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Optimizing Financial Planning Strategies in 2019

Optimizing Financial Planning Strategies in 2019

SVA Plumb Financial recently hosted their annual Investment and Tax Update. This popular program features insights on the market, an investment overview, as well as financial planning strategies for the coming year. This is the first of a 2-part article series based on the seminar presentation.

State and Local Tax Implications

With the 2018 tax season upon us, we are reminded that the Tax Cuts and Jobs Act of late 2017 has brought about many changes including a $10,000 limit on the deductibility of state and local taxes, or SALT.  Since property taxes are considered a local tax as it pertains to SALT, many are finding the near doubling of the standard deduction (now $24,000 for married filing jointly and $12,000 for single taxpayers) to be more beneficial than itemizing. 

Charitable Considerations

For charitably inclined individuals that have achieved Required Minimum Distribution (RMD) age of 70.5, electing Qualified Charitable Distributions (QCDs) from a Traditional IRA remains the most tax advantageous way to gift to qualifying charities.  As in the past, up to $100,000 may be distributed directly from a traditional IRA to a qualified charity.  Qualified charitable distributions not only satisfy up to $100,000 of one’s required minimum distribution, but also are exempt from ordinary income tax.  However, donors may not include qualified charitable distribution amounts as itemized deductions.   

For those that may not be of required minimum distribution age, or that may wish to make charitable contributions in excess of the $100,000 qualified charitable distribution limitation, establishing a Donor-Advised Fund (DAF) may be advantageous.  A donor-advised fund allows the donor to realize multiple-year donations in a single-year itemized deduction, determine the timing of distributions to their charities of choice in future years, and tax efficiently diversify away from highly appreciated assets.  As an example, let us say that you want to give $5,000 to charity for the next 5 years.  The state and local tax (SALT) meets or exceeds the $10,000 limit.  Therefore, you may gift $25,000 to a donor-advised fund in one year allowing you to claim itemized deductions of $35,000, effectively increasing your deduction benefit by $11,000 over the 2019 standard deduction of $24,000 for married filing jointly.

Education Expenses

For parents (or grandparents) planning for education expenses, new rules allow private school tuition to be paid from 529 plans.  Payments must be paid directly from the 529 plan and are capped at $10,000 per student.  Wisconsin residents may deduct up to $4,000 per student toward private school tuition for grades K-8, and up to $10,000 per student for grades 9-12.  The annual deduction for contributions to a Wisconsin Edvest plan have increased slightly to $3,280 in 2019, from $3,200 in 2018.  Contributions for 2018 can be made until April 15, 2019.  Unused deductions may be carried forward.

Retirement Plan Contribution Limits

Many retirement plan contribution limits have increased as well.  The contribution limits for Individual Retirement Accounts (IRA) and employee deferral limits have each increased by $500 in 2019.  Therefore, the 2019 IRA contribution limit is $6,000 while the employee deferral amount has increased to $19,000 for most defined contribution plans such as 401(k)s and 403(b)s.  The additional catch-up amounts for those ages 50 or greater remain unchanged at $1,000 and $5,000, respectively.  The taxable wage base for Federal Insurance Contribution Act or FICA has increased from $128,700 to $132,900, meaning you will pay FICA tax on more of your wages in 2019.

Recharacterization rules for amounts converted from Traditional IRAs to Roth IRAs have been repealed.  While Roth conversion strategies continue to offer long-term tax advantages through income smoothing, as well as enhance multi-generational estate planning efforts, determining the correct amount and timing of Traditional to Roth IRA conversions is more critical.

Estate Tax Exemption

The federal estate tax exemption has again increased as indexed to inflation.  For 2019, the estate and lifetime gift tax limit is $11,400,000 per individual, while portability continues to allow couples to exclude up to $22.8M with proper planning.  The stepped-up basis on after-tax assets upon death remains available.  The annual gift tax exclusion for 2019 remains unchanged at $15,000.

To Itemize or Not?

The need for itemizing may have seen some simplification as the result of the Tax Cuts and Jobs Act of late 2017; however, financial strategies still require a coordinated team of financial, tax and legal advisors to maximize your financial capacity and achieve the goals that are most important to you.  We encourage you to reach out to your SVA team to discuss current and changing life goals.

© SVA 2019

All information herein has been prepared solely for informational purposes only and opinions are subject to change. The tax information is from IRS.gov. For information on how these general principles apply to your situation, consult an investment professional. Tax and accounting services are provided by SVA Certified Public Accountants, an affiliate of SVA Plumb Financial.

Article Topic Specialist: Dan Gibson

Dan is a Principal for SVA Wealth Management, LLC. He has provided comprehensive financial planning and asset management services for SVA clients since 1998.

In his role, he consults with a broad range of clients on their investments and stays closely involved in ongoing investment research, analysis, and financial plan development. He has also served on the firm's Investment Advisory Committee (IAC).

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