2018 YEAR-AHEAD PLANNING GUIDE

Transcription

1 2018 YEAR-AHEAD PLANNING GUIDE

2 CONTENTS No matter what the year has in store for you, there are certain financial strategies you should consider. TAX STRATEGIES 2 RETIREMENT PLANNING 5 DIGITAL ASSETS 6 YOUR PORTFOLIO 7 OTHER PLANNING 8 CONSIDERATIONS The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.

3 TAX STRATEGIES The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017, and most provisions went into effect on January 1, This legislation marks the most significant change to tax law in over 30 years. The following chart summarizes some of the more common provisions of the tax code that were affected by the legislation. On the following page, we have provided additional detail on some provisions worth highlighting as well as other tax updates not directly related to the new laws. It is important to note that while Congress is responsible for drafting these laws, the vast majority of our Senators and Representatives are not experts in taxation. That job is left for those at the Treasury and the Internal Revenue Service. Those agencies are hard at work digesting the new provisions, many of which have significant room for interpretation. That said, while the law is the law, we do expect further clarity on how these new regulations will apply in the coming weeks and months. The information below (and that which you are reading and watching elsewhere) is all subject to change until final regulations are issued. Because of this, we will remind you to consult with your personal tax advisor before making any decisions that could impact your overall tax picture. SUMMARY OF FINAL TAX CUTS & JOBS ACT OF 2017 State & Local Tax Deductions Mortgage Interest Deductions Capital Gains Treatment Rates & Deductions Exclusion of Gain on Sale of Residence Estate Tax FOR INDIVIDUALS Deduction capped at $10,000 (same limit for Married & Single filers) for State Income Tax, Local Income Tax, and Property Tax combined Limits the deduction to interest paid on the first $750,000 of acquisition indebtedness for a first or second home HELOC interest should still be deductible if proceeds are used for acquisition indebtedness (i.e. to build or improve a primary residence) Debt on Second Homes can still be included in the $750,000 total Existing mortgage debt, or a loan that is in contract prior to will be grandfathered at the $1,000,000 limit and may also be refinanced up to the original mortgage term and balance There will be no change to existing capital gains tax rates or the Medicare surtax, however the rate you pay is based on 2017 tax brackets, not the new 2018 brackets 7 brackets with top rate of 37% Brackets adjusted annually based on Chained-CPI. Historically traditional CPI has been used Standard Deduction increased to $12,000 (Single) and $24,000 (MFJ) Personal Exemptions are eliminated Exclusion amounts stay the same ($250,000 Individual and $500,000 Married) Owned & Used Rules are also unchanged - 2 of Past 5 Years Estate, Gift & GST tax lifetime exemption doubled to $11,180,000 (Single) and $22,360,000 (MFJ); Portability remains as does 40% tax rate and basis step-up These limits will sunset at the end of 2025, then revert back to the limits in place in 2017, adjusted for inflation Gift tax annual exemption increased to $15,000 and the gift tax rate will remain at 40% 3

