Jimmy J. Williams, CPA/PFS, CFP® | Live a Life By Design

Deductions or Credits?

Posted on July 16, 2021July 16, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

One of the most confusing components of the Internal Revenue Code of the United States of America is the difference between deductions and credits. Let’s explore a few of these differences and provide you a guide as to how to select the appropriate approach to lower your income taxes for 2021.

Many younger, married couples desire to own a home. In 2021, due to the effects of the pandemic on supply chains and logistics, the cost of the various materials to build a home has risen significantly. A good method of lowering the overall cost of the home is to take advantage of any credits that may be available to you for home ownership. For example, when renting a personal residence, you receive no income tax benefits for your monthly rental payments. However, when you are investing in a personal residence, the current law allows deductions for ad valorem taxes and mortgage interest.

Notice in the previous sentence I used the word “deductions”. What if you had a more advantageous means of benefitting from home ownership? The First-Time Homebuyer Credit is available for those individuals who have not owned a principal residence in the 3-year period ending on the date of the purchase of the principal residence to which this credit applies. To many millennials, this is an incentive to invest in real estate for potential growth in the future.

The credit amount for purchasing your home, for tax year 2021, is limited to $8,000 or ten percent of the purchase price of the residence.

Additional considerations must be examined to determine qualification for the credit such as purchase price limitations of the home, modified adjusted gross income of the taxpayer (buyer) and the location of the property. Claiming this credit may sound confusing but the benefits exceed the time involved to determine qualification. Consult with your tax adviser or Certified Financial Planner™ professional prior to purchasing your first home to determine if you qualify for this generous credit.

The benefit of a tax credit as opposed to a tax deduction is that a credit offsets your tax liability dollar-for-dollar. For example, lets assume, in a very simplistic example, that you calculated your tax liability for the year 2020 and you owe $15,000 of tax and had $6,000 of federal income tax withholding from your paycheck. This would require you to pay the $9,000 deficiency out of your savings when filing your return. However, if you had qualified for a credit that would offset the deficiency of $9,000, say the First-Time Homebuyer Credit of $8,000, you would only need $1,000 of your savings to completely pay your tax bill.

The deductions for mortgage interest and ad valorem taxes are opportunities to save additional taxes but credits are more valuable to you due to the ability to offset the tax burden directly. Further, you may not accumulate a sufficient amount of itemized deductions for the year in which you buy your first home. The mortgage interest and associated taxes would not be helpful in lowering your income taxes if you can’t exceed the allowed standard deduction.

One of the bedrock principles of tax planning is to take advantage of legal opportunities to lower your tax burden to the lowest possible amount legally owed. Judge Learned Hand’s quote of patriotism in taxation comes to mind – “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Well said, Judge Hand. I’ll see you on the jogging trail!

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Freedoms and Opportunities

Posted on July 2, 2021July 2, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Sunday, we celebrate the founding of our country, the United States of America! For 245 years this land has offered opportunities in abundance to those who wish to grow their wealth. Hard work and perseverance are the two primary ingredients to creating and maintaining your family’s security. Today, I may reminisce about the opportunities I personally experienced as a citizen of this great country but many people have enjoyed the fruits of this fine land.

The future of the United States of America has always been about freedom. People from hundreds of countries across the globe have sought America as a land for their realization of a more secure future for their families. One of the greatest tools that allows U.S. citizens and residents to achieve their dreams is capitalism. Think about the number of immigrants who achieved wealth and fame by bringing their work ethic and creativity to this country. For example, Pierre Omidyar, the founder of eBay. Pierre is a French citizen who had a goal of developing technology in the United States that would allow people all over the world to interact and share interests. With revenue in excess of $10 billion, I would say that Pierre has realized his goal!

Along with the freedoms we enjoy in our country, we must accept our responsibilities as citizens. Not only did Pierre become uber successful, he shared his wealth by establishing a philanthropic foundation that supports others who simply wish to receive a hand “up” not a hand “out”. By sharing his wealth with others to build a better community and create opportunities for promising Americans, Pierre has been recognized and honored with a Carnegie Medal of Philanthropy.

