Unpacking The Recent Tax Proposal and How it May Affect You with Shawn Donovan

Curious about the recent tax proposal and how it may affect you?  If so, check out our recent podcast or the transcript below as we were joined by special guest Shawn Donovan for a second time to discuss the fine print of the recent proposed tax plan. Shawn Donovan is a CPA and Partner at Turner, Leins, & Gold, LLC.

Shawn is a Partner in the firm’s Maryland office. He has more than 15 years of public accounting experience as a trusted business advisor for his clients. He is experienced in tax preparation, planning and consulting for high net-worth individuals, partnerships and corporations. Specifically he enjoys working with real estate developers, commercial real estate investors, other professional service firms and government contractors. Shawn also has experience in auditing and attestation for small and medium-sized businesses.

Brad Sherman:  Good morning, and welcome to a special edition of Launch [00:00:30] Financial. Ash’s going to take a backseat today, but we are joined again by Shawn Donovan. Shawn, as you know from our early May episode, gave us wonderful primer on the proposed tax changes that the Biden administration had been going over. And, last week right before the September 15th quarterly deadline, they dropped this bomb through the House Ways and Means Committee on some proposed taxes. [00:01:00] And we wanted to bring back Shawn. For those of you who didn’t hear the first episode, go back and take a listen. Shawn joins us today to talk about some of the proposed changes. Shawn, welcome to the show. Welcome back. Great to see you and have you on. What’s new with the Committee?

Shawn Donovan: Good morning, Brad. Great to be back. Now we have some more specific clarity on some things that we thought may happen from the Biden proposal when he was running for President. Now we’re getting some [00:01:30] more clarity and more specifics about what’s going to be changing.

Brad Sherman: Great. For those small group that don’t know who you are, why don’t you tell everyone a little bit about yourself, and about the firm and whom you represent?

Shawn Donovan: Right. I’m a partner at one of the CPA firms here in Rockville. It’s Turner, Leins, & Gold. We have a Virginia office and a Maryland office. We handle high net worth individuals, small, medium sized businesses, and [00:02:00] we’re pretty much a full service CPA firm.

Brad Sherman: Great, great. A lot of things to unpack for high net worth individuals, as well as the small to medium sized business owners that we both collectively serve. In full disclosure, Shawn is the accountant to our firm and is a trust advisor, and wanted to make sure that he could share his guidance and wisdom with the audience.

[00:02:30] Where would you like to start? I know we talked before we recorded about some highlights for the two of us. Why don’t you start first with something that sticks out at you for folks to be thinking about in this new tax proposal?

Shawn Donovan: I think the thing that’s been really the headliner, the one everyone’s been concerned about is the capital gains rates increasing. When Biden was running for office, he’d initially said he wanted to raise it up to 39.6% from where it currently is, if you know, 15 to 20%. 20% if you’re [00:03:00] a high net worth individual making over $430,000 a year. Now, it’s going to be 25% for those households, 400,000 single, 450 married. It’s not quite the huge increase we were expecting. The one key point I noticed was there’s possible transitional rules effective September 13th, 2021. So, there might not be anything you can do about the capital gain at this point if they go back retroactively [00:03:30] to September 13th. We’ll just keep an eye on that one going forward. Hopefully, they allow all of 2021 to be under the old rules, but, we’re kind of at the mercy of their decision with regards to that.

Brad Sherman: Yeah. September 13th, I saw Twitter was exploding with highlighted numbers of the bill itself. September 13th was when this came out, so I guess pros and cons to everything. The pro is that it’s not retroactive to January [00:04:00] 1st of 2021.

Shawn Donovan:  Yeah.

Brad Sherman:  So, if you did have a capital gain event before September 13th, I guess you’re okay. From a planning perspective, really hard if you were in the middle of a transaction. Again, this is just a proposal, hard to believe that it’s going to pass as it stands. But it could, and definitely something to be mindful of after September 13th capital gain.

Shawn Donovan:  Absolutely.

Brad Sherman:   If you’re in the middle of a transaction [00:04:30] or wanting to sell some appreciated stock, not anything to plan for at least in the current bill as it’s written. But, definitely not fully retroactive to 2021, which there was rumblings of as well.

