purposeful time-out can help you avoid making promises to do things for others with the new funds. It is important that you inform others who may be expecting your financial help that you will not be ready to make those decisions for some time. This takes the stress and pressure off you and allows you time to plan what you will do with the money at your own pace. You may eventually decide to help others, including family members or charities, with some of the money if it fits in your financial plan, but by avoiding making promises right away, you don't make and/or break commitments that may lead to hurt feelings and broken relationships that could impact future relationships.

2. Set Reasonable Expectations About Timing. Once you have been informed about your inheritance, you may wonder when you will receive it. It is important to find out what types of accounts and assets you might be inheriting to set a clear expectation of how long it takes to get them.

You shouldn't expect to receive funds from an inheritance for at least one to two months following the death of a loved one (if you get them sooner, it is a pleasant surprise!) It could take longer if the assets are not liquid. In some cases, the estate is held up longer for final expenses and/or if legal issues need to be resolved. 

3. Be Aware of Taxes. It is also important to be aware of the types of assets you are inheriting so that you are aware if you might owe taxes on any of the dollars you are receiving. For instance, if you are receiving funds from an IRA or an annuity contract that might have a taxable portion, and you don't have taxes withheld at the time of distribution, you might need to plan to have extra funds at tax time to pay the bill.

Setting aside a portion of the inherited dollars for any possible taxes due is a good idea so you don't get caught blindsided at tax time.

4. Consider the Details. Once you receive the assets, many other questions (besides taxes) will be answered, such as: How should I hold the assets (i.e., in what registration?) Should I hold my inherited assets separately from other assets held with my spouse? Should I hold the same investments as my grandfather/father/etc. held, or should I change the investments? If I inherited IRA assets, how long do I have to distribute the account? Getting the help of a financial adviser to answer these questions is highly recommended.

5. Work with an Advisor. Working with a financial advisor to determine what has changed or could change with your financial picture with the new inheritance is highly advisable. This could include things like:

• Income

• Savings/Emergency Funds

• Spending

• Investments

• Debts/Liabilities

• Health Care

• Home

• Insurance

• Estate/Legal

• Self-Care

• Family/Children

• Gifting/Charity

When your changes have been identified, it makes sense to determine how they can help you identify and meet your financial goals. With the help of your financial advisor, you can design a plan for how to meet your financial goals with your new inheritance. Because it can be overwhelming, we recommend determining what goals must be tackled first and what can wait until later based on a "Now…Soon…Later" schedule. Then, meet regularly with your financial advisor to begin checking off the tasks it takes to meet your goals and make the most of your inheritance.

For many, receiving an inheritance means the loss of a loved one. And the fear of failing with the big responsibility that comes with handling what is being left financially (especially if you don't feel confident handling money) might leave you feeling overwhelmed. By taking your time and using the guidance of a financial advisor who will provide you with education and guidance, you can set yourself up for success to use your inheritance to make the most of your current and future financial goals.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Sandra D. Adams, CFP® and not necessarily those of Raymond James.

Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Don’t Fall Victim to the Widow’s Penalty!

Contributed by: Nick Defenthaler, CFP®, RICP®

Several years ago, after starting a new relationship with a newly widowed client, I received a confused phone call from her. She had received communication from Medicare that her Part B & D premiums would be significantly increasing for the year. To make matters worse, she also noticed when filing her most recent tax return that she was now in a much higher tax bracket. What happened? Now that her husband was deceased, she was receiving less in Social Security and taking fewer withdrawals from her retirement accounts. Her total income had decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she was a victim of what’s known as the “widow’s penalty.”

Less Income and More Taxes – What Gives?

Simply put, the widow’s penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse’s death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. Additionally, they will lose any other income tied only to the deceased spouse, such as employment income, single-life annuity payments, or pensions with reduced or no survivor benefits. Depending on how much income was tied to the deceased spouse, the surviving spouse’s fixed income could see a sizeable decrease.

At the same time, the surviving spouse starts receiving less income, and they find themselves subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married filing jointly in the year following their spouse’s death. In 2023, that means they will hit the 22% bracket at only $44,725 in income. Married filers do not reach the 22% bracket until they have more than $95,375 in income. Unfortunately, even if income remains the same, widowed tax filers will inevitably pay higher tax rates on this same income level. 