It is often forgotten that we have a duty, as Americans, to help our fellow man from the benefits we have gained our wealth. Libraries, schools, hospitals, and other critical structures in our communities, across this land, are built from the wealth earned by those capitalists that sought and achieved greatness. One of the greatest experiences a successful entrepreneur can acknowledge is the granting of opportunity to someone who, similar to himself, only needed someone to believe in their potential.

Our local community has benefited greatly from the generosity of such wonderful entrepreneurs and business people like Clark and Wanda Bass, Mike and Nancy McGowan, Gary and Ruyana Fugitt and many others. These dynamic families saw a need in their local community, and the State of Oklahoma, and sought a means of providing support. To build on their initial and abundant contributions is the responsibility of the next generation – you and me.

Take a look around at the many benefits we share as citizens of this, the greatest country on the planet, the United States of America. I have been fortunate to travel to many countries and am always proud to see home.

We are not a perfect country but we are country that continually seeks a better way of life for its citizens. You want to be a success in the United States of America? Roll up your sleeves, serve others in a manner that will help them solve their challenges and you will realize success beyond your imagination! Who knows? You may develop the next SpaceX, eBay or Facebook. When you do reach the pinnacle of success, remember your responsibilities and help others climb along with you to reach their potential.

May God continue to richly bless each of you as you seek your opportunities and may He bless the United States of America. Happy birthday, USA!

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The Secret To Investment Success

Posted on June 25, 2021June 25, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

The most negative action to reaching your goals in investing your retirement assets is emotion. Markets, by their very nature, expand and contract in every cycle. Why is it important to state the obvious? When humans invest, two emotions play a part. For example, when the market indexes are setting new records for growth, investors tend to become greedy. As soon as the expansion has cycled down and contraction in the economy is prevalent, fear becomes the emotion of the day.

To control your emotions while investing for your future, it is critical that you understand three factors about the process. First, if you are investing for your retirement, you must acknowledge the process is a long-term perspective. The assets you accumulate in life must sustain for at least thirty to forty years in retirement. With this mindset, you establish a personal investment policy that helps you capture market gains with a minimal amount of risk that you are willing to accept.

By focusing on the term of your income needs in retirement, you can weather the, somewhat volatile, market cycles without excess worry. Let’s face it, everybody worries about something, right? When you initiate your savings plan during your career, the accumulation phase consists of thirty to forty years as well. What this means is that the same approach to investing for your retirement will serve you well in retirement!

The second negative to reaching investment success is continually changing your investments based on returns. There have been many occasions in which an investor has irreparably harmed their success for retirement by simply trading their account excessively. For example, we developed a plan for accumulating a client’s retirement assets. Based on the age of the person, his risk tolerance and projected cash flow needs in retirement, he only had to follow through on the plan. However, he allowed emotion to overtake him when a colleague appeared in his office one day and remarked about the excessively high returns, he was experiencing in his employer’s retirement plan.

Our client decided the well-planned approach founded in logic was not meeting his needs because the markets would yield a much higher return. This is the emotion of greed taking control of the investment process. Within a year, the market cycle collapsed, and his portfolio had fallen by 50%. Imagine the next meeting we held with him and provided a comparison of his current allocation and results to that of the original allocation for his future. He was devastated and an emotional wreck!

The story does have a silver lining. We worked with him to formulate a plan that would place him back on track but required he work three years longer than he originally planned. Allowing your mind to host greed and fear has consequences. The probability of his lifetime plan for retirement being a success is very good.

Of the three negatives that can cause significant harm to your investment success is a concentration of investments. Diversification of risks within a portfolio helps you weather the market cycles by eliminating, or attempting to reduce, the impact of significant market volatility. In recent years, daily market swings have become the rule not the exception. Early in my career, I recall substantial swings in the S&P 500 Index would only be 10 or 15 points. In our current economic conditions, it is not uncommon to see fluctuations of 30 to 40 points in the index.

To allow yourself the highest probability of success in your investments, it is critical that you avoid emotions serving as guiding force, stick with your plan for saving and consistency will help you achieve your goals and diversify your portfolio to capture opportunities for reasonable returns in the long-term. A few small errors in investing can give rise to very large costs in your future savings. Seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional to help you establish a long-term plan that will give you confidence and clarity about your future. Until then, I’ll see you on the jogging trail!

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Can the IRS Do That?

