Cash Flow Planning

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The Mystery Surrounding Public Service Loan Forgiveness

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Contributed by: Kali Hassinger, CFP® Kali Hassinger

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The Public Service Loan Forgiveness program started in 2007, and in the fall of 2017, the first round of borrowers became eligible for possible loan forgiveness.  This program, however, has been the subject of confusion and frustration by those who were hoping to qualify, and, in some cases, planning for the reprieve of student loan forgiveness.  So confusing that the recent federal spending plan earmarked $350 million to help those who would have been eligible to receive loan forgiveness but may have unknowingly enrolled in the wrong repayment plan.  The Public Service Loan Forgiveness (PSLF) rules are stringent and require that the qualifying conditions are met for a period of 120 monthly payments, or 10 years!  Even for those who followed all of the rules and have been submitting the correct documents,

If you are hoping to qualify for Public Service Loan Forgiveness, you'll want to be sure that your loans and repayment plan are eligible under the program. 

Listed below are some of the requirements that you should be sure are in order.

1. You must work full time for a qualifying Employer in a qualifying role.

  • Most jobs working for a state, local, or federal government qualify.

  • Non-profit employers that qualify as tax-exempt under Section 501(c)(3) are eligible.

*Even if you think your employer and role qualify, you should complete and submit the Public Service Forgiveness Employment Certification Form on an annual basis and every time you switch employers

It can be accessed online:  https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf 

2. Only Direct Loans are eligible for Public Student Loan Forgiveness.  There are four types of Direct Federal Student Loans:

  • Direct Subsidized – These loans are for undergraduate students who demonstrate a financial need. The U.S. Department of Education pays the accrued interest while you're still in school, for the first six months after you graduate, and during periods of deferment.

  • Direct Unsubsidized – These loans are for undergraduate and graduate students, but financial need isn't required to qualify. These loans accrue interest while you're in school and during periods of deferment.

  • Direct PLUS Loans – These loans are for graduate students and parents of undergraduate students.

  • -Direct Consolidation Loans – This loan allows you to combine all of your eligible federal student loans into a single loan.

3. You must be enrolled in an income-based federal repayment plan.  The required payments are based on what is deemed to be your "Discretionary" income in comparison to the current poverty level, and payments are updated on an annual basis.

  • Income-Based Repayment Plan (IBR Plan) – Monthly payments are usually 15% of your discretionary income, but they can be as low as 10%. Loan terms can be 20 or 25 years.

  • Income-Contingent Repayment Plan (ICR Plan) – Payments under this plan are the lesser of 20% of your monthly discretionary income or your monthly payment on a 12-year repayment term with an income factor calculation. Loan terms under this plan are 25 years.

  • Pay as you Earn Repayment Plan (PAYE Plan) – Monthly payments are limited to 10% of your discretionary income. To qualify, you must have a partial financial hardship. The loan term is 20 years.

  • Revised Pay as your Earn Repayment Plan (REPAYE Plan) – Under this plan, your monthly payments are equal to 10% of your discretionary income. Undergraduate loans have a 20-year term, and graduate loans have a 25-year term.

If you've gotten through this list and you think you still may qualify, there are a couple of additional items that you'll want to keep in mind. 

  • The 120 qualifying payments don't need to paid consecutively. That means if you work for a non-qualifying employer for a bit, you won't lose credit for past payments that qualified.

  • The income-based payment amounts are affected by your Adjusted Gross Income on your tax return. If you are married and file taxes separately to keep your payments low, this strategy could increase your family's tax obligation.

  • If your income-based payments are suppressed low enough, they may be less than the amount of interest that accrues. If you leave the plan or no longer qualify for the repayment plan, the unpaid interest is capitalized and added to your loan's principal balance.

  • Making additional and early payments won't help you in the PSLF program. The program requires monthly payments, and you can only receive credit for one payment per month. If you do want to make additional payments, contact your loan servicer to be sure that the extra amount is credited to cover future monthly payments.

Even with all of the variables that we've covered, some additional rules and qualifications can be incorporated into the program.  It's especially important to check with FedLoan Servicing throughout the process and at least on an annual basis.  Be sure that you are weighing all of the pros and cons of the program, and as with any financial strategy, staying organized is essential!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. The information contained in this blog 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© and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. You should discuss any tax or legal matters with the appropriate professional.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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WEBINAR IN REVIEW: Retirement Income Planning: How Will You Get Paid in Retirement?

