The California Lutheran University Financial Planning Program prepares its students for their CFP ® certification while earning an MBA, it is the only business school on the list of the top 10. Its USDLA award-winning program consists of eight courses and a capstone project taking on average 18 months to complete.

The department is thrilled to announce such fantastic news and would like to recognize the faculty, as well as the students’ hard work, who are working professionals located across the United States and world. This fantastic achievement would not have been possible without the faculty’s dedication, expertise, and skills to the students.

If you are interested in earning an MBA or MS in Financial Planning please visit our website to learn more.

Here is a transcript of the webinar:

Cindy Grether: 

Good morning everyone. Today’s presentation “Year End Investment Planning” is brought to you by California Lutheran University’s financial planning program. We have one of our instructors who is presenting today, it’s Jeremy Witbeck. Jeremy is also an alum of the program. He received his MBA and financial planning here at Cal Lutheran. He’s also certified financial analysts and CFP, he received his undergrad in accounting at the University of Arizona and then his master’s degree here. I’m going to go ahead and let Jeremy start.

Jeremy Witbeck: 

All right, well thank you so much, Cindy. So today I am going to be presenting on some year and investment planning strategies and techniques that can be deployed to really try to take ownership of your taxes and some strategies to try to build long term wealth, through some of the preferential treatment that we receive in the tax code.

As I go along for those that are with me, please feel free to ask any questions or interject any of your own commentary, I recognize that there’s a lot of very knowledgeable professionals that are on this with me and hopefully will continue to join as I go along. And so the more than happy to have your thoughts or insights as we evolve in our conversation.

So, with that said, for the purpose of today, I’m going to focus on a few different areas. The first thing is I’m going to review just a refresher of the tax code that was enacted in 2018 and has continued in on in 2019. There were quite a few changes that were made from the tax code that we’ve had for many years prior to this change and so that certainly has some planning implications and things that we want to be aware of. I am also going to review the 2019 tax brackets and really lay out where we’re trying to target into, if we can, to maximize some of the tax benefits for individuals and married couples.

Then from there we’ll start going into some of the strategies. So we’re going to look at retirement accounts, the health savings account, we will look at tax loss harvesting strategies. We will look at asset location optimization and then lastly we’ll conclude with a discussion on charitable donations.

With the 2019 current tax code there were quite a few changes that were undertaken. The big one is that the tax brackets that people are subject to and also non-living entities as well. We’re overhauled to where they became a little bit flatter and overall the marginal tax brackets that people are subject to are lower. The reason for this, or the thought process that was communicated by Congress and the White House administration for doing this is that they also changed the way that deductions are handled. So in order to compensate for that, the overall marginal tax rate structure went down with that. And so the new tax code also increases the standard deduction. So it was a significant increase on were in 2019 the standard deduction is $12,200 for an individual person or $24,400 for a married couple. The reason why that is significant is a lot of people that were itemizing before, no longer meet the qualifications to itemize since the standard deductions is larger and that has some tax planning and investment tax planning, more specifically ramifications that need to be considered.

Now with this tax overhaul, personal exemptions were eliminated. So we no longer have a section on the tax form that asked for the number of people that are covered on that tax form with an exemption amount given and then also state and local tax deductions were kept and so they were kept to $10,000. So this is something that is felt on the coastal areas where a property taxes tend to be high and state taxes tend to be on the higher end. And so it’s important to note that before where you can deduct the full amount of that, that it is now capped at $10,000.

A couple other notable changes the mortgage interest deduction was lowered from $1 million on and $100,000 for a home equity line of credit down to $750,000. That was a pretty big reduction and that’s of course the limits that are in place for a married couple on those numbers. Simply divide by two if you’re looking at it for a single person.

A lot of the itemized deductions have been reduced or eliminated, the most notable especially for our profession is you’re no longer able to deduct the expense for attorneys for CPA’s and for tax preparers and for investment advisors on a person’s tax return when dealing with an individual tax return.

Then lastly, there is a new 20% pass through income deduction for certain types of corporations when engaged in certain business practices that you want to make sure that you’re knowledgeable about.

Now for the intent of this conversation we’re really going to focus in on how we can optimize our investments to fall in line with this tax code. But it’s important to have an understanding of how the tax code works to then understand how that’s going to impact some of our investment decisions.

Now the tax brackets did change pretty significantly. And so this chart here is a summary of our new tax bracket. Was there a question or comment? No. Okay.

 This is the new tax, tax bracket structure that we as taxpayers are subject to. You’ll notice that on the left of the chart the tax bracket ranges from 10% all the way down to 37% and the income levels that are subject to those tax brackets are listed on the right, where we have four different groupings. One is for a single taxpayer when we have head of household. So that would be a single taxpayer with dependence. Married filing jointly or qualifying widow is the third column. And then lastly, married filing single is the last column.

Notice that on the tax bracket there’s one that has a star and then one that has an X. The reason why I listed that there is for our tax planning, we are trying if we can to have a taxpayer remain in the 24% tax bracket or lower. The reason for that is because there’s a significant increase once we jump above the 24% all the way up to 32%. And so if we are able to keep a married couples taxable income, their AGI, below 321,450 or a single person’s below 16,725. Then we are going to have a significant impact on the amount of taxes that they have to pay.

The X is below the 35%, that signals where we start to see the marriage penalty introduced again. And so you’ll notice that what is unique to this tax bracket structure is that up until 35% the single and the married filing jointly numbers are figures are doubling. So, meaning that the 10% is 9700 for a single taxpayer for a married filing jointly taxpayer it’s 19,400 or double that amount. And that relationship stays true even through the 32% tax bracket, where a single taxpayer, the top end of that bracket would be 204,100 for married filing joint tax return before 408,200.

At 35% it no longer doubles. So there is a significant marriage penalty. Another strategy if we can’t keep them in the 24% tax bracket is to not go above 612 350 for a married couple since that has a significant tax ramification.