You brought up an interesting point. I think the definition that we talked about as we’ve had some clients who live in big cities and the definition of high net worth seems to be changing under this administration. I think one of the [00:05:00] big numbers that we’re seeing is $400,000 for single, 450 married filing jointly, which is a much lower number than the world was utilizing under the 2018 and prior.

Looking at these proposed income tax, capital gains 25% over 400,000. That’s basically a 10% reduction in income from the initial higher [00:05:30] end of the bracket, which as Shawn mentioned was 20, plus of course the Obamacare surcharge. And married filing jointly goes down another 10%, from 501 to about 450 there. Those are the new numbers of high net worth, which I know that some folks would argue can’t really get you much in high rent in high cost areas of living, such as the DC Metro area and New [00:06:00] York and California, and of course other major metropolitan areas where we’re seeing incomes a little bit higher than that.

Shawn Donovan: It’s for sure going to be an increase for people making in between that 400 to $600,000 married filing joint range. You were basically at different levels of 32 to 35 to 37%. Now once you hit 450 married filing joint, it’s [00:06:30] going to be 39.6% for couples making over 450,000, 400,000 for single. That could be a potentially big tax burden for those people, especially your friends in New York and around this area, the DMV. It’s going to be quite a headache for some tax payers for sure, when you look at the 2021 rates versus what it’s going to be going forward, if this bill passes.

Brad Sherman:  Yeah, another thing that was really surprising to me and serving the [00:07:00] entrepreneurial community also, without making this a political discussion, but it seemed like a lot of the lobbies for Biden were Silicon Valley. One of the things that stuck out at me was the qualified small business stock. Maybe you can go through that for folks, slowly, who don’t know what that is, who may be small business owners or thinking of that as something to consider.

Shawn Donovan: Yeah, there’s a code section 1202 that basically will allow [00:07:30] you to invest in smaller corporations, startups and whatnot. And you get to, based on when you had your investment, you can exclude upwards of 75% to even 100% of your gains on the sale once you actually get out of that company, sell your stock, everything like that.

Now what they’re proposing is, any taxpayer whose AGI exceeds 400,000, or if you are a trust or an estate, you [00:08:00] no longer get that exclusion anymore. I don’t know what that’ll do to the startup industry to investments in these smaller companies, knowing that the investor is going to have to have a tax bill afterwards, once they sell their shares.

Brad Sherman: Yeah. Something definitely to consider. A lot of folks are using this small business stock as ways to plan for not only estate planning purposes, tax planning. To get that deduction, especially [00:08:30] on the sale, is a big deal. I don’t know, maybe the Biden administration wants everyone to push to W-2.

Shawn Donovan:    Right.

Brad Sherman:  We’ll see what happens and how it comes out, but definitely a shot in the foot for people who want to start something, and some of the incentives from a tax perspective to grow an entrepreneurial organization. So, definitely keeping that in mind.

One of the things that’s of interest that we do around this time [00:09:00] of year of course, is Roth conversions. The internet kind of got lit on fire with Peter Thiel’s $5 billion Roth IRA from the donating of the original, I guess, the PayPal seed shares that grew and grew within the Roth. And it looks like legislative powers that be are really coming after some of these loopholes, or whatever you want to call them, backdoor [00:09:30] Roths funding the IRA account, then converting it immediately. Looks like they’re really trying to tackle that, eliminate that. I saw, it was interesting that prohibits Roth convergence for the highest income bracket starting in 2032.

Shawn Donovan:           Right.

Brad Sherman:              So, have some time to plan for that.

Shawn Donovan:           Right.

Brad Sherman:              But then, also eliminate back door Roth as a planning strategy, at least in this proposal, [00:10:00] starting Jan 1, 2022.

Shawn Donovan:           That’s going to be a big deal to some people, for sure.