Tax brackets are not the only place surviving spouses are penalized. Like the client in my story above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Specifically, single filers with a modified adjusted gross income of more than $97,000 are required to pay a surcharge on their Medicare premiums, whereas there is no surcharge until a couple who is married filing jointly reaches $194,000 of income. This means that a couple could have an income of $120,000 and not be subjected to the Medicare IRMAA surcharge, but if the surviving spouse has an income of $100,000, their premium will increase by almost $1,000 per year. In this same example, the widow would now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying $3,600 more in federal tax!

Proactive Planning

Short of remarrying, there is no way to avoid the widow’s penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse’s lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Several years ago, I was working with a couple (we’ll call them John and Mary), and after several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John’s passing. Several months after her husband’s passing, I met with Mary and suggested we convert over $100,000 from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes along with the significant medical deduction that was only present the year John passed, Mary only paid an average tax rate of 10% on the $100,000 we converted. As we stand here today, Mary is now filing single and finds herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates are set to expire at the end of 2025!)

The widow’s penalty should be on every married couple’s radar. While it’s possible that while both spouses are living, their tax rate will always remain the same, as we’ve highlighted above, unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning could help to dramatically reduce the impact this penalty could have on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

State Pension Tax Relief for All Coming Soon!

Contributed by: Kali Hassinger, CFP®, CSRIC™

In early March of 2022, Michigan’s Gov. Gretchen Whitmer signed the Lowering MI Costs plan into law. This legislative change includes an update that will phase out state tax on pensions (both public and private) and other retirement income for many Michigan residents! Like past rules, the amount that can be deducted depends on when you were born and is adjusted incrementally over the next four years. 

For those born in 1945 and before, there is no change. The maximum allowed deduction can still be claimed each year. In 2023, that amount is $56,961 for single filers and $113,822 for joint filers. This maximum deduction amount is adjusted for inflation each year.  

2023

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or, under the new law, can deduct up to 25% of the max 2023 deduction amount (Single Filers: $56,961 x .25 = $14,240.25; Joint Filers: $113,922 x .25 = $28,480)

• For those born between 1953 and 1958: Single filers can deduct up to 25% of the 2023 amount of $56,961 ($14,240.25), Joint Filers can deduct up to 25% of the 2023 amount of $113,922 (28,480). Under previous law, there was no deduction allowed. 

• For those born in 1959 and after:  No deduction allowed 

2024  

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 50% of the 2024 maximum deduction amount

• For those born between 1953 and 1962:  Can deduct up to 50% of the maximum deduction allowed in 2024

• For those born in 1963 and after: No Deduction allowed

2025

• For those born between 1946 and 1952:  Taxpayers will get to choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 75% of the 2025 maximum deduction amount

• For those born between 1953 and 1966:  Can deduct up to 75% of the maximum deduction allowed in 2025

• For those born in 1967 and after: No Deduction allowed

2026 

• For all taxpayers: Full Deduction allowed

This change is estimated to reduce state tax paid by an average of $1,000 for each household affected.

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Raymond James does not provide tax advice. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the Lowering MI Cost plan.

How to Make the Federal Funds Rate Work for You

Contributed by: Kelsey Arvai, CFP®, MBA

It is worth reviewing how interest rates work and how you might consider adjusting your saving, spending, and investing strategies. Please always consult your CFP® professional regarding your specific situation and what is right for you. The Federal Reserve interest rate (also known as the federal funds rate) is the interest rate at which banks and credit unions borrow from and lend to each other. It is determined by the Federal Reserve System (also known as the Federal Reserve or simply the Fed). The Fed is the central banking system of the United States, and the federal funds rate is one of the key tools for guiding US monetary policy. The federal funds rate impacts everything from annual percentage yields (APYs) you earn on your savings to the rate you pay on credit card balances.