But for the purpose of this conversation. We’ll talk about ways to try to keep us in the 24% tax bracket or lower using some planning techniques on with our investments. So let me pause for a moment and see if there’s any questions or comments before we move on.

No. All right.

The first thing that you want to really look at and perhaps one of the most obvious areas is to make sure that you are maximizing your retirement accounts. There’s a couple of reasons for this. One is that the contributions to your retirement account are what are called above the line tax.

Deduction items, meaning that it doesn’t matter if you itemize or if you take the standard deduction, but you’re going to receive a tax benefit for making your retirement account contribution with a few exceptions. One of the best pieces of advice that I’ve heard given, especially to young earners, is to try to get to the point where you’re maxing out your 401K contributions so that way the money can grow for you.

We can take advantage of the tax structure by recognizing whether or not we should make our 401k contributions as a traditional deductible contribution or if we should use a Roth 401k election for those contributions, now I’ll go into that consideration in just a moment.

The 2019 maximum contribution amount is 19,000. If you are over the age of 55 then you’re allowed to make an additional $6,000 catch up provision contribution which means that you can elect to defer $25,000 into your retirement account.

Now if you don’t have access to a 401k plan or if your income level is low than a certain phase out amount. You can also or you can in lieu of not having 401k contribution, make an IRA contribution. In 2019 the maximum contribution amount is 6000, if you’re the over the age of 55 you can make an additional $1,000 contribution which means that the maximum amount is 7000.

Now, earlier I mentioned that Roth 401k is or a Roth IRA are an option for you. And this is where we can use some planning to see if it makes sense to use the traditional route or the Roth route for these contributions.

The answer for this is determined by where your income level falls. And so if you’re in the 24% or higher tax bracket, then it is generally advantageous to make the contributions to your 401K and your IRA accounts on a deductible basis, meaning that you want to use the traditional route. However, if you are in the 10%, 15%, or 22% tax bracket, then that is a time where it makes more sense to contribute on or within a Roth account because your tax bracket is very low, and it is unlikely that out a few a future date, when you start taking money out of these retirement accounts, that you would be in a lower tax bracket. So it’s better to pay the taxes now where you’re assured to have a low tax bracket, as opposed to waiting until later where if your tax bracket goes up, then you’ll end up paying more in taxes than what you would have needed to.

Now, it should be noted that you may be ineligible to make a Roth or deductible IRA contribution if you have a company sponsored plan and/ or if you exceed certain income levels. So when making these contributions you will definitely want to consult with your tax professional. That’s something to be aware of but it’s definitely a conversation that you should have because there are some significant tax deferral advantages by utilizing these retirement accounts.

So let’s go ahead and pause and see if there’s any questions or comments from the group… Yeah, Brett.

Brett Layton: 

A great explanation and the beauty of Roth is if they’ve been so expanded lately, and it really gives employed younger people an opportunity to stuff money in that Roth before their income rises to the point where they’re phased out. And then if you’re write out those phase out levels. You can do some strange things. I mean, you can even donate to a (inaudible) if you’re self-employed to take your AGI down underneath the limit. And then at least get a Roth IRA in there because even though you’re qualified by a plan, you’re under a plan, you’re under the AGI limit and then the beauty of that Roth is it you’re diversifying attacks location you assets when you are in a D accumulation strategy and retire.

Jeremy Witbeck: 

Yeah, excellent points Brett and this is where I can’t stress enough having a knowledgeable planning oriented tax planner is going to significantly help in these areas. To Brett’s point, there’s a lot of planning that can take place here to ensure that we’re getting the maximum benefit out of these retirement accounts. This is where if you are at a stage where you’re in a lower tax bracket the Roth should be a heavy consideration because there’s some significant advantages to investing in a Roth account for future expenses. One being that because you’re in a lower tax bracket, you’re not going to pay a lot of taxes on those funds that also diversifying the retirement accounts that your funds are in at a later date helps to immunize you against future tax changes, so excellent points Brett and I appreciate you bringing that to the conversation. Any other comments or questions before we move on?

Cindy Grether:

I have a quick comment. So it looks like this is one of the first things you’re going to look at right?

Jeremy Witbeck: 

Absolutely. This should be one of the first things that everyone thinks of doing to plan for the future and to plan for taxation.

Cindy Grether: 

Alright. Thank you.

Jeremy Witbeck: 

Alright, so let’s go ahead and look at health savings accounts. So this is really become popular in the last I’d say 10 years or so. Some people would actually argue that a health savings account is even more valuable than a retirement accounts, meaning a 401k or an IRA account not explain why that said in just a moment.

If you’re not familiar with the health savings account a health savings account is a special investment vehicle that you’re allowed to use if you are in what’s called a high deductible health insurance plan.

So high deductible health insurance plan is one where you have to cover certain costs out of pocket and these costs that are covered out of pocket tend to be much higher than what you would find in a traditional medical coverage plan. Now the reason why you’d be willing to do this is the premiums for this type of insurance are also lower and you have the benefit of saving than a health savings account.

The way that a health savings account, which is called HSA for short, works is that you are allowed to contribute pretax dollars just like a 401k plan for example. So you contribute your pretax dollars and then they are invested and grown for future medical expenses. The beauty of a health savings account is that the growth is tax free and when you use the funds for qualified medical expenses, they are withdrawn tax free. So that’s where it deviates significantly from a 401k or other retirement account is that these are not taxable when they are withdrawn from the account. So that’s something that is not true for a 401k plan or a traditional IRA account.

The other benefit of a health savings account is that there is no RMD requirements. So if you reach the age of 70 and a half and you have a big HSA balance, you’re not required to start distributing like you are under the current tax code with a traditional IRA. Now with the health savings account you are allowed to contribute up to $7,000 for a family policy or $3500 for a self-policy.