Brad Sherman:              Urge people as always to take a look at, especially if you’re in that real sweet spot between retirement and claiming Social Security where your marginal bracket rate might be lower from when you were working. So, if you have lower wages due to either a partial year retirement or something else, and you need to fill those [00:10:30] brackets up like we’re talking about, Roth conversions have always been a great strategy for those who are in a lower bracket. But, I think the next three months are going to be full of Roth conversions and people really taking a look at their effective tax rates now, if this bill passes, and what their effective tax rates will be in the future. If you want to speak about some of those changes that you might have seen.

Shawn Donovan:           Yeah, for sure. The Roth conversion’s going to be a great [00:11:00] tool for 2021. Especially if you’re in between that 400 and $630,000 married filing joint, adjusted gross income range, you’re going to be paying 32% to 37% in 2021. Whereas next year, it could be 39.6, or in the future it could be even higher. We don’t know that. Plus, it reduces your future minimum distributions going forward, [00:11:30] required minimum distributions from your IRA. There’s a lot of good to doing Roth conversions.

Last year it was really good because of the removal of the requirement to withdraw from IRA. So, you could almost convert that Roth to replace the income and keep your income smooth throughout from ’19 to ’20. I would again consider doing it for 2021, for sure. As long as you can keep yourself in between the 32 and 37%, even if you’re at 37%, it might be worth considering [00:12:00] for 2021.

Brad Sherman:              Yeah, definitely something to think about for those listening to reach out to your financial advisor or tax professional. Take a look at what your effective tax rate was on your 2020 return. Of course, as Shawn’s mentioning, just to go through, required minimum distributions did change from 70 1/2 to 72. Some folks that are in that retirement age, [00:12:30] that may not have an income distribution from their IRA, might be wanting to take advantage of a conversion. As Shawn says, it does reduce the amount that is required to be taken out. You do pay tax today, so definitely can model out the benefits to that on a case-by-case basis. But, if we are looking at higher tax rates in the future, this could be a huge planning opportunity for a lot of reasons.

[00:13:00] Going back to the Peter Thiel example, they really did come after it hard. It looks like within this bill, eliminating the ability to put company stock and some other things within the IRA, which is an interesting little caveat that I know a lot of folks were potentially buying other things, real estate, some other non-traded instruments within your IRA.

That’s another shot at this. It says, [00:13:30] according to this bill, “Prohibits IRAs from investing in entities in which the owner has a substantial interest, 50% ownership threshold for public companies, 10% for privately held.” We’ll see how that impacts IRA and retirement plans as well.

Shawn Donovan:           The corporate tax rate, that has been a big one in the news that you’ve been hearing about. In 2017, it was reduced from 35% to 21%. That [00:14:00] was a pretty big decrease. I know the Democrats were not a huge fan of that big of an increase for huge C corporations that pay their own taxes. They’re coming up with now 26.5%, which is down from Biden’s original proposal of 28%. Sounds like a compromise was made somewhere. So, 26.5% is the corporate tax rate we’re looking at. It would still be the third highest I believe in the whole world, but much less than it was before at 35% pre- [00:14:30] Trump tax cuts. It’s a little bit of an increase. Not sure how it’ll affect clients of our realm where they’re smaller. You could still use planning to make sure the corporation doesn’t pay any tax at the end of the year by calculating year end bonuses, et cetera. That’s just another thing to keep in mind of the corporate tax rate, it will probably be increasing from 21%.

Brad Sherman:     Got it. Definitely something to really [00:15:00] take a look at there. Just another opportunity to talk about the child tax credit. We’ve been back and forth on that. As some of you know, checks were sent out at some folks that were taking the child tax credit as a deduction on their returns. Just in this new bill, they’ve extended the child tax credit, but also want to make people aware that if you are getting the check and depositing it, you might be in for quite a surprise.

Shawn Donovan:           Right.

Brad Sherman:              [00:15:30] Because that money was previously being deducted off of your return. If you’re doing that, kind of be mindful.

Shawn Donovan:           For sure.