4 TAX STRATEGIES CONTINUED Alimony Carried Interest Kiddie Tax 529 Plans Alternative Minimum Tax FOR INDIVIDUALS No longer taxable to recipient or deductible to payor Only applies to agreements entered into after Must hold assets for at least 3 years to take advantage of favorable tax treatment Will be calculated by subjecting the child s unearned income to the Trust tax brackets Top rate of 37% will apply to any income over $12,500 Expands the use of 529 accounts to cover tuition up to $10,000 for students in K-12 private schools Remains but will affect very few taxpayers FOR BUSINESS OWNERS Business owners will be able to deduct 20% of qualified business income from Lower Tax Rates for Business Income from pass-through sources on their personal income tax returns. This deduction phases out Pass-Through Entities beginning at $315,000 (MFJ) Deduction expires after 2025 Corporate Tax Rate Lowers the corporate income tax rate from 35% to 21%, starting in 2018 Business interest deduction capped at 30% of income, excluding depreciation Business Credits & Deductions Net operating losses deduction limited to 80% of taxable income TAX DOCUMENTS To prepare for your tax return filings, we suggest you start gathering your documentation now. Essential items to collect include Forms W-2, K-1 and 1099 as well as charitable contribution documentation, and any property tax and mortgage documentation. For our clients enrolled in the Comprehensive Lenox Personal CFO program, we encourage you to send this information to us to be scanned and added to your vault, and we can then forward everything to your tax preparer. TAX WITHHOLDING TABLES On January 11, the IRS released new withholding tables which are required to go into effect for payrolls beginning February 15. The IRS is still working on an online calculator as well as updated W-4 forms. With all the changes, it would be a good idea to check with your tax advisor to ensure your withholdings do not leave you substantially under- or over-withheld. TRUST FUNDING AND ANNUAL EXCLUSION GIFTS You do not need to wait until December to fund your Trusts or to make your annual gifts. The annual exclusion amount for 2018 has risen to $15,000, after holding steady at $14,000 for the five previous tax years. The limit for exclusion gifts to a non-citizen spouse has increased from $149,000 to $152,000 for Making these gifts early in the year removes from your estate both the value of the gift and any appreciation on those dollars throughout the year. ESTATE TAXES The Estate, Gift, and Generation- Skipping Transfer Tax exemption has more than doubled from 2017 to $11,180,000 per person for The Federal Estate, Gift, and GST tax rate remains at 40%. From a taxation standpoint, we must take an anything can happen approach when looking out over the next 5 to 10 years. While many of the provisions of the new tax code may change or be reversed, historically tax moves made in a given year with a given law have been grandfathered with subsequent changes to the said law. Aside from brief periods of time when the estate tax has been repealed, the exemption limit is at an all-time high, and those with the ability to do so should consider making substantial gifts out of their estate now in the event these exemptions come down in the future. Please note that if you have not completed an estate plan, or if your plan has not been reviewed or updated over the last five years, we strongly encourage you to make this a priority for Lastly, keep in mind that there have been some recent changes to various State Estate Tax laws. For instance, the New Jersey estate tax was repealed effective January 1, 2018, though the state s inheritance tax, which applies to all but spouses and children, is still in effect. You should check with your Lenox team to confirm if any changes were made in your home state. ADVANCED PLANNING STRATEGIES Grantor Retained Annuity Trusts (GRAT) are wealth transfer vehicles that can provide the opportunity for tax-free transfers of property. The hurdle rate on a GRAT in February 2018 was 2.8%, which is quite attractive for planning purposes. Family Limited Partnerships and other advanced estate planning strategies that utilize Valuation Discounts are back on the table and viable. After a prolonged debate, the regulations around Valuation Discounts were withdrawn in October

5 RETIREMENT PLANNING RETIREMENT PLANS Keep in mind the following retirement plan deferral limits for 2018: 401(k) Plans: The contribution limit increased from $18,000 to $18,500 for The catch-up contribution limit for those ages 50 and over remains unchanged at $6,000. Note that with many 401(k) plans, the catchup contribution is an active election which must be made annually. Keep in mind that some programs also allow you to make additional non-deductible contributions up to the defined contribution plan limit ($55,000 as noted below). Lastly, if you are receiving a match from your employer on your 401(k) contributions, you should consult with your Lenox team to ensure you are making your contributions in a way that maximizes your employer match. IRA Accounts (Traditional & Roth): The contribution limit remains at $5,500. The catch-up contribution limit for those ages 50 and over remains at $1,000. Remember that non-working spouses can continue to make contributions to their own IRA based on the working spouse s earnings. Contribution Deadlines: Remember that you have until April 17, 2018 to make your 2017 Traditional and Roth IRA contributions while 2017 SEP IRA contributions can be made until October 15, Defined Contribution Plans: The contribution limit has increased to $55,000 or 100% of compensation, whichever is smaller. ROTH PLANS You can still convert any Traditional IRA to a Roth IRA with no limits on income. As you may be aware, the Roth conversion strategy allows you to pay taxes today on your retirement account. Ultimately, you will create an asset which will provide tax-free retirement income, avoid Required Minimum Distribution rules, and provide a tax-free income legacy to heirs who can stretch the account out over their longer life expectancies. Here are some notable items related to Roth conversion strategy: Recharacterization: The new tax laws eliminated the ability to recharacterize Roth IRA conversions beginning in Note however that you can recharacterize any 2017 Roth IRA conversions up until October 15, (k) Conversions: Many 401(k) plans now offer the ability to convert Traditional 401(k) plans to a Roth 401(k) during continued employment. Your 401(k) plan administrator has to allow for this. Roth and Your Estate Plan: If you do not think you will need to use your IRA in retirement, you may be better off converting to a Roth IRA. With a Roth, you can avoid having money forced out of your retirement account for Required Distributions starting at age 70½. Your children will also be able to inherit the IRA and stretch distributions throughout their life, and therefore continue the tax-free growth. RETIREMENT PLAN DISTRIBUTIONS Review any required 2018 distributions on qualified accounts to ensure your tax withholding is appropriate. Also important to note the Qualified Charitable Distribution (QCD) rule, a tax-free direct distribution from your IRA to a charity, has been made a permanent part of the tax code. Note that you must be at least age 70½; QCDs are limited to the amount that would otherwise be taxed as ordinary income; the maximum annual amount that qualifies as a QCD is $100,000, and these distributions must leave your IRA by the required minimum distribution deadline. DEFERRED COMPENSATION STRATEGY The limit for contributions to a pretax or Roth 401(k) is $18,500, or $24,500 for employees 50 and over. Your employer-sponsored retirement plan may permit you to contribute even more, on an after-tax basis, up to the total defined contribution plan limit of $55,000 ($61,000 if 50 or over). Here are the advantages: You can withdraw after-tax voluntary contributions if needed without tax or penalty. You would be taxed on the growth when withdrawn. When you leave your employer, you can roll the after-tax contributions into a Roth IRA and their growth into a traditional IRA. It serves as an automatic additional savings plan. Employer 401(k) match contributions and other defined contributions made by your employer will count against the limit. Consult with your plan provider or human resources department to see if after-tax contributions are permitted. 5