The Fed was first created in 1913 with the enactment of the Federal Reserve Act. A series of financial panics, specifically a severe one in 1907, led to the desire for central control of the monetary system to alleviate financial crises. The Fed is composed of several layers governed by the presidentially-appointed board of governors (known as the Federal Reserve Board or FRB). Historical events such as the Great Depression and the Great Recession have led to the expansion of the roles and responsibilities of the Fed. One of the functions of the Fed is to manage the nation’s money supply through monetary policy. Three key objectives have been established by Congress for monetary policy in the Federal Reserve Act – maximizing employment, stabilizing prices (prevention of inflation or deflation), and moderating long-term rates. The Fed largely implements monetary policy by targeting the federal funds rate – typically by adjusting the rate by 0.25% or 0.5%. The way it works is when you deposit money at a bank or credit union, those deposits provide banks with the capital needed to extend loans and other forms of credit to clients. Banks are required to keep a certain percentage of their total capital in reserve to help guarantee their stability and solvency.

The current federal funds rate is between 4.50% and 4.75% as of early February (part of the effort by the central bank to control inflation and maintain a stable economy). When interest rates are rising, make sure you look for high-yield savings opportunities, pay down credit card debt, and, if you’re looking for a car or home, make sure your interest rate reflects the current rate.

If you have a credit card, the most important strategy to focus on right now is prioritizing paying it off. While changes to interest rates will not affect your current fixed-rate loans, such as your car loan or mortgage, if you carry a balance on a credit card, the rate you owe on that money will continue to rise alongside short-term rates set by the Fed. If you cannot pay down your debt quickly, consider moving your debt over to a balance transfer credit card that could ensure you will pay no interest on your balance for a number of months.

On a positive note, rising interest rates create savings opportunities. Even though interest rates on deposits tend to correlate with the rise of the fed funds rate – you will likely earn next to nothing on your regular savings account, which typically is around 0.01%. If you have accumulated a large amount of cash in the bank above your current cash needs and emergency savings (three to six months of expenses), you might consider looking to a high-yield savings account, a money-market fund, or a one year Treasury bill (T-bill). Rates have increased quite a bit lately; the one year bill is now at 5.07%, and the two year is around 4.65%. Interest on T-bills is not taxable at the state level. Not a significant impact for Michigan residents, but if you live in a high-income state such as California, these become even more attractive. Our team has identified several money markets funds offering yields of around 4.5% (more than you would typically see at the bank).

The Federal Funds Rate is important to understand as the rate changes can impact your wallet. Ultimately, it is your own habits that are the main factor in determining your financial situation. As always, if you have any questions, feel free to contact our Team at The Center; we would be happy to help!

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Investors should consider the investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

Understanding your Tax Return: Why Adjusted Gross Income Matters

Contributed by: Robert Ingram, CFP®

Tax Filing season is officially underway for the 2022 tax year returns. If you find yourself feeling a little extra stress or anxiety during this time, you are not alone. The U.S. tax code is undoubtedly complicated (that may be the understatement of the year), and your main focus is simply trying to get to the bottom line: how much do I owe, or how much am I getting back as a refund? Sound familiar?

As you are completing and reviewing your tax return, some other line items on your return (in addition to the bottom line) are worth looking at a bit more closely. In particular, your Adjusted Gross Income (AGI) may seem like just a number on the way to calculating your taxable income, which then determines your tax bill. And while that is true, your AGI is also used to determine eligibility for a number of different tax deductions, tax credits, and even retirement plans. It is also used to determine things like Medicare premiums, the amount of taxable Social Security benefits, and whether you may be subject to an additional tax on investment income.  

What is Adjusted Gross Income?

Simply stated, your Adjusted Gross Income is your total income minus certain types of…well, adjustments.  

This total income would be your gross income that combines a wide range of items, including things like W2 wage income and certain types of employer benefits, business income, Social Security benefits, pension and retirement plan distributions, investment income, capital gains, and other applicable income.

Once your Total Income is determined you would still make other potential adjustments for items that can include self-employment SEP IRA, SIMPLE IRA, or other qualified plan contributions, eligible Traditional IRA contributions, Health Savings Account contributions, eligible student loan interest, self-employed health insurance, alimony paid, and other adjustments. 

Why Adjusted Gross Income (AGI) Matters

As mentioned, the AGI is a number on the way to determining your Taxable Income.  Potential deductions such as the standard deduction or the itemized deductions, for example, are applied to the Adjusted Gross Income amount.

The applicable tax rates are applied to the Taxable Income to determine your Tax amount (almost), after factoring in additional deductions and/or credits you may be eligible to include.