Shawn Donovan:           It was increased a little bit. It went from 2,000 to 3,000, so it won’t be such a huge hit for some. And I know it’s 3,600 for if you have kids under five, so it’s a little bit of a age difference, at five at the end of the year. If your kid turns six, like mine does at the end of December, 2021, you don’t get the 3,600. You [00:16:00] will probably lose a little bit of your credit on your return for 2021, but you’re getting the money up front. So, just keep in mind that your tax bill might be a little bit higher by the time you file 2021. You probably want to reach out to your CPA just to figure out how much higher.

Brad Sherman:              Great tip there. For those crypto folks, the IRS has added also wash sale rules. Not fair that the equity markets are wash sale and then the crypto folks [00:16:30] could do what they want. It looks like some tightening there.

As a reminder for all those that have been investing in whether it’s NFTs, Cryptopunks, Bitcoin, Ethereum, whatever, to be mindful of the tax rules there, and make sure that if you’re operating on Coinbase, PayPal, et cetera, they are sending 1099s to the IRS. So, don’t be in for surprise when tax season comes along there.

Anything else? I [00:17:00] think that this is a really good unpacking of this bill. It looks like we have not done a full phase out of the 199A, which is good. Their elimination of step-up in basis, which was a big deal for wealthy families, seems to be out of this initial proposal. Big, big rumblings on, on salt, and that’s the state and local tax deduction that hit hard. [00:17:30] A lot of the clients in this area, the Maryland, New York, New Jersey, Virginia, et cetera, that have higher property taxes. We’ll see what happens there. Again, we could debate the inequality and wealth gap and how to change that, and the views on some of these things that were left out. But, those are the things that were at the top of my list of things that I know people were concerned about from our first conversation in May, that didn’t make it to the bill. [00:18:00] And I think we’ve covered-

Shawn Donovan:           And one more thing to add Brad, the estate exemption. There’s talks about lowering it from 11.7 million to five million, which could affect some people, especially with rising real estate values around the country right now. A lot of estates, a lot of parents that are dying, passing away, their estates might be in between that 5 million to 11 million dollar range now that real estate’s so much higher than it used to be. [00:18:30] So, you might want to keep an eye on that for estate planning purposes as well.

Brad Sherman:              Right. And remember to check with the state laws, because a lot of the state laws are obviously lower than the federal exemption. If you’re doing your state planning and updating that leading up to it.

Shawn Donovan:           Maryland being one of them.

Brad Sherman:              Maryland being one of them, of course, and DC as well. Make sure that you’re working in conjunction with all of your other esteemed [00:19:00] colleagues, whether that’s your estate lawyer, your CPA. If insurance is something that you want to discuss as a way to pay for a bill like this, some folks like to use insurance for that. Not recommending that as a strategy. But, having all of your players on your team understanding what’s in the law, bringing in estate’s tax, and of course financial planning would be the biggest, [00:19:30] but those are all good points.

Someone asked me, we have some New York clients that called right away and they said, well, what do we do? When’s the latest that something like this could pass? And then I was reminded of your horrible Christmas to New Year’s a few years ago when everything changed on a dime for you. We hope to not get you out of your Christmas pajamas to tell us that this has passed, but we hope to have you on again to follow [00:20:00] as this bill progresses through Congress and the changes that may or may not occur.

But I thought that this was a really great primer on what to expect and the changes that folks can think about. And the key takeaways to do between now and the end of the year seems like Roth conversions, and some ways to either through donor-advised funds, which we’ve talked about in the last episode. And of course, check out the episode of Elizabeth Goldstein on donor-advised funds. But it [00:20:30] seems like getting yourself through either charity or other deductions into this 400,000 range if you’re single, and 450 if you’re close on married filing jointly, will save a ton of tax. And might be beneficial to donate a couple thousand bucks just to save even more on tax.

We’ll be looking for individualized ways to help our clients. I know Shawn is always mindful of that as well. We’ll give you the final [00:21:00] word.

Shawn Donovan:           I appreciate it a lot, Brad, for having me on again. And hopefully, we can do it again once we have finalized rules, and we know exactly the type of planning and tips and things that we need to have our clients do for the year 2021 and 2022. A lot of exciting changes though, for sure.