If you’re over the age of 55 you also are given an additional thousand dollar makeup provision to increase your HSA balance.

This is another account that should be a primary consideration for contributing to if you have the right medical insurance policy.

Now I recognize that not all companies offer high deductible health insurance plans. If your company doesn’t offer one, unfortunately, this is an investment vehicle and a savings vehicle that you’re not eligible for but we’re seeing these types of plans grow in greater popularity, and so this is probably something that you will see down the road if you haven’t seen it yet already.

So any…oh Brett I see that you have your hand raised.

Brett Layton: 

Yeah, I think these are great, but I think people, just personally I’m 62 and while I’m healthy I’m entering the stage where medical expenses are real. So HSA’s may not be a debt I want to take, even though they have some very attractive features. And if you can build that pile of money until you become my age we’re all going to spend a quarter million bucks on health care and retirement, so it’s just wonderful.

Jeremy Witbeck: 

Yeah, absolutely and you can use the funds and a health savings account for things like Medicare. So there’s a lot of flexibility on how you use it for qualified medical expenses. But to your point, this is just like a 401k, the biggest benefit for these is when you start younger and that you’re allowed you are able to allow time to compound the amount in these accounts. Whereas at 62 being that you’re three years away from Medicare age, and in fact, you’re no longer allowed to contribute to an HSA account once you get the age of 65 the benefit there would be greatly muted.

Do you have any other comments or questions are see your hand is still up?

Cindy Grether: 

Jeremy, I have a question, what is considered a high deductible?

Jeremy Witbeck: 

The definition changes every year, I did not prepare the figures. It would be something around $9,000 per year. But the difference is that you would be required to pay out of pocket up to that level and then other types of coinsurance and maximum out of pocket levels will kick in. But I don’t have those figures prepared with me today.

Cindy Grether:

Okay, but that that makes sense. I just didn’t know how high it went. 

Jeremy Witbeck:

Yeah it is a much higher amount. So for a single person, it’s going to be half as much as it is for a family policy. I should say rather to use their terminology, self-policy will be half the level of a family policy, I believe the numbers I just quoted previously were for a family policy, but these are things that you can easily look up just with a quick Google search to see what the current years thresholds are. But it will say when you select the medical plan what the or if it qualifies as a high deductible medical coverage because it will typically have high deductible in name.

Cindy Grether:

Alright. Thank you.

Jeremy Witbeck: 

All right, any other comments before we move on? No. Okay.

So another strategy that we can deploy is what’s called tax loss harvesting and the reason why we do this is because with capital gains if we are able to keep the capital gains below 488,850, long term capital gains are taxed at a very profitable rate of 15 and then over that amount we start seeing 20% taxation and then we can get into more complicated subjects like the Obamacare surcharge or the Obamacare tax that helps to cover the medical plan changes that were enacted under the Obama presidency. And so because these taxes can become quite high on especially when you factor in the state taxes there are often times strategies that we want to deploy to try to reduce the gains that were recognized in any one year.

One of the ways that we can do that is by looking within the portfolio and our taxable accounts to see if there are any quote-unquote loser stocks or loser securities and these are simply securities that have lost value, since they were initially purchased.

For example, imagine that you have a to stock portfolio and let’s say one stock went up 20% since you bought it and the other stock went down 10%. The overall portfolio has appreciated approximately 10% if we had half between the two securities. But the way that the tax codes written we only have to pay taxes on the gains that are realized. And so we can leave the stock that’s up 20% unrealized, and we can sell the stock that’s down 10% and realize that game. So for our tax return purposes we would only show the 10% loss which would help to shelter any other capital gains.

Now, it should be noted that if you don’t have any capital gains the most that you can use against ordinary income which ordinary income is another way of stating your job income or your W2 income.

The most that you can utilize as a $3,000 loss against your ordinary income and so you don’t want to get too aggressive on this necessarily if you don’t have any gains to shelter. But this is an effective way to bring down your tax bill, especially on your investment gains.

There is one caveat when you tax last harvest and that is you have to wait 30 days to repurchase the security. Both before the date of sell and after the data of sell and so that means that you can’t just sell it and then buy it back tomorrow and expect to capture this lost because then the wash self-provisions will kick in. And so, you have to not hold that security within it’s really a 61-day window, 30 days before the day of and 30 days after, that way you can take advantage of the loss on your tax return.

So, any comments or questions on tax loss harvesting? No? Alright.

So, one other note to mention is, this is something that you really want to think about throughout the entire year, and not just necessarily at the end of the year. One of the missed opportunities on is that you have a volatility event where there’s some tax loss harvesting that could occur in the middle of the year and then the market rallies through the end of the year. If you wait until the end of the year, you may have lost your window, this is something that you want to keep in the front of mind throughout the entire year because there can be some significant tax strategies that can be deployed given certain volatility events that are incurred.

Let’s talk about asset location optimization. So, this is one of those areas that I don’t hear talked about enough on but it can make a significant difference on your taxes over time by knowing where to hold certain types of assets. And so, because of the way that tax deferred and taxable accounts recognize taxation events or because of the timing difference, then there are certain securities that are advantageous to be held in one account versus the other.

So, in the taxable account anytime that there is a recognizable event you’re going to incur taxation and so we tend to hold assets in a taxable account that will minimize or extend the timing of the recognition of that income or of that game. Within a taxable account, that’s where you typically want to use more of your passive or lower turnover funds and strategies.

Once again, we’re trying to avoid recognition of taxes and to defer them as long as possible and the taxable account is a perfect place to hold them. Also, you want to hold your long-term capital gains tax securities within the taxable account. Your dividend payers meaning more specifically your qualified dividend players. So your US dividend payers are preferably held in the taxable account because they also receive preferential tax treatment.

Also, direct real estate should be held in a taxable account and not in a tax deferred account. This is actually one that sometimes is not well understood. And so let’s explain why.