Posted on June 17, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

One of the most powerful data collectors in the United States is an agency named the Internal Revenue Service (or as often referred to as the “IRS”). As an agency under the U.S. Treasury, the IRS has tremendous power to collect data and assets of the citizens and expatriates of our country.

To help combat unreported income, the IRS requires banks, financial institutions and other organizations, to report cash transactions of more than $10,000 to the agency. This report is titled a “Currency Transaction Report” or CTR which is tracked by taxpayer to compare with the person’s tax filing for the year. Many industries continue to utilize currency and coins as a means of transacting business. For example, car washes, vending machine operators, dry cleaners, restaurants, etc. allow their customers to utilize cash as a means of payment.

Recently, the U.S. Secretary of the Treasury, Janet Yellen, proposed the limit on tracking cash transactions be lowered to $600 per transaction. This would be a significant imposition on the financial institutions reporting the activity as well as an intrusion into the privacy of most, if not all, U.S citizens.

Consequently, a CTR may be reported if you had a series of cash transactions with your financial institution in which the total was at least $10,000. For example, let’s assume you deposited $7,500 of a larger sum of moneys, in cash in your checking account on Monday at 10:00 A.M. You retained additional sums of cash for groceries, clothing and other necessities of life. However, later that evening you realize you do not need the full amount of the remaining cash and deposit $2,500 of excess cash in your checking account on Tuesday at 10:00 A.M. This series of cash transactions would be collapsed and reported as a CTR to the IRS due to the total reaching $10,000 within a short period of time.

Another industry that is not a financial institution but is required to report cash transactions is gaming. Let us assume you are the lucky winner of a slot machine payout of $10,000. The casino management is required to collect your personal information and report the winnings to the IRS. This can occur if you are cashing in your tokens, purchasing or redeeming chips, acceptance of wager winnings, etc.

Once you file your annual tax return, the IRS computer system compares the income reported on your return to that referred to the agency by payers (i.e., employers, casinos, banks, investment custodians, etc.). If the income reported on your return is greater than the amounts referred to the IRS, most likely your return will be approved and processed without delay. However, lets assume you inadvertently failed to report a small information return in the amount of $100. The IRS will perform its comparison and send you a letter asking for explanation. Should you be unable to explain the discrepancy with adequate documentation, you will be sent a bill for the computed balance you owe the federal government.

With the storage of tremendous and sensitive personal data, the IRS must safeguard its information collected on the citizens. Privacy is paramount for the IRS. However, this charge of privacy of citizens’ personal data was breached last week. A disgruntled employee of the IRS unlawfully disclosed to the world the income tax returns of Jeff Bezos, Warren Buffett and other uber-wealthy citizens. One of the most sacred filings of a person is their income tax return. This annual filing requires disclosure of some of the most private information, which would equip someone with the tools necessary to steal your identity and ruin your credit.

The best method of protecting your privacy is to review your credit report periodically. Do not provide your Social Security Number, date of birth or other identity information to individuals on the phone. Many scams are carried out on unsuspecting individuals and the scammers win handsomely! The IRS or Social Security Administration will not call you to demand money without sending a letter to you before they call. Do not fall for scams that insist your grandchild is going to be placed in jail if you do not send money for his/her bail to the scammer on the phone. Do not laugh, this happened, and many elderly citizens lost significant monies.

Filing tax returns, and paying the least amount that you lawfully owe, is a responsibility of citizens of the United States. If you have questions about someone seeking your personal information, err on the side of caution. Seek out a CERTIFIED FINANCIAL PLANNER™ and Certified Public Accountant to help guide you through the maze of tax compliance. See you on the golf course!

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Timeline To Retirement

Posted on June 10, 2021June 10, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

When making lifetime decisions it is critical that adequate time and consideration be given to the issue. Life has a way of paying us dividends based on the planning for events that we wish to occur. By reading this article, you will be more prepared to reach your desired results in life.

First, think about the desired outcome you seek. If you decide to retire, at some point in the future, it is integral to the level of success of this goal to plan accordingly. By initiating this process of systematic saving in your 20’s, the probability of success is higher than if you wait until you are age 60 to begin.