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

One of most common questions I hear from clients as they approach retirement is, “How do I actually get paid when I’m no longer working?” It’s a question that I feel we as planners can sometimes take for granted.  Because we are helping hundreds of clients throughout the year with their retirement income strategy, we can sometimes forget that this simple question is often the cause of many sleepless nights for soon-to-be retirees.   

Saving money throughout your career can be simple, but certainly not easy. Prudent and consistent saving requires a tremendous amount of discipline. However, if you elect the proper asset allocation in your 401k and you’re a quality saver, in most cases, accumulating really doesn’t have to be all that difficult.  However, when it comes time to take money out of the various accounts you’ve accumulated over time or have to make monumental financial decisions surrounding items such as Social Security or which pension option to elect, the conversation changes. In many cases, this is a stage in life where we frequently see those who have been “do it yourselfers” reach out to us for professional guidance. 

The first step in crafting a retirement income strategy is having a firm grip on your own personal spending goal in retirement. From there, we’ll sit down together and evaluate the fixed income sources that you have at your disposal. Most often these sources include your pension, Social Security, annuity income or even part-time employment income. Once we have a better sense of the fixed payments you’ll be receiving throughout the year, we’ll take a look at the various investable assets you’ve accumulated to determine where the “gap” needs to be filled from an income standpoint and determine if that figure is reasonable considering your own projected retirement time horizon. Finally, we need to dive into the tax ramifications of your income sources and portfolio income. If you have multiple investment or retirement accounts, it’s critical to evaluate the tax ramifications each account possesses. 

Make sure you listen to the replay of our webinar “Retirement Income Planning: How Much Will You Get Paid In Retirement?” for additional tips and information on how you might consider structuring your own tax-efficient retirement income strategy.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

The information contained in this blog 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 Nick Defenthaler and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. You should discuss any tax or legal matters with the appropriate professional.

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How to Choose a Survivor Benefit for Your Pension, Part 1 of a 3 Part Series on Pensions

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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If you’re married and eligible to receive a pension upon retirement, chances are you will be making an election for a survivor benefit before you start collecting. What should you choose when it’s time to elect your payment option?

As a quick refresher, when a pension has a survivor benefit attached to it, the income stream the pension provides goes through the lifetime of you and your spouse. Depending on the level of the survivor benefit, you could see a large discrepancy in the payment amount that the pension ultimately provides while both spouses are still alive. 

For example, the monthly payment a 100% survivor benefit provides will be much lower than the monthly payment a 25% survivor benefit would provide. This is because the 100% survivor option offers a guaranteed continuation of full benefits to the surviving spouse as compared to only a 25% continuation of benefits. In reality, a survivor benefit is an “insurance policy” on your pension! The reduction in monthly benefits by having a survivor option is like the “monthly premium” on that insurance policy.

Case Study

Let’s take a look at an example of how selecting a survivor option could vary depending on your family’s unique, personal situation:

Nancy (age 65) and Steve (age 64) are evaluating Nancy’s pension options as she approaches retirement in a few months. Unfortunately, Nancy has had heart issues over the years and does not have longevity in her family. Steve on the other hand, is in great shape and plans on living into his nineties.  Below are the pension options Nancy has to choose from:

  • 100% Survivor Option

    • $42,000/year to Nancy: Steve would receive $42,000/year if Nancy dies first

  • 50% Survivor Option

    • $46,000/year to Nancy: Steve would receive $23,000/year if Nancy dies first

  • 25% Survivor Option

    • $48,000/year to Nancy: Steve would receive $12,000/year if Nancy dies first

  • Straight-Life Option (No Survivor Benefit)

    • $50,000/yr to Nancy: No continuation of payments for Steve when Nancy dies

Due to Nancy’s health issues, the straight-life option would likely not be advisable. There is a very high likelihood that Nancy pre-deceases Steve so they would not want to select an option that would provide zero continuation of benefits, especially considering the size of the pension payment. In a similar vein, Nancy and Steve are not comfortable with Steve only receiving 25% of Nancy’s pension if she passes before him, primarily due to Nancy’s health issues.  At this point, they have narrowed their options down to the 100% survivor or 50% survivor benefit election.  