The result after subtracting and adding any of those items is the amount of your Total Tax.  

(A key point to remember here is that while tax deductions lower your income used to calculate your tax amount, tax credits reduce the actual tax amount itself dollar for dollar.)

Based on your total amount of tax withholding and tax payments you’ve made, plus any additional eligible tax credits (e.g. Additional child tax credit, American Opportunity credit, Earned income credit), you may have paid more than the calculated Total Tax amount or less than the Total Tax amount.  If you have overpaid, then you would expect a refund.  If you have paid less than the Total Tax, then you would owe additional tax.

AGI Determines Eligibility for Some Tax Deductions and Credits

Several tax deductions and tax credits you may be able to take advantage of are subject to different AGI limitations.

• If you itemize deductions, medical expenses above 7.5% of your AGI are deductible. Therefore, the lower your AGI, the easier it is for more of your medical expenses to clear that 7.5% hurdle to be deductible.

• Itemized charitable donations you can deduct in a tax year are capped at a percentage of AGI. For example, you can deduct cash gifts made to qualified public charities up to 60% of your AGI. Non-cash gifts to public charities, such as stocks, bonds, and mutual funds owned for more than one year, are up to 30% of AGI.  

If you have a year with large charitable gifts, in some cases it could actually benefit you to have a higher AGI so that the deductible ceiling is a larger dollar amount.  Now, any portion of charitable gifts exceeding the percentage of AGI limit is therefore not deductible for that tax year, but the potential tax benefit is not completely lost. 

The amount in excess of the AGI limit can carry forward for use in future tax years (for up to 5 years).  But remember, you would still need to itemize your deductions to take advantage of the amount carried over into those years.  This is something to factor in to your charitable giving and tax planning, particularly if you expect to take only the standard deduction in the future.

Part of the eligibility criteria for some tax credits is that Adjusted Gross Income cannot exceed certain amounts, depending on your filing status (i.e., single, married filing jointly, head of household, married filing separately). Some credits where this applies include:

• The Child and Dependent Care credit

• Elderly and Disabled Senior tax credit

• The Earned Income tax credit

Modified Adjusted Gross Income (MAGI)

Along with Adjusted Gross Income (AGI), another related term to get to know is your Modified Adjusted Gross Income (a.k.a. MAGI). Your MAGI is essentially your AGI with certain income and deductions added back into that figure. The IRS uses MAGI to determine if you qualify for a range of tax benefits and programs, separate from the deductions and credits using AGI mentioned earlier.   

For example, MAGI is used as a criteria to determine

• If Traditional IRA contributions are deductible

• If you are eligible to contribute to a Roth IRA

• If you are eligible for the Child Tax Credit

• If you qualify for the American Opportunity or Lifetime Learning education tax credits

• If you are eligible for Premium Tax Credits and savings applied to marketplace health insurance plans under the Affordable Care Act

• If you pay higher Medicare premiums due to having income above certain thresholds

What makes the MAGI complicated (and often confusing) is that it is not a separate line item shown on Form 1040 of the tax return. Instead, it is calculated and used where applicable when completing your tax return or by external programs using tax return information. Also, the specific calculation for MAGI can be different, depending on how it is used. Different eligibility items add back different deductions or types of exempt incomes in each of their definitions of MAGI. To illustrate this point, let’s look at a couple of specific examples.

In the case of determining if contributions to a Traditional IRA are deductible, MAGI is calculated by adding AGI plus the following items (as applicable):

• student loan interest deduction

• foreign earned income and housing exclusions

• foreign housing deduction,

• excluded savings bond interest used for higher education,

• excluded employer adoption benefits

On the other hand, for the purpose of determining any Medicare premium adjustments, the Social Security Administration uses MAGI calculated as AGI plus any tax-exempt interest earned. 

When determining your eligibility for these types of tax benefits or projecting your Medicare premium, it is important to know the Modified Adjusted Gross Income that applies to each one. For many people without a lot of the unique deductions or exempt income to add back, their MAGI will be very close to their AGI. However, being aware of both AGI and MAGI and how each is applicable can be very beneficial when doing proactive tax planning throughout the year, not only during tax filing season.  