We highly recommend that anyone planning to retire, in the next five years, give significant thought and planning to the design of this period of life. For example, will you travel, buy a second home, make substantial gifts to grandchildren or charity? These are worthy endeavors. However, to reach your goal you must plan for these expenditures.

Second, review your lifestyle needs. Oh, I didn’t define the difference between a need and a want. These two types of lifestyle goals are very different. Our brains are wired for gratification. I call this the “monkey” brain. We can’t seem to keep this “brain” focused on the important tasks in life because we are battling an insatiable hunger for fun and immediate responses. So many people have been trapped in poorly experienced retirements because of this phenomenon.

To plan for long-term results that provide for your needs and wants, you must engage your “sage” brain which is the thought process that makes humans unique from animals. Your “sage” brain says, “When I start my first job, I will save 10% of my net earnings for my future.” The battle starts and “monkey” brain sees every toy that you have ever wished for and couldn’t afford. “Don’t worry about the future, live for today,” says “monkey” brain. You must be focused in the early years of life to create a future that is substantial.

Lastly, start today planning for your future. If you wish to live a life by design, it takes planning and soul searching. Retirement is a phase of life than can be tremendously enjoyable when planned accordingly. Seek out a CERTIFIED FINANCIAL PLANNER^® to help you create your dream for the future. You will be glad you did!

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Managing Risk In Your Portfolio

Posted on May 27, 2021May 27, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Risk is one of the most difficult investment variables for individuals to control. All aspects of life have a risk component. A friend of mine attempted to prove his strategy for removing all risk was valid. He simply stated that he could bury his money in his backyard. When I reminded him, that thieves may discover his hiding spot, he may forget where he hid the money or environmental changes, such as a flood, may prohibit him from accessing his funds, he quickly withdrew his comment about safety.

When you invest your money in an investment account, the custodian bank will provide you coverage using membership in SIPC or the Securities Investor Protection Corporation. This type of insurance protects you in case of a bank failure in a similar process as FDIC, or Federal Deposit Insurance Corporation. Limits are higher for securities investors at $500,000 per investor and accounts insured under FDIC are limited to $250,000 per account. These coverages are only available if the custodian bank is insolvent.

Another form of risk is market risk. The probability of losing value in the markets may be reduced by implementing a systematic approach to investing. For example, a portfolio’s inherent risk will rise when the total investment positions within a portfolio consists of more equities than bonds or cash. However, based on the current economy of the United States, bond yields are below inflation. Simply put, your bond investments, particularly those that are rated investment grade or better, provide interest yields that will not sustain the purchasing power of your dollar. Gasoline, food and other necessary staples of life are rising faster in cost than bonds can create income.

To mitigate risk in your portfolio it is critical that you understand the purpose of diversifying your positions. Do not allow current market conditions to impact your allocation of investments within your portfolio. This action will lead to greater risk in your retirement assets than you may be willing to accept.

Investment advisers utilize two methods of rebalancing portfolios to maintain an acceptable level of risk: 1) percentage and 2) time. When a certain asset class of a portfolio increases in value, the remaining asset classes lose the same percentage of their weighting. Remember, your portfolio is a pie chart. You can only have one hundred percent of the pie at any given time. If your equity positions increase in value by 10%, then remaining positions of the portfolio will have been reduced by 10%. The best means of reducing this increased risk level is to sell the equity positions back to their original percentage in the portfolio. This action is known as rebalancing based on asset allocation.

The second method of rebalancing is based on time. For example, rebalancing the portfolio based on set periods of time passing. Continuing with the previous facts presented about percentage of asset allocation rebalancing, the growth of the portfolio would cause you to rebalance to your original allocation every quarter, semiannually or annually. Again, you would sell the positions that are growing and buy the positions that have performed less. Keep in mind that you are controlling risk in the portfolio not simply maximizing return of the portfolio.

Investing is a long-term process. To create a portfolio that will meet your long-term needs such as retirement, you will need to consistently invest in a balanced portfolio that accepts the level of risk you wish to tolerate. Remember, nothing ventured, nothing gained. By consistently rebalancing your portfolio, whether using the percentage of asset allocation method or the time method, you may control the inherent risk within your investments at a level you feel is acceptable.