Because Nancy is a number cruncher, we created a spreadsheet to analyze the value of maintaining a larger survivor benefit, assuming she pre-dececeases Steve at various ages:

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While it’s all well and good that Steve would receive a higher continuation of benefits if Nancy passes before him under the 100% survivor option, we have to remember that there is a “cost” to this pension option ($4,000/yr lower payout compared to the 50% survivor option). However, as the table above shows, it does not take long at all for Steve to “break even” on the cost of the $4,000/yr “insurance premium”. 

After reviewing the numbers in detail, Steve and Nancy decided to elect the 100% survivor option.  They arrived at this decision primarily because of Nancy’s reduced life expectancy. In addition, if she does die before Steve within the first 15 years of retirement (a very likely possibility), it only takes several years for the larger survivor benefit to make up for the lower pension payment Nancy would have received during her life, especially taking into consideration Steve’s good health.  

As you can see from our example, many factors come into play when selecting a pension benefit and survivor option. While it might be human nature to ask which option is best, unless we have the proverbial crystal ball to look into the future and see what life has in store for us over the next 30+ years, it’s impossible to provide a concrete answer.

When evaluating pension options, my number one goal as a fiduciary advisor is to provide a sound recommendation that aligns with your own personal situation and retirement goals. If our team can be a resource for you in evaluating your pension decision, please feel free to reach out to us.  

See Part 2 of the series, What You Need to Know About Pension Benefit Guaranty Corporation or PBGC. Part 3 Explaining the What is "Restore" Option for Pensions I invite you to listen to a replay of my webinar from April 24th at 1:00 pm on Retirement Income Planning: How Will You Get Paid in Retirement?  

The case study and accompanying chart have been provided for illustrative purposes only. Individual cases will vary

 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

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Choosing a Down Payment Option on a House: Beyond the Numbers

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Contributed by: Robert Ingram Robert Ingram

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Whether you’re buying your first home, looking to downsize or are considering that ultimate dream house, you’re probably facing a couple of common questions. How much should I put down on the purchase?  How much should I finance through a mortgage?  A 20% down payment is typically recommended as a good starting point because amounts less than 20% will likely subject you to private mortgage insurance (PMI) in most conventional loan programs, which increases your mortgage payment.  However, as financial planners we’re often asked if it makes more sense to put down larger amounts and carry smaller mortgages, or to keep those extra funds and invest them.

Making a larger down payment

There are several benefits to increasing the amount you put down on your home purchase.  Having a smaller mortgage balance that you repay over time lowers your monthly payment.  This can provide more flexibility in and control over your monthly budget with smaller portions being committed to servicing debt. 

The smaller mortgage also means you will pay less interest on your loan.  For example, if you put an additional $25,000 down on your home purchase, you are borrowing $25,000 less and you save interest that you would be paying had you borrowed it.  This interest cost savings is like a return on the $25,000 that you are not borrowing.

There are, however, some important considerations when taking more of your assets and putting them towards the home purchase.

  • Those resources are no longer as accessible for your other needs or financial goals. Is your cash reserve still intact in case of unexpected emergencies? Would you still be on track to retire or to fund that college plan?

  • Changes to your financial circumstances or in the economic environment could make it difficult to access the equity in your home through future borrowing. Unfortunately, we saw this all too often during the financial crisis in 2008-2009 when many banks and lending institutions cut home equity lines of credit and drastically tightened their lending standards.

  • Having to fall back on other assets such as your qualified retirement plans or IRA accounts could result in additional taxes and/or early withdrawal penalties depending on your age and other circumstances. Not only could this negate some of the cost savings from making the larger down payment, but it may also derail your retirement.

Smaller down payment and investing the difference

Choosing to make a smaller down payment and investing the additional dollars rather than adding them to the down payment can make sense financially if a key assumption holds true. This assumption is that your investment’s returns outperform the interest cost of your mortgage.  Consider a bank that pays depositors an interest rate (its borrowing cost) and then lends those funds to borrowers for a charged interest rate (its investment return).  If the bank pays 2% interest to depositors and earns 5% interest on the money it lends, its potential earnings exceed its costs, a profitable financial move.