6 LIVING IN A DIGITAL WORLD IDENTITY THEFT PROTECTION Data security becomes more critical each year. At least once a year we encourage our clients to ensure they are taking appropriate steps to mitigate the risk of identity theft and other issues related to loss of personal information. A few quick items to review: Credit Report: We encourage you to run and review credit reports annually for your entire family to catch any reporting errors or fraudulent activities. This is particularly important in light of the Equifax data breach in For those of you who have not done so already, you should consider signing up for a Credit Monitoring service. Though far from foolproof, it can be a valuable tool in protecting yourself from identity theft. You can obtain free annual credit reports, at or call A more comprehensive report (as well as your credit score) is available for a fee at Protect/Check One of the most common issues today is hackers breaking into personal accounts. If they gain access, they will be able to steal personal information as well as send s posing as you. You should keep a close eye on any outbound , change your passwords regularly, and do not allow others to access your . Change Passwords Regularly: It makes sense to update all your passwords every few months. Statements: Make sure you are regularly reviewing all transactions for all accounts. This is one of the most important ways to make sure there are no unauthorized transactions. Beware of Phishing: Phishing is a technique used by identity thieves to get your sensitive information by pretending to be a site you trust. You should be suspicious of any incoming phone calls or s that ask you to provide any confidential information, especially if the request is for usernames and passwords, account numbers, or social security numbers. DIGITAL ASSETS Have you included your digital assets, such as photos and music, in your estate plan? Those with extensive collections should consider adding these items to your Wills and Trusts to ensure intended beneficiaries have access to the necessary online credentials. USER IDs AND PASSWORDS It is easy to become overwhelmed by the volume of User IDs and Passwords required in our day-to-day lives and the importance of keeping these items secure. You should consider using a password manager apps like DashLane, 1Password, or LastPass. These applications can generate and keep track of all your passwords in one secure, easy-to-access place. You can also use these types of applications to securely store other sensitive data such as secret question answers, credit card numbers, and addresses. 6

7 YOUR PORTFOLIO ASSET ALLOCATION 2017 was a strong year for markets with positive returns across all asset classes. As you can see in the graphic on the right, International stocks led the charge (both Emerging and Developed) while US Stocks posted impressive gains. Bond returns were less exciting but still in positive territory. We anticipate continued market strength for 2018 and will maintain our focus on International over Domestic Equities. We do expect a rise in interest rates, and we will need to monitor the effect this has on portfolios, especially the fixed income portion. Asset Allocation remains our central focus in building portfolios for clients. A key component of proper asset allocation is continued monitoring of your goals and risk tolerance about how you are allocated. We find that the start of a new year is an ideal time to discuss these topics, along with any other items that may alter your allocation in the coming months such as cash bonuses or significant income tax payments. Given the strong returns in equity markets, it may also be time to consider re-balancing specific asset classes YEAR-END PERFORMANCE (Year-to-date total returns as of ) S&P 500 S&P 400 Midcap 16.2% 21.8% Russell 2000 MSCI EAFE MSCI Emerging Markets MSCI ACWI Barclays Agg S&P Interm Nat'l Munis JPM Emerg Mkt Debt HFRX Global HF 3.6% 4.1% 6.0% 10.3% 14.6% 25.1% 24.6% 37.3% HFRX Equity Mkt Neutral 10.1% MSCI REIT 5.1% Bloomberg Commodity 0.7% HFRX Mng'ed Futures 5.2% Source: Barclays, Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor s. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays US Aggregate, REITs: NAREIT Equity REIT Index. The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays US Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Past performance is not indicative of future returns. Guide to the Markets U.S. Data are as of December 31, CRN Fee-based financial planning services offered through Lenox Advisors, Inc. Lenox Advisors, Inc. offers access to securities and asset management services through MML Investors Services, LLC, 530 5th Avenue, 14th Floor, New York, NY 10036, , member SIPC. Investment adviser representatives of Lenox Advisors, Inc. offering fee-based financial planning services may also be registered representatives and investment adviser representatives of MML Investors Services, LLC for purposes of offering securities and asset management services, as applicable. Lenox Advisors, Inc. is a wholly owned subsidiary of NFP Corp.. Lenox Advisors, Inc. and NFP are not affiliates or subsidiaries of MML Investors Services, LLC. Services offered through Lenox Advisors, Inc. as an Independent Registered Investment Advisor are not sponsored or offered through MML Investors Services, Inc. Lenox Advisors, Inc. 7