Managing your future is difficult. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in establishing, monitoring and rebalancing your retirement portfolio to gain a higher probability of reaching your long-term goals. You may qualify for a complimentary stress test for your portfolio. To live the type of life you desire, without excessive risk, may just be the plan you need for success. See you on the jogging trail!

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Small Mistakes, Big Consequences

Posted on May 21, 2021May 21, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

As humans, we make mistakes all the time. Some mistakes may relate to your career choice. Other mistakes may relate to the location of your home. However, some of us make, seemingly, small mistakes and don’t realize the impact the outcomes will bring to our lives.

Small mistake #1: Failing to save for retirement early in your career. When a person is 23 years of age, the future seems so distant. Their entire career is just launching from the starting gates of their recent college graduation and time is their friend. Fast forward twenty-five years and the person is looking at their future with a different lens. Kids, mortgage, car payments, and other living expenses caused by the choices made many years earlier has redirected their otherwise retirement savings to current expenses of life.

The obvious outcome is one that none of us wishes to realize – working until we are much older than we would prefer. By initiating your future savings at the beginning of your career, time and compounding of money will help you realize your financial goals later in life. Start with your employer’s plan and contribute at least the amount the company will match. For example, if your employer matches 5% of your salary then you should seek a goal of contributing 5% of your salary. The math is easy on this one. You will have doubled your contribution amount annually with the employer’s matching contribution. Let’s assume the markets treated you favorable and the investment in your employer’s plan grew by 8% for the year. Now, you can experience growth far beyond your 5% initial deferral from your salary.

Small mistake #2: Failing to live within your means. A philosophy practiced in our retirement planning business is one of “pay yourself first” for our clients. You want to do things differently in your life than most of your friends – save first, spend second. What this means is that you will treat your retirement contributions as a priority before incurring and spending your earnings on current pleasures of life. Too often we experience clients that meet with us that have all the toys of the day but lack any liquid savings or future investments.

Maximize your probability for retirement success by implementing a budget and focus on “paying yourself first”. By taking a more realistic approach to your future, you will continue to enjoy life and enjoy it more abundantly when you retire. Of course, prudent investment selection and monitoring are critical during the accumulation phase of life. You may wish to seek the guidance of a Certified Financial Planner practitioner to initiate your plan and provide you annual feedback on your progress.

Small mistake #3: Allowing your credit card balance to remain unpaid after one month. This is something that too many of us fall victim to early in life and it is a difficult problem to solve if left unattended. Based on a survey performed by Nerdwallet in January, 2021, the average balance carried on a credit card is $7,149 and the U.S. household will pay interest charges of $1,155 on average for 2021. Further, the survey discovered 63% of the responses indicated that they feel their household finances have worsened from that of the previous year.

The best method of controlling the interest accruing on credit card balances is to remember the card is for emergency purposes only. Do not use a credit card for a purchase that can’t be paid in full with your current savings or income. To be obvious, the use of a credit card is a means to live outside your current means.

To resolve this mistake, use a debit card that immediately withdraws the funds from your bank account. Another method of solving the credit card debt issue is to ask your credit card issuer to draft the full payment each month from your checking account. This is a critical step since you must be certain the funds are available for the payment each month.

Lastly, place your credit card in a small plastic bowl of water. Place the bowl in the freezer and leave it there for about 3 days. Remove the bowl and note the credit card is safely stored in a block of ice that requires thought and effort to free the card. I know this sounds silly, but it is effective for those people who are impulse buyers with their credit cards.

Don’t wait to improve your life by eliminating or resolving these three little mistakes from your life. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in managing your cash flow to maximize your future savings. What have you got to lose? Worry, anxiety, stress, etc. See you on the golf course!

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It’s About More Than Numbers

Posted on May 10, 2021May 10, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Too often we paint someone with a broad brush as to their contributions to the world solely based on the group in which they are a member. For example, medical doctors may specialize in a field that allows them to focus on a specific area of the human body. These physicians are capable of providing you general advice and medical care but may also provide you greater, more detailed, information pertaining to a particular illness such as kidney ailments or cancer of the brain.

Wealth advisors are individuals who may specialize in certain areas of financial matters that a particular segment of the population needs. For example, many wealth advisors focus on corporate executives and their unique compensation opportunities. Other advisors may focus more on the intricacies of Social Security Benefits and less about long-term market investments.