Brad Sherman:              All right. Well, only a CPA would say that these changes are exciting, so that’s good to always have you on. Some of these scare me a little, and [00:21:30] I think what you said, the September 13th hard rule, I think will scare some folks.

Shawn Donovan:           Absolutely.

Brad Sherman:              As they’re in the middle of probably a lot of end-of- the-year transactions and preparation for what was anticipated for 2022. But, we really appreciate you coming on. We value your time and your opinion and advice. And, thank you to the audience for listening. Let us know what you think. Let us know, hit us up privately if there’s a specific issue that you want to [00:22:00] tackle. Or, if you think that this proposal impacts you directly, let us know.

And, as always, be well. Be safe. Hoping for a healthy continued school year. I know everyone on this microphone set is, between Shawn and I. And be well, everybody and we’ll talk to you soon.

Shawn Donovan:           All right. Take care, Brad.

Advance Child Tax Credit Payments in 2021

There has been Important changes to the Child Tax Credit  that will help many families get advance payments of the credit starting this summer. The IRS will pay half the total credit amount in advance monthly payments beginning July 15. You will claim the other half when you file your 2021 income tax return. These changes apply to tax year 2021 only.

To qualify for advance Child Tax Credit payments, you — and your spouse, if you filed a joint return — must have:

  • Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return; or
  • Given us your information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
  • A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
  • Made less than certain income limits.

The IRS will use information you provided earlier to determine if you qualify and automatically enroll you for advance payments. You do not need to take any additional action to get advance payments. The IRS also just started an online tool that will allow families to tell the agency they don’t want to receive advance monthly payments from the enhanced child tax credit, scheduled to start next month. For more information, head directly to the IRS website here. We will continue to follow and report on any further information released about the matter. If you have any questions for us and your particular situation, reach out to your tax professional or please email us at info@shermanwealth.com. 

 

Don’t Forget This Year’s Tax Deadline Extension

As we kick off April and financial literacy month, we want to remind you about the tax deadline extension the IRS instated this year. Due to the coronavirus pandemic, the federal government extended this year’s federal income tax filing deadline from April 15, 2021, to May 17, 2021. This extension automatically applies to filing and payments. So, if you owe taxes for 2020, you have until May 17, 2021, to pay them without interest or penalties. This extension applies to all filers, including businesses, individuals, trusts, estates, and more. This gives you plenty more time to fund your HSA’s along with your Traditional or Roth IRA’s (depending on what you are eligible for). 

Taxes likely won’t be the only aspect of your finances to be affected by the COVID-19 pandemic. Speak with your financial professional or tax professional about your particular situation. Before making any decisions, make sure to check your state deadlines to ensure there are no different cut-offs you must comply with. Check out the video below as Brad discusses the unemployment benefits and how those will affect your tax situation this year. As always, if you have any questions, please reach out to us at info@shermanwealth.com or schedule a 30-minute introductory call here

Why You Need To Understand The Tax Implications of Capital Gains 

With tax season in full speed and the recent influx of DIY traders, it’s a great time to discuss the tax implications of capital gains in the market and how to better educate traders who are lacking the knowledge of the implications when trading the stock market. 

In a recent twitter thread, tweeters were discussing the lack of education platforms like Robinhood provide on capital gains and wash sale rules. With the recent short squeeze stocks and bitcoin craze, people have been seeing enormous gains in the market, yet do not know what to do with the gains once they make them.

Pictured above is a snippet from a NAPFA forum where a guy started with $30,000 in his Robinhood account, transacted $45,000,000 in 2020, for a net profit of $45,000. However, when he received his 1099B, he had accumulated 1.4 million dollars in capital gains and a $800 tax bill. Because of his lack of knowledge about wash sale rules and the tax implications of capital gains, he saw a huge tax hit. 

With financial literacy month just days away, this example is extremely timely and important to bring light to. As you can see, there is such a large gap in financial literacy in this country, especially surrounding the implications of trading and behavioral biases involved. Please inquire with a financial professional before making major moves in the market. It’s important to fully understand the implications of your decisions and how they will affect all aspects of your portfolio. If you have any questions, please reach out to us at info@shermanwealth.com or schedule a 30-minute complimentary appointment here.