A risk to this strategy of investing the additional funds in lieu of a larger down payment, however, is that earning the required investment return is not guaranteed.

When thinking about making the investment decision, there are some important points to consider.

  • What kind of investor are you?
    Investors should have the appropriate risk tolerance and willingness to invest in a portfolio of different asset categories that may provide the opportunity to earn their required rate of return long-term. For very conservative investors it may be more difficult for their portfolios to outperform the mortgage interest costs. (It may be especially difficult if the mortgage interest rates are higher than historical averages)

  • Following your investment strategy also takes discipline over the long-term.
    It can be challenging to avoid some of the emotional buying and selling decisions that in hindsight can lead to under-performance, and to keep your investments invested.

  • How do you handle debt?
    If the mortgage without the larger down payment is not a burden to your cash flow and you have been successful in limiting other forms of consumer debt, this strategy may fit. If you are prone to getting overextended or have a large part of your budget allocated to paying off debt, reducing your potential mortgage debt may be the appropriate option.

As you can see, many factors can play into the down payment decision depending on your own unique circumstances and values.  As always, consult your planner when considering these financial moves.  We are here to look at the big picture to help you make confident decisions.

Robert Ingram is a Financial Planner at Center for Financial Planning, Inc.®

Any opinions are those of Bob Ingram and not necessarily those of Raymond James or RJFS. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Asset allocation and diversification do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James Financial Services does not provide advice on tax, legal or mortgage issues. These matters should be discussed with an appropriate professional.

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Helping Older Relatives? How to Help Without Jeopardizing Your Own Finances

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Contributed by: Matthew E. Chope, CFP® Matt Chope

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Helping elderly family members with financial issues can be tricky.  In many cases, you may feel an obligation to assist, especially if the older adult is on a fixed budget and has limited financial resources. In fact, a recent MetLife study found that 68% of American caregivers have been found to spend their own money to support the needs of their older adult relatives, which drained funds that they had planned to use for their own financial independence. If you sense that an elder you care about is on a trajectory for financial ruin, what can you do to help? 

How do you step in and assist without putting your own financial security in jeopardy? 

The first thing to do is to gather some information to get a better sense of your loved one’s financial picture.  You’ll want to have an understanding of their assets and debts, and their budget:  their sources of income and their expenses. With the understanding of what income and what bills and expenses the older adult is dealing with, you can better connect with resources that may be able to assist them.

A client (let us call him John) told me a story recently about how he helped his older sister in-law (let us call her Bonnie) make some difficult decisions.  Bonnie was not a high-income earner in her working years. Although she was able to purchase her home and pay off her mortgage; she didn’t save much, and she had now depleted her savings.  At age 75, the reverse mortgage that Bonnie had put in place, in addition to her minimal Social Security income were not enough to keep up with her rising costs for health care (Medicare premiums and prescription drug co-pays), property taxes, insurances and utilities.

Here are the actions John took to help Bonnie with her situation:

  1. John discovered that the county would allow her to apply for a reduced or total removal of real estate taxes through the property tax poverty exemption. As a result, Bonnie received a full exemption from her property taxes. Each county has a program for low-income folks - you need to complete an application and appear before a board of review annually. Here is a link with more information: https://www.michigan.gov/documents/treasury/Bulletin7of2010_322157_7.pdf

  2. John contacted low-income home energy assistance (LIHEAP) and received a reduction in electricity and heating costs for Bonnie. https://www.benefits.gov/benefits/benefit-details/1545

  3. John contacted Human ARC Premium Assist about receiving a significant reduction in Medicare Part B premiums; as an added bonus, they also provided assistance with Bonnie’s prescription drug costs. https://screening.humanarc.com/PremiumAssist

  4. While online at the premium assistance site, John found more information about special coverages for things like medical alert, ambulance/transportation assistance, and a 1.25% copay for prescriptions.

  5. John contacted Social Services about food stamps and Bonnie is now receiving about $97 more a month through a program called SNAP. http://www.feedingamerica.org/need-help-find-food/

  6. For Bonnie’s auto insurance, John pays the whole year upfront and Bonnie pays John back monthly so she can take advantage of the discount for paying the premium annually.

  7. John pays Bonnie’s utility bills via automatic payments from his account to avoid late fees, which in the past were a wasteful and unnecessary expense. Bonnie also reimburses John monthly for this.