When you directly invest in real estate there are a lot of tax advantages for doing so. One being that you get to appreciate the property when you hold real estate for investment purposes. You get to right off the interest and the taxes that are paid. You also get to leverage the real estate when done in this manner and so real estate can be an attractive holding because of the tax benefits and the benefit of leverage that you receive

It should be held in taxable account. The reason why you would really shy away from directly investing in real estate in a tax deferred account. So, for example, within a Self-Directed IRA is because you lose many of the tax benefits by holding in the IRA. So for example, you are no longer able to write off the interest and you’re no longer able to depreciate the property.

Also, you typically cannot use a mortgage when held in a Self-Directed IRA account, for example, and so you lose the benefit of the leverage that you would enjoy in a taxable account. Direct holdings of real estate should almost always be held in a taxable account. Then lastly, any tax-free types of bonds should be held in a taxable account because you’re not paying taxes on them anyways and so you get no benefit by holding them in a tax deferred or tax exempt account.

Now within the tax deferred or tax-exempt account, this is where you’ll want to place your more active or higher turnover funds and strategies. This is where you’ll also want to have your short-term capital gains type investments also rates should be held in a tax deferred or tax-exempt account. The reason for this is that reads generate a lot of ordinary income and in fact rates are required to distribute 90% of their income and so it is very tax inefficient to hold that within a taxable account so better place would be within your tax deferred or tax-exempt account.

When I say tax exempt that means your Roth IRA, for example. Also, taxable bonds are much better held in a tax deferred account is once again interest income is an ordinary income type item which has a higher tax bracket structure then long-term capital gains in dividends and so bonds be held within the tax deferred account. Then lastly, this one’s not as well-known, precious metals. So, things like gold and silver should be held in a tax deferred account, not in a taxable account. On the reason for that is that when you recognize the gains on precious metals, the taxation is treated as a collectible asset. Which collectibles have an alternate tax schedule. In fact, precious metals have a long-term capital gain rate of 28% versus the typical 15% that most tax preparers would face on other types of assets. So, because the taxation rates so high on precious metals it is generally preferable to hold them in a tax deferred account or a tax-exempt account.

So, any questions on asset location optimization or comments?

This is another one of those areas where an advisor can really build a lot of long-term value by knowing understanding and recognizing this and building a portfolio that seeks to optimize the assets on as well as possible.

Cindy Grether:

It looks like Brett has a question.

Jeremy Witbeck: 

Oh, Brett. Thank you.

Brett Layton: 

Hi, thank you. I had a brief interruption. Direct real estate, did you talk at all about the possibility of tax-free exchange if they’re in taxable accounts?

Jeremy Witbeck: 

I did not. On this I did not cover some 1031 exchanges, but…

Brett Layton: 

I’m sorry. Just the other thing about self-directed IRAs, I’m a tax preparer and they can be tremendously dangerous because a lot of people don’t understand or fully appreciate prohibited transactions and the excise tax that’s associated with breaking the rules. 

Jeremy Witbeck: 

Yeah, absolutely. When you really boil down what most people are investing in the self-directed IRAs and the limitations or the shortfalls. It’s almost never a recommended strategy for people because you’re giving up so much and you’re creating a lot of headache and opening yourself up to a lot of issues that it’s one of those investment ideas that probably should die but kick around I think because of the love that people have a real estate and it gives them the ability to invest in something that they might not otherwise have the means to even if it’s in a very poor way of doing it. So those are great points right. I appreciate that insight there. Any other comments or questions?

Alright, so the last thing I want to review with everyone. Our charitable donations. And so the reason wh a lot of times, people will have a belief that it doesn’t matter what my tax situation is, I will have a tax benefit by donating to a charity. And while that’s never always been true. It is especially not necessarily true. Given the new tax code with a much higher standard deduction amount.

For a charitable donation to be recognized on your tax return that means that you have to itemize at least when done in a traditional route. So, since many taxpayers are not going to itemize, especially in the later stages of their life, charitable donations that no longer have an impact on their taxes.

That doesn’t mean, of course, that you shouldn’t donate to charities, but it does mean that we can be smarter about how we donate to charities to try to ensure that we receive that tax benefit. One of the ways that we can do that is by donating a portion or all of an RMD directly to a charity. What that does is that bypasses the RMD from being reflected on your own tax returns, so that you’re not taxed on that income. You receive a definite and very direct tax savings by making that donation to a charity.

Once again, you don’t have to make the entire RMD payable to the charity, you can do a portion, but that is something that’s recommended, especially for those that know that they’re not going to itemize. Avery effective strategy is to donate appreciated stock directly to the charity. Or, and I’m going to cover this in a moment, to a donor advised fund. The reason why it is more preferable to donate appreciated stock even over cash to a charity is because typically when you sell a stock and recognize the game, you have to pay capital gains tax if it’s out long term or you have to pay a short term gains of those held short term on that stock and then the after tax proceeds can be donated or spent however you’d like. However, you bypass or you eliminate the need to pay any gains, or excuse me, taxes on the gains when you donate it directly to a 501C3 charity. Since the charity has a tax-exempt status they also will not have to pay any taxes on the gains. So it means that a donor is able to give a higher amount, since there is less of a tax drain on the contribution.

Now, for those people that are close to the standard deduction amount a strategy to consider is making multiple years of donation in one year and then going a year or two, without donating. By lumping your donation together, it can kick you above the standard deduction threshold and ensure that you receive a tax write off for the amount that you donated

The last one and this is one I think will see us with more prevalence with the current tax code is to use what’s called a donor advised fund. What a donor advised fund does is it allows you to set aside a pot of money and to dole that money out over time. So there’s no requirement that you dispose of it quickly. In fact, you can dole it out over the next five, ten, twenty years if you want it. And so the reason why this is advantageous is that you get an immediate tax deduction in the year that the funds are donated to the donor advised fund, but that doesn’t mean you have to give it to the charities right away. You can spread it out, you can do your research, you can do whatever it is that you believe will help you decide how best to use those funds. Now the one caveat though is once you donate funds into a donor advised funds you’re not going to be receiving that money back. It is a gift to charities, which will be selected later by you, but it is a donation or a gift that you can’t recall if you change your mind.