How To Take Advantage of the Tax Deadline Extension

For those scrambling to get their tax returns together before next month’s deadline, you’re in luck. The federal income tax filing deadline has been extended one month, the Internal Revenue Service (IRS) and the U.S. Treasury Department announced this week. It’s official. The federal income tax filing due date for individuals for the 2020 tax year is now May 17, 2021 instead of April 15, 2021.

The 2021 tax filing season began on February 12th, 2021. The IRS is still urging Americans to file as soon as possible even though the deadline has been extended. The filing deadline extension applies to individual taxpayers, including those who pay self-employment tax, the IRS said. After May 17, Americans who have not filed will be subject to penalties, interest and additions to tax. 

Because the tax deadline has been extended, that means you have more time to fund your retirement accounts as well. Take advantage of this extension to make sure you are well prepared for the May deadline. If you have any questions regarding this year’s tax return, as always, reach out to your tax professionals or CPA for guidance on your particular circumstance. Additionally, for more detailed information, check out the IRS website detailing the fine print of this extension. As always, you can reach us with any questions at info@shermanwealth.com or schedule a complimentary 30-minute consultation here.

What You Need To Know About the Third Stimulus Package

On Wednesday March 10th, Congress approved the American Rescue Plan, the third stimulus relief package since the pandemic started a year ago. The $1.9 trillion American Rescue Plan Act includes measures ranging from stimulus checks to child tax credits, jobless benefits to vaccine-distribution funds, healthcare subsidies to restaurant aid. The legislation is the largest aid package to pass since widespread restrictions tied to the coronavirus pandemic began in March 2020.

Here’s what to know: 

  • Federal unemployment benefits of $300 per week have been extended until early September.
  • If you collected unemployment in 2020 or do so in 2021, you do not owe taxes on the first $10,200 in assistance. 
  • Lots of people will receive $1,400 stimulus checks in the coming weeks. Individuals with an adjusted gross income of $75,000 or less and married couples earning $150,000 or less qualify. 
  • Most Americans with kids will qualify for a new child tax credit: $3,600 per year for every child under 6 and $3,000 for each kid ages 6-17. 

Aside from these stimulus bill changes, tax day, April 15th, remains the same. Make sure to file your return on or before that date to avoid penalties. Check out our definitive guide to your 2021 tax return with detailed information on this year’s tax season. In addition, make sure to fund your retirement accounts by this year’s deadline. We will continue to monitor any changes to 2021 filing dates, but we recommend to check with your CPA with any questions on your situation. 

If you have any questions on the third stimulus package and what it entails, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute introductory call here.

Definitive Guide To Your 2021 Tax Return

The IRS has tons of rules and forms when it comes to your tax return. And a ton of those rules affect investing for retirement, so we rounded them up in one place. Below are some of the many limits that affect your retirement savings for the 2021 tax year. Click here for this downloadable pdf.

Contribution limits on retirement accounts

Annual 401(k) contribution limit

$19,500 if you’re under 50 years old, and $26,000 if you’re over 50. If you have both a traditional and a Roth 401(k), that’s the total limit you can contribute across both accounts.

Annual IRA contribution limit

$6,000 if you’re under 50, and $7,000 if you’re over 50. Again, this is the total contribution limit across both traditional and Roth IRAs.

Annual SEP IRA and Solo 401(k) contribution limits

25% of your “net earnings from self-employment” or $58,000, whichever is lower.

Annual SIMPLE IRA and SIMPLE 401(k) contribution limits

$13,500 if you’re under 50, and $16,500 if you’re over 50. (Btw, these count toward your overall 401(k) contribution limit, too.)

Income limits to contribute to a Roth IRA

Depending on your modified adjusted gross income (MAGI), you might be partially or fully ineligible to contribute to a Roth IRA. Note that these limits don’t apply to Roth 401(k)s. (Those don’t have income limits at all.)

If your filing status is single, head of household, or married filing separately

If your MAGI is over $140,000, you can’t contribute to a Roth IRA. If it’s between $125,000 and $140,000, you can contribute a reduced amount. And if it’s less than $125,000, you can contribute up to the full $6,000 / $7,000 limit.