  8. To save money on her cell phone bill, John added Bonnie’s phone line to his plan as an additional line.

  9. Bonnie was willing to give up cable TV – John found that an inexpensive antenna works fine and they were able to rid Bonnie of her monthly cable bill.

With a little bit of creativity and resourcefulness, John was able to assist Bonnie while also preserving his own financial resources.  If you or someone you know is in the position of assisting an older adult and needs help putting together a strategy, please let us know.  We are here to help!

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The case study provided is hypothetical and has been included for illustrative purposes only. Individuals cases will vary. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax, legal, or mortgage issues, these matters should be discussed with the appropriate professional. 

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Annuity Basics

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Contributed by: Kali Hassinger, CFP® Kali Hassinger

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An annuity is a contract between you, the purchaser or owner, and an insurance company, the annuity issuer.  In its purest form, you pay money to an annuity issuer, and the issuer eventually pays the principal and earnings back to you or a named beneficiary.  Life insurance companies first developed annuities to provide income streams to individuals during retirement, but these contracts have since become a highly criticized investment vehicle.  The surrender periods, fees, and endless annuity products on the market make it difficult for retail investors to understand contracts, let alone feel confident that it's the best option available for their situation.  There are of course pros and cons to consider when entering into an annuity contract, and it's especially important to understand the basics of what an annuity offers. 

Annuities are categorized as either qualified or non-qualified. 

Qualified annuities are used similarly to tax-advantaged retirement plans, such a 401(k)s, 403(b)s, and IRAs.  Qualified annuities are subject to the same contribution, withdrawal, and tax rules that apply to these retirement plans.  That may make you question why someone would use a qualified annuity at all!  If you are merely looking for tax-deferral, a qualified annuity probably doesn't make sense in connection with your retirement account.  However, depending on your goals, there are aspects of a qualified annuity that are not available with traditional retirement plans, such as a living income benefit guaranteed by the insurance company and an additional death benefit. 

One of the attractive aspects of a non-qualified annuity (which means the money deposited has already been taxed), on the other hand, is that its earnings are tax-deferred until you begin to receive payments or make withdrawals. During the period before withdrawing funds, the non-qualified annuity is treated similarly to your typical retirement plan.  The same age requirement is enforced, which means that if you access this account before age 59 ½ there is still a 10% tax penalty on a portion of the withdrawals.  The difference between a qualified and non-qualified annuity becomes apparent, however, when the withdrawal or annuitization payments begin.  Only the part of these payments that represents investment or account growth is taxed at ordinary income tax rates.  When annuitizing a contract, there is an "exclusion ratio" that means each payment represents both a portion of your initial investment and a portion of your investment returns.  This means that the entire payment received isn't taxable to you – only the percentage that represents an investment gain. 

Beyond the categories of qualified and non-qualified annuities, you can then classify annuities into fixed and variable contract options.

A fixed annuity functions similarly to a bank CD.  You make a deposit, and the insurer will pay a specific interest rate over a specified period.  A variable annuity, on the other hand, allows a contract holder to invest the funds in annuity subaccounts or mutual funds.  Insurance companies can offer income riders as an additional benefit to their annuities.  These riders typically have a guaranteed income growth rate, and they will increase the overall cost of the contract. 

It is important to understand that annuities, although they can be an effective savings tool, are not right for everyone.  Most deferred annuity contracts are designed to be long-term investment vehicles and can penalize the contract holder for making early withdrawals.  If an annuity seems like it would fit within your overall financial picture, it is essential to consider which annuity products are appropriate and how to utilize them within your investment portfolio. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

The information contained in this report 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® and not necessarily those of Raymond James. 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. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors.

With variable annuities, any withdrawals may be subject to income taxes and, prior to age 59 1/2, a 10% federal penalty tax may apply. Withdrawals from annuities will affect both the account value and the death benefit. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. An annual contingent deferred sales charge (CDSC) may apply.

A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you're not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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Tax Reform Series: Changes to Medical Deductions

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Contributed by: Sandra Adams, CFP® Sandy Adams

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

With most of the focus on new tax rates after tax reform was recently given the green light, it is easy to forget that some of the biggest changes don’t have anything to do with tax rate — they are about deductions.  In 2018, the standard deductions will increase, (reference MT’s blog on changes to standard deductions) and many limitations will be put in place for those who typically itemize deductions (historically only about 30% of Americans according to available IRS data).  Here we will focus on Changes to Medical Deductions and provide general information on how they work.