But those are the tax planning strategies I put together, Brett it looks like you have a comment or question.

Brett Layton: 

I’m sorry, no, I left my hand up, but now that I’m on charitable remainder trusts are also interesting in special circumstances if you have appreciated property. One of the issues that we’re all facing now though is that the discount rate that the IRS uses is so tremendously low, it’s really tough to get much of an annuity back and still qualify. 

Jeremy Witbeck: 

Yeah, and this is certainly not an exhaustive list of ways that you can make charitable donations to your point, charitable remainder trusts are another avenue on that can be deployed. And once again, this is where having a knowledgeable and an effective tax planner and advisor can really help you to make some long-term decisions and long-term planning choices that will not only bring yourself considerable value and tax savings, but also give you the ability to use your wealth to enact changes or social programs that you personally believe in. So, with that. Any other comments or questions before we wrap up? No? 

Cindy Grether:

Oh, I’m going to put Joe on the spot. Joe, do you have any questions? You’d have to unmute your mic, so to speak.

Joe Gitto: 

Hi, I’m in a pretty noisy place that’s why I have on you on mute. But no, I don’t. I mean, this is, you know, very a short briefing of information that I’m already aware of but I like to kind of stay sharp. I like joining these calls, but thank you so much for the info I appreciate it.

Jeremy Witbeck: 

Yeah, well thank you both for participating with us today. So, Cindy, I don’t know if there’s any other questions, but that concludes the presentation I prepared for everyone to that.

Cindy Grether: 

Okay, I just want to reiterate California Lutheran University School of Management offers an MBA in financial planning for professional seeking and graduate degree. It helps financial advisors pursue a leadership position or grow their financial planning practice by deploying advanced financial planning, effective client communication counseling, streamline practice management, as well as leveraging fintech. Cal Lutheran is also a Hispanic serving institution.

There’s a graduate level scholarship is available to qualified Latina women who are seeking an MBA and financial planning. So if you’re thinking about coming and joining us, don’t hesitate to contact me or contact our admissions group.

And with that, I want to thank you, Jeremy for taking the time today, we appreciate you and teaching here at CLU and bringing the wealth of knowledge that you have to the classes you teach and to this particular presentation. So, thank you.

Jeremy Witbeck:

It was my pleasure. Thank you, Cindy.

Learn more about Cal Lutheran’s Financial Planning Program here and follow us on social media:

Facebook: https://www.facebook.com/financialplanningclu

LinkedIn: http://linkedin.com/company/financialplanningclu

Instagram:  https://www.instagram.com/financialplanningclu/

Cindy Grether:

Okay, well, I want to introduce everybody to our presenter today Hratch Karakachian. Hratch has been teaching with Cal Lutheran University for the past seven years and he’s been mainly teaching in the financial planning program, although he’s taught at Cal Lutheran in other programs and in the MBA program also. 

You know Hratch, is a CPA, he has a Masters of Business Taxation from USC. So that’s some of his background. He’s also a Juris Doctorate, he has a Juris Doctorate so we’re lucky to have him in our program because he can teach a lot of different classes like the estate planning class, the tax class and any of our accounting type classes. So we’ve been really lucky to have him working with us.

You know, I think I read in your bio since 2012 you’ve been providing legal services, with an emphasis in taxation estate planning, real estate and business advisory services and so that’s what you do mainly, but on the side you work with us and we’re really privileged to have you working with us, so I’m going to go ahead Hratch and you can start your presentation on year-end taxation.

Hratch Karakachian:

Thank you, Cindy for that kind introduction and welcome everyone. Okay, I’ll go ahead and get started because we have a lot to cover. And we don’t have too much time. As people start trickling in, I think it everybody can see the slides here?

Cindy Grether:

I can see them, fine.

Hratch Karakachian:

Let’s spend just a few seconds on the agenda. I’m going to cover some preliminary matters, then we’ll get into some tax planning ideas for individuals and some separate and distinct ideas for businesses, you’ll have my contact information we will have a Q&A session.

I’ve only been a lot of 20 minutes and covering all of this information 20 minutes is a virtual impossibility. So, I beseech you to hold your questions until the end. So I can at least spend a few seconds on each subject, to give you some background.

On this, so my preliminary matters is timing is really important. I’m very glad that all of you are here attending this, we only have about 47 days left until the end of the year, when the year closes and the New Year rolls around it’s too late to do any planning. So now’s the time and some important items, I’m sure you know a lot of this stuff, for this is a quick review for you.

Accumulating the financial information for you and or your clients if you’re a financial advisors. Accumulating the financial documents or assisting your clients to gather this information and then reviewing any closed transactions or open transactions to see if they’re going to be closing before the end of the year, whether you want you or your clients want them to close or keep them open, and maybe push them in as 2020 transactions.

The other item that I wanted to mention briefly is analyzing these financial transactions. It’s not fun work. Someone has to dig into the, the numbers and prepare projections look up the transactions analyze them and also keeping an eye on what is happening in 2020 or 2021 in terms of transactions that taxpayers are contemplating or would come up

The tax cuts and jobs act, I think will be with us for the near future, unless there’s a major impact and major shift in congress next year. We can see some changes there, but for the most part 2019 and 2020 I don’t expect any changes from a tax perspective and also coordinating all of this information with the tax advisors is very, very important.

So let’s get straight into the planning for individuals. The two key items here deferring income to a future year by either planning for something not to close in or opening a transaction in December and then waiting and not doing anything until it’s formally closed in January. 

So what type of things will taxpayers do in terms of differing income to a future year?