Except: If your status is married filing separately and you lived with your spouse at any time during the year, you can’t use a Roth IRA if your MAGI is over $10,000. If it’s under $10,000, you can contribute a reduced amount.

If your filing status is married filing jointly or qualifying widow(er)

If your MAGI is over $208,000, you can’t contribute to a Roth IRA. If it’s between $198,000 and $208,000, you can contribute a reduced amount. And if it’s less than $198,000, you can contribute up to the full $6,000 / $7,000 limit.

Income limits to deduct traditional IRA contributions

Anyone with an earned income (investment income doesn’t count) can contribute to a traditional IRA up to the limit. If your MAGI is greater than a certain amount, you may be partially or fully ineligible to deduct them on your tax return, though.

If you are covered by a retirement plan at work (ie 401(k), SEP IRA)

If your filing status is single or head of household

If your MAGI is over $76,000, you can’t deduct your traditional IRA contributions. If it’s between $66,000 and $76,000, you can deduct a reduced amount. And if it’s less than $66,000, you can deduct up to the full $6,000 / $7,000 contribution limit.

If your filing status is married filing jointly or qualifying widow(er)

If your MAGI is over $125,000, you can’t deduct your traditional IRA contributions. If it’s between $105,000 and $125,000, you can deduct a reduced amount. And if it’s less than $105,000, you can deduct up to the full $6,000 / $7,000 contribution limit.

If your filing status is married filing separately

If your MAGI is over $10,000, you can’t deduct your traditional IRA contributions. If it’s under $10,000, you can deduct a reduced amount.

If you aren’t covered by a retirement plan at work (ie, 401(k), SEP IRA)

If your filing status is single, head of household, or qualifying widow(er)

None. You can deduct up to the full $6,000 / $7,000 contribution limit.

If your filing status is married filing jointly or separately

If neither you nor your spouse is covered by a retirement plan at work, there’s no income limit. You can deduct up to the full $6,000 / $7,000 contribution limit.

But say your spouse is covered by a retirement plan at work:

  • If you file jointly and your MAGI is over $208,000, you can’t deduct your traditional IRA contributions. If it’s between $198,000 and $208,000, you can deduct a reduced amount. And if it’s less than $198,000, you can deduct up to the full $6,000 / $7,000 contribution limit.
  • If you file separately and your MAGI is over $10,000, you can’t deduct your traditional IRA contributions. If it’s under $10,000, you can deduct a reduced amount.

Limit on indirect IRA rollovers per year

You can’t do an indirect rollover from one IRA into another IRA more than once a year. That’s not once per calendar year, or even once per tax year — it’s once per rolling 12-month period.

This applies whether it’s traditional-to-traditional or Roth-to-Roth. However, direct rollovers don’t count, and traditional-to-Roth conversions don’t count. (Neither do rollovers from your employer retirement plan, like a 401(k) — those are different.)

Age limits on retirement accounts

There’s no age limit on IRAs. But you do have to stop contributing to your other tax-advantaged retirement accounts when you hit age 70½ — unless you’re still working, in which case you can keep contributing to a plan that’s sponsored by that employer.

And at age 72, you have to start taking required minimum distributions (RMDs) from your retirement accounts (except for Roth IRAs — no RMDs on those). If you’re still working, RMDs on non-IRA retirement accounts can be waived, unless you own 5% or more of the company that employs you. (The CARES Act waived all RMDs for 2020, but 2021 RMDs seem to be back on. We’ll update this page in the event that changes.)

Those are the limits you need to know about. Now go forth and invest for that dream retirement.

Disclosures:

Sherman Wealth Management LLC (“Sherman Wealth”) is a Registered Investment Advisor (“RIA”), located in the State of Maryland. Sherman Wealth provides asset management and related services for clients nationally. Sherman Wealth will maintain all applicable registration and licenses as required by the various states in which Sherman Wealth conducts business, as applicable. Sherman Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion.

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Is Tax Being Withheld From Your PayCheck?