8 OTHER PLANNING CONSIDERATIONS GOOD HOUSEKEEPING The start of a new year is a great time to ensure that the many often overlooked parts of your financial plan are adequately addressed. These include: Beneficiary Designations and Estate Plan Fiduciaries: Have you remembered to assign both primary and contingent beneficiaries to your life insurance policies and qualified accounts? Are the fiduciaries appointed to your estate plan still able and willing to fulfill the tasks that would be required of them? Review Insurances: As the calendar turns over to a new year, it is a perfect time to review all your basic insurances; auto, home, umbrella, health, life and disability income protection. If you've gotten married, had a baby or purchases a home you may be under insured Are your auto and home policies/ coverages enough to cover losses in the event of a major claim? Do you carry enough life insurance to protect your family in the event of a pre-mature death? If you become totally disabled and cannot continue to work, do you have disability income protection through your employer or a private policy in force? With the new health care mandates, do you have a health plan that will protect you and your family in the event of a major accident or illness? Property & Casualty Insurance: Have you added insurance coverage for any valuable articles acquired in the past year? High-value jewelry, art, and antiques can be separately scheduled on your homeowner s insurance. We recommend that you take a photograph of all planned items and store them along with the receipt or appraisal for each item. Lenox Personal CFO clients can store this information in their Vault. Review your Financial Plan: Has anything changed in the past year? Have you made progress on goals you have set in the past? INCENTIVE STOCK OPTIONS (ISOs) For those that hold Incentive Stock Options, you should consider exercising these early in the year. There are two distinct advantages to using ISOs sooner rather than later in the year. First, you ll get the clock ticking on the holding period required to qualify the proceeds for long-term capital gain treatment (one year from the date of exercise). If options are exercised before April 15 of the current year, then cash will become available before April 15th of the following year. Second, exercising early gives you an extended look-back period to form a bail-out strategy in case of significant market declines after exercise. EXPENSE MANAGEMENT In January, you should start receiving year-end statements from your banks and credit cards. These reports provide valuable insights into your spending patterns. The accuracy of your living expense number is critical in evaluating your retirement plan model. For Lenox Personal CFO clients, your website includes some valuable technology to assist you in managing and evaluating your expenses. ANNUAL SAVINGS While it is essential to understand your expense structure, we feel it is equally important to set and track savings goals for the year. Once we have an understanding of those goals, we can discuss the best way to deploy your savings across your portfolio. LENOX GROUP EXCESS LIABILITY INSURANCE PROGRAM We will once again be sponsoring a discounted Umbrella Insurance program for Lenox clients. Open enrollment is in February for a March 1 policy start date. You will be receiving Enrollment or Renewal information in February. The information provided is not written or intended as specific tax or legal advice. Lenox Advisors, Inc., its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel MML Investors Services, LLC does not provide tax or legal services. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC ( 530 Fifth Avenue, 14th Floor, New York, NY 10036, Fee based financial planning services are offered through Lenox Advisors, Inc. a registered investment advisory firm, and are not offered or sponsored by MML Investors Services, LLC. Lenox Advisors, Inc. is not a subsidiary or affiliate of MML Investors Services, LLC. Lenox Advisors, Inc. is a wholly owned subsidiary of NFP Corp. NFP Corp. is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. FP145 CRN