One of the more controversial a proposed limitations on itemized deductions during the tax reform debates was the potential repeal of medical expense deductions.  According to the IRS, nearly three-quarters of tax filers who have claimed the medical expense deduction are age 50 or older and live with chronic conditions or illnesses, and seventy percent of filers who claimed this deduction have incomes below $75,000.  The final tax bill DID NOT eliminate the medical expense deduction; in fact, the deduction was temporarily expanded.  Under the final Tax Cuts and Jobs Act, the 10% of AGI threshold for medical deductions is reduced to just 7.5% of AGI both retroactively for the 2017 tax year and for the 2018 tax year (the threshold will return back to the 10% of AGI threshold for tax year 2019 and beyond).

How do Medical and Dental Expense Itemized Deductions Work?

For 2017 and 2018 tax years, any amount of Medical and Dental Expenses (see IRS Publication 502 for a list of items that qualify for the medical/dental expense deduction) above an individual’s 7.5% of AGI “floor” are deductible.  For example, if your AGI is $40,000 and your medical expenses were $5,000 (assuming you itemized), you could claim $2,000 as a deduction [$5,000 in expenses less the floor (7.5% x $40,000 = $3,000)].  Note that you are not allowed to deduct expenses that were paid with pretax dollars or reimbursed by an insurance company.

Your ability to use itemized deductions versus the standard deduction in future years will likely depend not only on the amount of medical expenses you have to deduct, but those expenses in combination with other possible deductions that will have significant changes in 2018 and beyond.  For changes to additional itemized deductions, please see our additional posts to get more information, and please consult your professional planning team, including your financial planner and your tax advisor, as you develop for forward looking tax strategy.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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Tax Reform Series: Changes to Charitable Giving and Deductions

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

If you’ve heard the charitable deduction is going away under the Tax Cuts and Jobs Act of 2017, you are certainly not alone – this is a common misconception under our new tax code.  To be perfectly clear, gifts to charity are certainly still deductible!  However, depending on your own tax situation; your deduction may not provide any tax savings due to the dramatic increase in the standard deduction moving into 2018: 

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Standard Deduction vs. Itemizing Deductions

Think of the standard deduction as the “freebie deduction” that our tax code provides us, regardless of our situation.  If you add up all of your eligible deductions (state and local tax, property tax, charitable donations, medical expenses, etc.) and the total happens to exceed the standard deduction, you itemize.  If they fall short, then you take the standard deduction.  Pretty simple, right?

With the standard deduction nearly doubling in size this year, many of us who have previously itemized deductions will no longer do so.  Let’s take a look at how this change could impact the tax benefit of your charitable donations:

Example

Below is a summary of Mark and Tina’s 2017 itemized deductions*:

  • State and Local Taxes = $6,600

  • Property Tax = $6,000

  • Charitable Donations = $5,000

  • Total = $17,600

  

Because the standard deduction was only $12,700 for married filers in 2017, Mark and Tina itemized their deductions.  However, the only reason why they were able to itemize was due to the $5,000 gift they made to charity.  If they didn’t proceed with their donation, they simply would have taken the standard deduction because their state and local tax along with property tax ended up being only $12,600 – $100 shy of standard deduction for 2017 ($12,700).  Their gift to charity created a tax savings for them because it went above and beyond the amount they would have received from the standard deduction!

For the sake of our example, let’s assume Mark and Tina had the same exact deductions in 2018.  It will now make more sense for them to take the much larger standard deduction of $24,000 because it exceeds the total of their itemized deductions by $6,400 ($24,000 – $17,600).  In this case, because they are taking the standard deduction, there was no direct “economic benefit” to their $5,000 charitable donation. 

*This is a hypothetical example for illustration purposes only. Actual investor results will vary.

Planning Strategies

Because many clients who previously itemized will now take the larger standard deduction, reaping the tax benefits for giving to charity will now require a higher level of planning.  For clients who are now taking the standard deduction who are charitably inclined, it could make sense to make larger gifts in one particular year to ensure your charitable deduction exceeds the now larger standard deduction. Or, if you’re over the age of 70 ½, the Qualified Charitable Distribution (QCD) could be a gifting strategy to explore. Of course, we would want to dig deeper into this strategy with you and your tax professional before providing any concrete recommendations. 