Do you know how much money is being withheld from your pack check? Probably not. In fact, 45% of the people polled by the American Institute of CPAs said they don’t know when they last reviewed the amount of tax withheld from their paychecks.

Truthfully, many people we talk to do not really understand their tax implications nor understand their W-4 forms. Why should you care about your W-4 forms? Because, even though your taxes and filing a tax return may seem daunting, it’s important to remain on top of the situation to know how it will impact your finances. 

You might think that you just owe taxes, but thats not necessarily true. Indeed, the IRS issued 125.3 million refunds for the 2019 year, with recipients getting back an average of $2,535, according to agency data as of Nov. 20.

With the new year approaching, it’s important to become aware of your financial situation so that you can be in good shape come the beginning of next year. 

While tax season can be confusing and stressful, it’s crucial to understand your situation. Consider seeking help from a financial advisor or accountant when it comes to your taxes to help you better understand your withholdings. If you have any questions, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute consultation.

New Fed Strategy Means Cheaper Loans For A Long time — Here’s How You Can Benefit

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As we’ve all been waiting to hear about the outcome and policy changes from the Jackson Hole symposium, there’ve been some updates that you should know. The Federal Reserve has said that it will let inflation run “hotter than normal” to help the economy bounce back from the coronavirus crisis, according to a CNBC article. According to some commentary, it seems as though this policy change is meant as a stimulus, to get people to spend more. 

Since the central bank lowered its benchmark rate to near zero in March, credit card rates have hit a low of 16.03%, on average, according to Bankrate.com. The average interest rate on personal loans is currently about 12.07% and home equity lines of credit are as low as 4.79%, according to Bankrate, both notably less than the APR on a credit card.

On the flipside, “Low inflation has helped suppress mortgage rates,” said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace. “If you let inflation go up, mortgage rates will also go higher.”

Given this new economic data, and with these cheaper loans for a longer period of time, it’s important to take a look at where you can lock in those lower rates, such as through credit card balance transfers or refinancing your mortgage. If you have any questions about this new policy, and want to see how this could be an advantage for your portfolio, please reach out to us at info@shermanwealth.com and we would be happy to discuss with you. 

What’s Ahead For Your Taxes If Biden Takes The Presidency

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With the election around the corner and recent news of Joe Biden’s running mate, Kamala Harris, we wanted to take a look at his proposed tax plan and what impact it may have on the finances and current tax plans of Americans.

As Biden accepts his party’s nomination for president this week at the Democratic National Convention, high-income earners are beginning to wonder if it’s time to revisit their tax plans. Indeed, taxpayers with taxable income over $400,000 could see their individual income taxes tick up under a Biden presidency. The former vice president has also called for raising taxes on wealth transfer.

Below we will outline Biden’s proposed tax plan, which CNBC has sliced into two categories, income taxes and estate planning. 

Income Tax 

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found. Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation.  The long-term capital gains tax rate in 2020 is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly).

Estate Planning 

Last month, the Democratic presidential contender collaborated with Sen. Bernie Sanders, I-Vt., and the two formed six task forces to release a 110-page policy document. The document gives some insight on what we might expect from a Biden administration. “Estate taxes should also be raised back to the historical norm,” the task force wrote in the policy plan.         

Indeed, the Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people — either at death or as a gift during life — without facing the 40% estate and gift tax. The gift-and-estate tax exemption is $11.58 million per individual in 2020.

Biden has set his sights on the “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death. The owner’s basis — the original investment in the asset — steps up to market value at death, which means the heir is subject to little to no capital gains taxes if he sells it. Biden proposes taxing the unrealized capital gains in the asset at death, which essentially does away with the step-up. Wealthy households are likely to use gifting strategies to head off this change, said Bertles of Tiedemann Advisors. “This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption,” he said.

Make sure to take a look at Biden’s proposal and think about how that may impact your situation. In just a few short months, this plan could be put into effect, so start thinking about any changes you could make to your tax plan and talk to an advisor for some guidance. As always, we are here to help if you have any questions regarding what these changes could mean for you.