The tax code is complex, and determining how tax-related items apply to your unique situation depends on many factors. These are important conversations to have with your financial planner and tax professional, so please don’t hesitate to reach out to us if you have questions. 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Three Tax-Savvy Charitable Giving Strategies

Contributed by: Lauren Adams, CFA®, CFP®

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Proactive Planning Moves for an Evolving Tax Environment

Contributed by: Timothy Wyman, CFP®, JD

Contributed by: Lauren Adams, CFA®, CFP®

Just about every financial decision and transaction that we make has an income tax component or consequence. With federal marginal rates currently as high as 37%, state income tax rates as high as 13%, and additional surcharges for high-income earners, being efficient with income tax planning is paramount in accumulating or conserving wealth.  

Moreover, President Biden is planning the first major federal tax hike since 1993 that appears likely to be passed this year, at least in part. If passed, tax measures would likely take effect in 2022, with the potential for some measures to be applied retroactively even into 2021. 

At The Center, we have a long history and experience working with our clients and their tax preparers to drive down tax costs as much as possible. Our planning team may address the following for our clients’ benefit:

Marginal Tax Rate: The marginal tax rate is the tax rate paid on the next or last dollar of income. Current federal marginal rates go from 10% up to 37%. Your current, and expected future, marginal rate provides insight into decisions such as accelerating or delaying income as well as whether municipal bonds or taxable bonds are most efficient. Your marginal bracket also determines what long-term capital gains rate is applied. The current highest marginal bracket is 37% (and current proposed tax legislation could raise the upper rate to 39.6%).

Average or Effective Tax Rate: In addition to your marginal tax rate, the average rate helps us understand your overall tax picture. To determine your average rate, divide the total tax paid by your total income. For example, one might be in the 35% marginal tax bracket, but their average tax rate might be closer to 25%.

Itemized vs. Standard Deduction: Are you itemizing deductions, or does the standard deduction provide a greater benefit? With current limitations on itemized deductions, such as state & local income taxes and real estate taxes capped at $10k, many find that they no longer itemize deductions unless they “bunch.” For instance, bunching may involve grouping five years’ worth of charitable donations into one year. Many people do this by gifting to a vehicle like a Donor Advised Fund so the tax deduction may be recognized immediately, but the funds then get divvied out to charity more slowly over time. Essentially, bunching itemized deductions, such as charitable gifts, every other or few years typically provides the most efficient tax strategy.

Long Term Capital Gains: Under current law, long-term capital gains (securities held longer than 12 months) receive preferential tax rates vs. ordinary income tax rates. There are three brackets 0%, 15%, and 20%. Current proposed tax legislation could raise this rate to 25% for the highest income earners.

Carry Forward Losses: The goal of investing is to make money. One strategy to use when an individual investment loses value is to “harvest the loss.” Harvesting losses can be valuable as they offset capital gains dollar for dollar. If you have extra or additional losses, up to $3,000/year can also be used to offset ordinary income. Ideally, this harvesting of losses should be done on an ongoing basis rather than only at the end of a quarter or year.

Qualified Dividends: Qualified dividends are dividends taxed at a long-term capital gains rate instead of your ordinary income tax rate, which is generally higher. All things being equal, we would rather have dividend income that is considered qualified to achieve greater tax efficiency.  

Roth Conversion Opportunities: Sometimes paying tax today versus later is a tax-efficient strategy. If you feel that you will be in a higher bracket later, or even that your beneficiaries may be at a higher tax bracket, full or partial Roth conversions can be employed to recognize that income today at a lower rate. Roth money can be used to provide tax-free and RMD free retirement income. Having Roth dollars also provides opportunities to optimize your current marginal bracket as part of a comprehensive retirement income plan. 

IRMAA Surcharges: Our tax code contains provisions that may be described as “hidden taxes.” One such tax includes the Medicare income-related monthly adjustment amount (or IRMAA), which is an extra surcharge based on your total income (specifically Modified Adjusted Gross Income). Meaning, depending upon your income, you might pay a higher premium for Medicare (Part B and D). For example, in 2021, a joint couple pays $148.50/month when their income is less than $176k. Once you go a dollar over, the premium now becomes $220.20/month per person and is added to your Medicare premiums – a hidden tax. There are additional thresholds, and the current maximum premium for those with income over $750k is a total of $582/month each. Managing brackets by limiting or decreasing income, such as using Qualified Charitable Distributions from an IRA, can reduce your surcharge.