For most of us, the number one reason we give to charity is to support a cause that is near and dear to our heart.  However, as I always like to say, if we can gift in a tax efficient manner, it just means additional funds are available to share with the organizations you care deeply about instead of donating to Uncle Sam. 

Don’t hesitate to reach out to us for guidance surrounding your gifting strategy, we are here to help!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

The information contained in this blog 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, we do not guarantee that the foregoing material is accurate or complete. 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. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. 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. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

 

 

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Tax Reform Series: Changes to the Mortgage Interest Deduction (including home equity loans/LOC implications)

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Washington has been busy and after many twists and turns sweeping tax reform was signed into law on December 22, 2017.  There are key changes for homeowners regarding the mortgage and home equity line of credit (HELOC) interest deductions.

Mortgage

If you own a home, mortgage interest is still deductible. The debt cap of deductibility, however, has been lowered.  The new cap limits interest deductibility to the first $750,000 of debt principal.  Debt principal refers to acquisition indebtedness or loans used to acquire, build, or substantially improve a primary residence.  The new $750,000 cap is a reduction from $1,000,000 and an additional $100,000 of home equity debt. 

  • The reduction to $750,000 expires December 31, 2025 and reverts back to $1,000,000 beginning in 2026.

  • Mortgage debt incurred before December 15, 2017 is grandfathered under the $1,000,000 cap

  • In the future, a mortgage refinance for debt incurred prior to December 15, 2017 will retain the $1 million debt limit (but only for the remaining debt balance and not any additional debt). In addition, any houses that were under a binding written contract by December 15th to close on a principal residence purchased by January 1, 2018 (and actually close by April 1st) will be grandfathered.

Home Equity Line of Credit (HELOC)

Home equity lines of credit give homeowners the ability to borrow or draw money using equity in the home as collateral.  New restrictions mean that home equity loan interest is not necessarily eligible for a deduction. 

While you may have read that interest on HELOC’s is no longer deductible, this is only if the loans are cash out or for purposes other than home purchase or improvement.  It’s important to note that deductibility is not based on whether the loan is a home equity loan or home equity line of credit. Instead, the determination is based on how the proceeds are used.

  • If the money is used to consolidate debt, pay for college or used for any other personal spending not associated with home acquisition or substantial improvement, the interest is not deductible; without grandfathering.

  • Interest on a HELOC up to the total $750,000 cap that is used to build an addition or substantially improve the home is deductible for taxpayers that itemize.

We are here to assist in any way we can.  This summary of mortgage and HELOC interest deductibility changes highlights key areas to keep in mind for 2018 tax planning.  If you have any questions regarding your personal situation, don’t hesitate to contact us.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

The information contained in this blog 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 Laurie Renchik and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. 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. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. 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. Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

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Tax Reform Series: Changes to State and Local Income Tax

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Contributed by: Matthew E. Chope, CFP® Matt Chope

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The Tax Cuts and Jobs Act (TCJA) is now officially law.

We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The original proposals for tax reform would have completely eliminated any deductions for taxes paid to a state or local government, including local property taxes.

 “State And Local Tax” (SALT) provision varied, and controversially was projected to have a disproportionate impact on states with big cities with high state and local tax rates (like New York, California, and Maryland have some of the highest state income tax rates, and therefore the higher state income tax deductions).  Many people in these states are considering moving to lower taxed states due to this tax law change.

However, in the final version of the Tax Cuts and Jobs Act of 2017, households will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. Notably, it is a $10,000 limit on the combined total of property and income taxes, not $10,000 each! The $10,000 limit applies for both individuals and married couples (which is an indirect marriage penalty for high-income couples), and is reduced to $5,000 for those who are married filing separately.

In addition, to prevent households from attempting to maximize their state and local tax deductions in 2017 before the cap takes effect in 2018, the new rules explicitly stipulate that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017 and instead will be treated as having been paid at the end of 2018. However, this restriction applies only to the prepayment of income taxes (not to property taxes), and applies only to actual 2018 tax liabilities.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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