To be certain, your life is more complex than simply working with numbers to reach your lifetime goals and dreams. It is vital that you consider the qualitative factors in your life as much, if not more so, than you do the quantitative factors. My case in point is the life of a lady we will call “Jane”. By all outward appearances, Jane had all that was needed to sustain her the remainder of her life and leave a legacy for her children to expand their wealth. A couple of years after her husband’s passing, we asked Jane if we could meet to discuss the important matters in her life. She assumed we were talking about her accounts and showed up with her Financial Organizer we provided when initiating the relationship.

Immediately, we recognized that Jane had not understood what we wished to discuss with her. After explaining the importance of happiness in her life, we asked her a few simple questions to initiate this subject. “What is one thing that happened recently that made you smile and one thing that was difficult?” She looked up at me and began to create a big smile on her face. She exuberantly stated, “I had the best time recently volunteering as a cancer patient attendee!” I asked her, “What of that process made you so happy?” She responded in a way that made me realize she had found a new purpose in life. “When John was dying, I had no one that understood, truly understood, what I was going through at that time in my life. By helping these terminally ill individuals live a more fulfilling life and knowing that someone understands the palette of emotions they are experiencing, helped me heal and find happiness again.”

We continued to discuss this wonderful opportunity for Jane to serve and offered her some qualitative advice. “Why don’t you establish a self-help group or lead others in the process of caring for terminally ill individuals that provides dignity, understanding and compassion?” This new form of serving her fellow man gave Jane the emotional support she needed to truly live again after the loss of her husband.

As wealth advisors that specialize in retirement planning, we place a significant amount of importance on helping clients understand, and navigate, the maze of life after the loss of someone special. We are proud of our technical competence and expertise. More importantly, we are most humbled that our clients know that we are here as a resource for more than numbers.

As humans, we are all different in some way. However, we all need emotional support, in addition to financial advice, to truly live a rewarding life. It is not all about the numbers unless you are talking about the lives you touched in deep, emotional moments that helped them see life in a better way.

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Solutions to the Top Financial Concerns of Retirees

Posted on May 3, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Rising healthcare costs. Death of a spouse. Outliving investments. These three concerns are constantly confronted by retirees. Solutions to these challenges do exist.

Based on historical costs, it is likely that retirees will experience a 7 – 9% increase in healthcare costs in 2021 over what they paid in 2020. One of the best methods of controlling your out-of-pocket medical costs, it is critical that you understand what Medicare covers and consider a supplemental policy to provide you coverage for the amount of expense not covered by Medicare. It is not unheard of for a person to experience a bill for a hospital stay of only a few days in the amount of $10,000 that is not covered by insurance! Consider a supplement to your Medicare coverage to mitigate the excess expenses that may disrupt your financial plan for the future.

The premature loss of a spouse is not something any of us wishes to think about. However, it happens far too often, and the surviving spouse is stressed with burial costs as well as lower household income. Consider this scenario. A retired couple receives $5,000 per month of Social Security Benefits. One of the couple suddenly expires due to a heart attack. The surviving spouse needs $5,000 per month for the operation of their lifestyle and household functions. Resulting from the loss of her spouse, the widow receives only $2,500 per month of SSA Benefits for the remainder of her life (with some annual cost of living increases).

How can one prepare for this loss of income? First, if your spouse retires from the federal government or as a school teacher, consider the option to leave your survivor a portion, or all, of your retirement benefits. Yes, the election to choose survivor benefit options will pay a lesser current amount to the retiree but it will provide some assurance to your surviving spouse should you predecease you.

Another option to replacing income is to work with a CERTIFIED FINANCIAL PLANNER™ professional to create a financial plan that allows your investments to exceed long-term inflation impact. This approach will allow your investments to provide you funds that will retain purchasing power as the cost of goods rise. It will be impossible to control inflation, but it is possible to control your investment strategy to counter inflation’s effects on your family’s budget.

The overarching concern of most retirees is the potential that they may outlive their investments. One of the best methods of addressing this concern is to properly invest, project lifestyle expenses and plan for contingencies. None of us can accurately predict the future. However, with a few assumptions and proper planning, most families can protect their future by forming a valid plan and monitoring the plan’s performance each quarter to determine weaknesses or changes that should be addressed.