Maxing out pre retirement plans. So if clients have not maxed out their retirement plans. This is a pre tax retirement plans, it’s a good time to increase their contributions, to reduce their income. Also looking into IRA contributions, even if they’re members of a defined contribution or defined benefit plan. There’s always an opportunity to make non deductible contributions and there’s in certain circumstances with lower AGI’s individuals can get a deduction for some IRA contributions.

Roths are very, very big and they’re gaining in popularity every day. So that’s always something to look into it to consider. There’s some limitations on IRA contributions, income limitations. So for those who are moderate or high income earners who do not qualify for an outright graph contribution.

There’s a potential doing a backdoor Roth, which includes opening up traditional IRA and converting those funds into a Roth. There are some rules that need to be followed in the conversion, specifically with the backdoor Roth. Having those thinking about those couple of few rules is very, very important to make sure that the backdoor roth work smoothly.

Also Roth conversions and Roth conversions obviously increases income because the pre tax contributions sending in defined contribution plans or 401K plans that are going to be converted into a Roth. The individual converter, if you will, has to recognize all of those funds as income and you’re probably thinking, well, why would somebody do that because the first bullet point here says deferring income to a future year.

Well there’s some advantages. It’s very, very fact and circumstances specific. So the numbers have some projections that have to be done and it would make sense for certain individuals to do Roth conversion specific especially if they have years where they’re going to be in a lower income tax bracket. Or there’s an expectation that they’re going to be in higher tax brackets in the future. Or if you believe that the rates are going to be much higher several years down the line, which is a time period where individuals would have to withdraw or take out their distributions out of their retirement plans. Of course, with Roth’s, Roth owners do not have to take out distribution so long as they’re alive. So there’s one advantage, they’re allowing the rock to grow.

Keep the NIT, the net investment tax in the back of your mind. That’s the 3.8% tax that came about during the Obama administration. There’s quite a large number of taxpayers, especially those earning portfolio type income who gets stung by this tax and it’s an additional tax that could be managed under certain circumstances.

Qualified opportunities zones this came out in the tax cuts and jobs act, it’s still, it’s, it’s an early stages. These investments allow individuals to rollover their gain from the sale of their capital gains from the sale of securities or the sale of real estate into the so called opportunities own investments, and that allows the taxpayer the differ and to a certain extent, eliminate some of that game.

The IRS has issued some rulings and regulations clarifying some points, but there’s still some information that’s not clear on these investments and there’s a couple of senators asking the IRSto issue additional guidance and information.

The secure app which overwhelmingly passed the House this year, made some significant changes to defined contribution plans. One of the changes is it’s going to get rid of, if it passes the Senate and signed by the President that has not happened yet, but if it does the Security Act as it passed the House will eliminate the opportunity for individuals who inherit an IRA. To be required to be forced to take out distributions of the entire balance over a 10 year period.

If this rule passes, the laying or deferring distributions from an IRA is going to be very, very difficult to do. So if there’s individuals who have trusts either look through trust or accumulation trusts. As the beneficiaries of IRAs, those are the folks that should be very, very cognizant of this week. Because if this passes non spouse beneficiaries will be forced to distribute the funds within a 10 year period, which is going to delay the future appreciation of funds in IRAs and these pension plans.

Now let’s shift over to the deductions.

I talked about deferring income and the previous slide, which makes sense in certain circumstances. Here we talk about accelerating the deductions. In other words, taking the actions in 2019 to reduce the adjusted gross income for individuals and also their taxable income.

Before the tax cuts and jobs act a lot of people prepaid their state income taxes, they prepaid their property taxes. That planning option is pretty much on because of the $10,000 cap and for most people who live in high tax jurisdictions in New York, California, New Jersey, Massachusetts are way over this 10,000 tax cap. So now the option is not to accelerate the payment of property taxes and the delay them into a future year with the hope and the goal to temper this kappa of this $10,000 account.

Charitable contribution planning with the increase in the itemized deductions. A lot of taxpayers are taking the standard deduction. So most of them don’t have to itemize but there’s some planning that could be done.

With respect that a charitable contribution planning also health care expenses. So if you have clients were charitably inclined or clients or tax peers who are spending or will be spending large amounts on health care expenses, there might be some planning opportunities to prepare those expenses ahead of time to take advantage of those deductions, if in total those deductions are higher than the standard deduction. As remember you take the higher of the two. Either the standard deduction or itemized deduction and itemize adoptions, whichever is more beneficial to the tax.

But what are some of the charitable contribution planning points?

Qualified charitable deduction is when an individual can direct their required minimum distribution out of an IRA to a qualified charity. The funds can’t be coming to the owner of the IRA, they have to go directly to charity, but the check can be sent to the owner of the IRA. The owner can either deliver it or send it off to the charity.

Now, this point is helpful because it prevents or helps the taxpayer from not reporting the income. They don’t get a tax deduction for QCD, but then again, they don’t have to report the income which keeps their adjusted gross income low, which helps with some of the either other itemize deductions. There’s the bunching where individuals could contribute more in one year and less than the following year and so on so forth. By making higher contributions, so that they can take advantage of the itemized deductions. Donor advised funds are very popular. I read something yesterday one of the business bulletins, maybe it was Forbes or The Times, that as a result of the tax cuts and jobs act, donor advised funds donations has increased dramatically over the last year or so.

Also donations of marketable securities helps because it prevents the taxpayer from reporting and again on sale of the securities and there’ll be more bank for the buck and more funds would go to the charity and the taxpayer would end up paying less taxes.

Health care expenses now there’s a limitation the threshold has gone up to 10% of AGI.But if you have older taxpayers who spent substantial funds on healthcare medical expenses, they could take advantage of this, especially if they have relatively lower AGI’s. Doctors, dentists, health insurance, premiums prescription medication, also caregiver salaries.