Net Investment Income (NII) Tax: Another so-called hidden tax applies to single taxpayers with MAGI above $200k and $250k for couples filing jointly. Investment income over these thresholds contains an additional 3.8% tax. So, while the stated maximum capital gains rate is 20%, the highest long-term capital gains rate is actually 23.8% with the surtax (before taking state taxes into account).

Phase-outs: At last count, there are over 50 tax credits that may be available to taxpayers. Unfortunately, they are subject to a variety of income phase-outs, so careful planning is required.

The Biden tax plan, if passed, contains additional income and estate tax provisions that we are closely monitoring including, but not limited to:

• New tax increases on households earning more than $400k, including upping the top tax rate to 39.6% and lowering the amount of income needed to reach that top bracket

• Increasing the top long-term capital gains rate from 20% to 25% 

• Restricting many tax and estate planning techniques, including backdoor Roth IRA conversions, the ability to convert pretax IRA dollars into Roth IRA dollars for high earners, and eliminating intentionally defective grantor trusts (a strategy used to move assets out of one’s taxable estate)

• While the Biden plan appears to exclude any “wealth tax” such as proposed by Senator Elizabeth Warren, there may be changes to estate tax provisions such as decreasing the Estate Exemption Equivalent from $11.77M per person to $5M

• Introducing and expanding additional child tax credits 

Lastly, we find that efficient tax planning considers not only your current year taxes, but a plan that considers several years or even several generations. Assuming an increase in individual (and corporate) tax rates, the stakes will be even higher and proper planning can help put more in your pocket.  

Stay tuned for an upcoming video message in November intended to keep you in the loop with proposed tax changes. Learn more about the American Families Tax Plan proposal HERE.

Timothy Wyman, CFP®, JD, Timothy Wyman, CFP®, JD, is the Managing Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Tim earned a place on Forbes’ Best-In-State Wealth Advisors List in Michigan¹ in 2021 for the fourth consecutive year. He was also named a 2020 Financial Times 400 Top Financial Advisor² for the third consecutive year.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Biden’s “American Families Tax Plan” Proposal and How It Could Affect You

Contributed by: Josh Bitel, CFP®

Ever since President Joe Biden has taken office, there has been much talk about how the tax landscape may change. On September 13th, Democrats on the House Ways and Means Committee released their new tax proposals. While the outcome may differ from the proposals listed below, we always want to keep you informed on proposed changes. Highlights are summarized below.

 New Top Ordinary Income Tax and Capital Gains Rate

Perhaps the most talked about piece of the proposal is the return of the 39.6% income tax bracket. This rate was previously in place from 2013-2017 but reduced to 37% with the Tax Cuts And Jobs Act of 2017. However, this new proposal does not simply replace the 37% bracket with the 39.6%. Instead, it reduces the amount of income a taxpayer can have before being placed in that top bracket. Single taxpayers making over $400,000 or married couples making over $450,000 will be in the new top bracket under this proposal.

 Along with ordinary income tax brackets, top capital gains tax brackets may also change. The major difference between this change and the ordinary income tax change is that (if approved) this will go into effect immediately and impact all capital gains from that point forward. In contrast, the ordinary income tax brackets won’t change until 2022. See the chart below for proposed capital gains tax changes.

Proposed Capital Gains Tax Changes

Changes to Roth IRA Strategies

 This one may hurt more for advisors. If enacted, this part of the proposal prohibits converting after-tax dollars held in retirement accounts to Roth IRAs. In other words, the “backdoor Roth IRA” and the “Mega backdoor Roth IRA” would be left in the dust.

 Another proposed change would go a bit further. In 2032, Roth CONVERSIONS for high-income earners would be prohibited. Any single person earning over $400,000, or married couples earning over $450,000, would be impacted by this rule.

These are just a few of the many changes proposed by Democrats on the House Ways and Means Committee. Of course, the actual bill may look drastically different than the proposals listed in this blog. Planners here at The Center will be sure to stay on top of any changes and keep you informed as they come out.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.