Life is too short to be worried about each day’s results of your portfolio or the possibility of a life-wrecking illness. It is far better to enjoy each day that you are given and spend time with your loved ones creating memories that generations will enjoy far beyond your earthly existence. My mentor, Jim Rohn, said it best, “Days are expensive. When you spend a day, you have one less day to spend. So, make sure you spend each one wisely.” Go ahead, live your life by your design!

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Estate Tax Changes May Affect You

Posted on April 22, 2021April 22, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Big projects and changes in the operations of government are always sought by new presidents with in their first one hundred days in office. President Biden is no exception to this trend.

However, one of the areas of change proposed by the new administration is estate taxation. Under current law, most citizens’ estates in the United States would be well under the exemption allowed of $11,700,000. For those whose estates exceed this exemption amount, the rate at which their estate value is taxed is 40%. The current law is set to “sunset” after 2025 and the exemption would be returned to $5.5 million which would subject many more estates to taxation.

Biden has proposed a significant reduction in the estate exemption to $3.5 million and a limit of $1,000,000 on lifetime transfers. To provide some historical context, when I began my career as a CPA, the estate exemption was $600,000. While seemingly low, it did require many families to liquidate assets of their estates to pay the assessed tax. There were exceptions to the $600,000 exemption for farms and other “family-owned” businesses.

In the proposal to reduce the estate tax exemption, the proposed lifetime transfers limit of $1,000,000 will require many families to perform considerable planning to minimize the tax burden caused by such a low threshold. Under current law, the lifetime transfers, called “inter vivos gifts”, would be exempt from tax up to the amount of the estate exemption of $11.7 million. By uncoupling the exemption and gift tax amounts, many families will reassess their gifting plans for the next generation.

One of the most significant changes in the proposed law is the removal of the “step-up” in basis doctrine allowed by law for more than 50 years. Many attempts have been made over the years to repeal this valuable tool for estate planners. To understand how drastic this change would be to most American families, let’s consider the family home being bequeathed to the children of a decedent. When the parents purchased the home and 640 acres in 1960, the price paid of $25,000 would be their basis in the property. However, during the period of ownership by the parents, natural resources and subsurface mineral deposits of a vast amount were discovered. The land is now worth $5 million (keep in mind this is meant to be an educational example). Under current law, the heirs could sell the property immediately after the death of the parents and receive $5 million tax-free. Fast forward to 2022, assuming Congress passed the bill requiring taxation on capital gains and the lowering of the estate tax exemption to $3.5 million, the heirs of the estate would receive only $4.4 million after the payment of estate tax. The capital gains assessed on the conveyance would be another $1,386,000 to be paid by the heirs upon sale of the property.

To summarize our very simple example, the total value of the property inherited would be $5,000,000. However, under the proposed law changes by the current administration of our government, total taxes in the amount of almost $2,000,000 would be assessed the transactions. Today, if this same scenario occurred, the family would be exempt from all estate and gift taxation as well as no capital gains tax producing a savings of $2,000,000 to the family.

Allow me to reminisce for a moment. In 2010, the United States had an unlimited estate exemption meaning any citizens dying in the year could pass all of their estate assets to their heirs without U.S. estate tax being assessed. The owner of the New York Yankees, George Steinbrenner, had an estimated net worth of $1.4 billion at the time of his death in 2010. His passing in 2010 enabled his heirs to receive his net worth without paying any estate tax to the United States.

This is the thought behind the removal of the “step-up” in basis doctrine and lowering of the estate tax exemption. However, many Americans who have worked diligently to provide for their families and became successful over time may now be caught in the net of taxation at a time they can least afford it. Most family-owned small businesses may be worth more than $3.5 million but lack the liquid assets to pay the tax burden. This scenario would require the sale of the company, or at least its assets, to pay the tax. This draconian approach to taxing the middle class will not bring much treasury to the coffers of the United States.

Estate laws are very complex. If you wish to maximize the amount of assets you wish your heirs to inherit, now is the time to create a plan. Seek out the advice to take advantage of opportunities to reduce the burden of taxation on your wealth. Contact a CPA and CERTIFIED FINANCIAL PLANNER™ professional to assist you in creating and maintaining a plan for your future. I’ll see you on the jogging trail!