Taxpayers and I have a couple of clients in this situation who need 24 hours, seven days a week care because they need assistance with their activities of daily living. A caregiver salaries can be deducted as medical expenses so keep that in mind as you’re working with clients and taxpayers.

Another thing that employees can do before your end is to double check their tax withholdings make sure that they have enough tax withheld. Of course, that requires doing a projection, trying to figure out where they’re at with respect to their income and their tax liabilities and there’s enough information now because the October 31, ten months of information would give individuals a good idea where they stand for 2019 from a taxable income perspective. So that would be a good opportunity for individuals to run their numbers to see where they are and to see if they need to send in more and to have additional withholdings or make estimated tax payments, if they prefer. Of course, then that employees can do both. They can submit taxes withholdings or make estimated taxes. Where self employed individuals are required to send in their estimated tax payments, the estimates and there’s no withholding opportunities.

Required minimum distributions for those who are over 70 and a half is something to keep in mind, the penalties on not taking out distributions are severe so I recommend everybody to double check and make sure that those distributions are taken.

Health savings accounts, contributions, this provides a triple benefit. There’s a tax deduction upfront when the contribution is made. The funds grow on a tax deferred basis and when the funds come out to pay from a qualified medical expenses, make them on a tax free basis. This requires having a high deductible plan and for the most part, that’s reasonably easy to determine if have been individually as a high deductible plan or not. If they don’t, they have a high deductible plan and they don’t have an H an HSA. This is another way of creating additional deductions and reducing their income.

Loss harvesting rule, even though only $3,000 of capital losses are allowed against the offset. Portfolio and ordinary income. This is still a good planning option, given how the stock market has done over the last year or so. Most portfolios have built in appreciation, but if there’s some some positions that have built in losses, one could consider selling those, but keep the wash sale rules in the back of your mind when you do that or when your clients do that. One option would be to take the wait and see approach to roll the dice to sell the last position. Wait 31 days and then buy it back.

The other thing to think about is if you have individuals or clients who have multiple accounts with different brokerages and they’re trying to do some loss harvesting, you have to make sure that it the other investment advisor or the other broker is not buying the same stock. That requires reviewing the monthly statements to make sure that that hasn’t happened. If all of the investments are at one financial institution, it’s a little bit easier to do. But if there are multiple institutions, you have to double check to make sure that the exact same stock has not been purchased within the 31 day window.

A few additional comments regarding the estate and gift tax, the exclusion is pretty high. So they’re very, very few people who will be impacted by this.

The high estate and gift tax exclusion will be with us until the end of 2025, unless Congress changes the rules. For the last several years, three and a half million dollars is the amount that is the sweet spot that a lot of politicians like. It’s high enough to help certain tax bearers but it’s not too high. There’s a big movement now to come up with a wealth tax or an estate tax, to force people to pay tax on their wealth, their fair share so to speak.

But let me make one point even if you have clients who are below this amount it is possible if there’s a change in the law and the exclusion drops down to, let’s say, the original amount which was 5 million adjusted for inflation, that amount could be somewhere in the neighborhood of five and a half to six and a half. So if nothing happens as of January 1, 2026, this 11.4, 11.58 million. (these are the amounts for 2020) it’s 11.4, 22.8 for 2019 those these amounts, these exclusion amounts are going to drop down to the six, five and a half million neighborhood.

The IRS has come on and said that if there are individuals who take advantage of these higher amounts will not have to pay a penalty if the amounts are dropped down to lower levels at some point in the future.

Access business loss and changes to net operating losses is something that was put in place by the tax cuts and jobs act. That limits individual taxpayers from taking advantage of their losses.

Not operating loss can only shelter 80% of someone’s taxable income and in the access business loss, there are some limits where business losses cannot be used to offset all of an individual’s ordinary income. 

So let me give you a quick example. I know I’m running out of time, so bear with me for just a few more minutes. If you have an individual who has W-2 income but has some investments, some active in an S corporation or partnerships that are generating losses.

Before the tax jobs and jobs act if those losses were more than the W-2 income of this specific taxpayer, taxable income would be zero because that individual would be allowed to offset their entire income. But now, under this excess business loss rule, they’re limited and they will not be allowed to use their otherwise active operating losses to offset all of their income.

For the higher wealth, folks, the annual gifting is still an option $15,000 per year. Funding 529 plans also paying tuition for children and grandchildren. Tuition directly to the educational institution and the payment of health care expenses directly to the medical service provider are not treated as taxable gifts requiring the filing of the gift tax return.

 Insurance check up, I have this point here, just as a reference and as a reminder. It’s always a good idea to at least once a year to sit down and talk with an insurance agent to go over the insurance policies, liability insurance, health insurance, malpractice insurance, etc.

There is a California Healthcare mandate now that will be effective as of January 1, 2020.  The federal health care mandate has pretty much gone but California and some other states, including New York and I believe, New Jersey, have a state healthcare mandate now and for those individuals who do not have healthcare insurance there’s going to be a $695 penalty or a tax charged by the franchise tax board and this would apply to California residents in California taxpayers, obviously. There’s some benefits that are still in place for teachers $250 for eligible educators, including K through 12 system.

If they purchase supplies and items to be used in the classroom, they can deduct $250. There’s also the education credits that are still available but their restrictions on the amount of income individuals have to be able to take advantage of these credits.

Sometimes it’s more advantageous for children to take the credits instead of the parents, but you have to look at the circumstances and see which one would benefit the other.

A few comments for businesses, just a couple of points that I talked about deferring income and accelerating deductions, specially for tax cash basis taxpayers where if their purchases have to be made, supply type purchases. They can be made in November, December of 2019 and be written off as deductions against the income of 2019. So long as they’re used within one tax year.

Vehicle expenses require some documentation. Personally I take advantage of the vehicle expense because I keep track of my mileage driving, etc. and that generates a substantial tax deduction for me. I recommend it to everybody. It’s the very tedious approach to keep track of the daily trips and the mileage, but it adds up very, very quickly if you’re doing a lot of driving

$1.99 A is the is the qualified business income deduction. That came about what the tax cuts and jobs act also it was first tax return applied to us 2018. There’s some calculations and  there’s some restrictions on taking advantage of that qualify business income deduction, especially with specialized service trader businesses, the SSTB’s. These are predominantly the service providers, medical professionals, doctors, lawyers, accountants, insurance professionals, for some reason, architects and engineers are not treated as SSTB’s.

But there are thresholds for individuals to take advantage. These are the threshold amounts for single and married individuals, if your taxable income is higher than those amounts and if you’re running a service business, you’re not going to be able to take advantage of the qualified business income that action. The qualified business income deduction allows a 20% reduction of your of your qualified business income which reduces the tax rate.

From a high of 37% down to 29.6% and even if you don’t have a service business there’s some limitations as well. W2 limitations and also cost basis limitations of assets used in a trade or business. This requires some thinking and analysis as well. But there’s a lot of businesses that take advantage of this and which is helpful for a lot of businesses.

The state and local tax deduction. There’s a $10,000 cap for individuals, but for businesses. If have a rental real estate or real estate investments, property taxes are allowed 100% against the rental income. So there’s no cap for businesses that incur state and local and property taxes.

The other item for businesses is bonus depreciation, which is 100% for shorter life assets. For 2019, 2020 and 2021 shorter life assets, five, seven, and 15 year property will be allowed to take a 100% depreciation deduction.

So for example, if you buy a computer used in your trade of business for $5,000, this rule, this bonus depreciation rule, will allow you to write off the entire $5,000 in year one in the year it’s purchase. The goal behind this rule was to promote and help in the investments in businesses to acquire property.

This does not apply to longer life, real estate assets, residential real estate or commercial real estate, but it does apply to shorter life assets.

It is an election so there has to be a filing with the return for purposes of bonus depreciation. There’s also the section 179, those limits have been increased, but since bonus depreciation is around section 179, it will not be used because it gets you the same place. Section 179 also allows for 100% deduction for purchases of shorter term property, 5, 7, 10 and 15 year property.

This was heavily used by businesses, smaller businesses because there were some limitations on this rule that since bonuses are in there, ost people would use the bonus depreciation rules as opposed to section 179.

Here’s some background information about me and my contact info. I’ll stick around for a few minutes here to answer any specific questions you have, or feel free to connect with me offline. Thank you everyone for your attention and I’m all yours starting right now.

Marcus has a question. Let’s look at that first

Question: 

Is your physician client active in the S corp business? Is it unrelated to the medical practice? 

Karakachian’s Answer:

So, the limit is 250 for single taxpayers, 500,000 for married taxpayers. The losses from the active business cannot reduce the income by more than $500,000 for married taxpayers. So for example if we look at this fact pattern you gave me a 565 that we do. If your client has $500,000 lot of losses from somewhere else, from another business, then he could reduce this taxable income down to 65. If, for example, he’s got losses of 600 he can only reduce his tears W-2 income down to 65 and the $100,000 of excess loss, is not lost. That will be carried over 2020 as a net operating loss. Does that answer your question Marcus?

By unrelated business, I meant if this was another trader business that the individual was involved in. The example above, Andrew, if you look at the example Marcus posted a 565 if this individual, this physician is incorporated and they’re taking out a salary out of the corporation. That corporation is going to have an income or a loss driven by the W-2 income. Okay? So that analysis here, in that case, the physician is not going to be able to pay themselves a 565.

Question: If the W-2’s from the S corp, they must be going to qualified plan contributions? 

Karakachian’s Answer: Perhaps I don’t know. You can have a W-2 to 565 coming from their own S corp and still generate a loss in the S corp somebody’s going to be funding that S corp somehow.

Question: 

You have an individual who has a W-2 from their employer. Then they have another side business where their partner is an individual who is a shareholder in an S corporation, a separate S corporation, a separate partnership with a separate trader business and that entity is generating the loss. It also applies to individuals who have high portfolio income. Where the losses will not be allowed to eliminate a portfolio income.

Yeah, Brett had a comment earlier.  About the 75.8 discount rate regarding charitable remainder trusts and charitable lead trusts. Those are helpful, but they have some brilliance. There’s some compliance issues with forming a charitable trust. There’s some legal fees. An attorney has to draft a documents to set one up and there’s also annual compliance costs, the trust have to fall returns on an annual basis, and those returns can get pretty complicated.

Question: 

Brent has another comment here- credit cards work for cash basis taxpayers?

Answer:

Yes, that’s correct. So if you charge something on December 31 even though you’re not going to pay for it until sometime in January, you could still take it as a deduction for 2019 because the charge was made in 2019 and the credit card holder is obligated to pay for that charge

Question: 

There is a question about homeschoolers

Answer:

I’m not sure, but I don’t think so. I think that K to 12 is for the supplies to be used at a school. At an actual, physical school where there are students and a full time faculty, but I’m not a hundred percent sure. 

Any questions, any additional comments, questions? No? Great. Well, thank you everybody for your time and attention. I’m always available if you want to run things by me, give me a call or send me an email or connect with me through LinkedIn.

Your calls are always welcome and I’d be happy to share my thoughts and impressions with you. Have a good afternoon everybody and have a productive rest of the year. Bye.

Watch the archived webinar below:

Hratch Karakachian – Webinar

Learn more about Cal Lutheran’s Financial Planning Program here and follow us on social media:

Facebook: https://www.facebook.com/financialplanningclu

LinkedIn: http://linkedin.com/company/financialplanningclu

Instagram:  https://www.instagram.com/financialplanningclu/

Commission vs. Ethics (Fiduciary?) – Igor Zey

May 16, 2019

12:00 PM – Pacific Time (US and Canada)
Learn more about Cal Lutheran’s Financial Planning Program