The Importance of Equitable Estate Planning

February 23, 2018
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Have you considered the factors that may promote inequality in wealth transfer?  

Suzanne is widowed and has four adult children. Her investment portfolio is worth $1 million, and she owns a bed-and-breakfast inn worth $1 million as well. Can she conveniently and equally bequeath these assets to her kids to give each child a $500,000 share of her wealth?

This may not be as easy as it seems. “Suzanne” and her estate planning dilemma are hypothetical; the above scenario genuinely illustrates why “equal” estate planning is not necessarily equitable.

Some estates are hard to divide fairly. This problem often surfaces when successful individuals or families have much of their net worth in illiquid assets, such as investment properties, collectibles, or private company interests. An illiquid asset can be hard to sell, and its price may need to be reduced to make a sale or exchange work. Once sold, the illiquid asset may not represent an “equal” share of the estate, only a devalued one.

Moreover, the illiquid asset may be unwanted by the heir. An heir may have little desire to become a landlord or maintain a classic car collection.

Life insurance can address this problem. In the above scenario, the purchase of a $2 million life insurance policy may be a very wise move. This will boost the value of the estate to $4 million and permit “Suzanne” to bequeath $1 million in assets to each of her kids. The ownership of the $1 million bed-and-breakfast inn no longer needs to be divided. That $1 million share of the estate can be left to the heir with the most interest in real estate investment.

The division of assets is still imperfect. The $1 million investment portfolio and the $1 million inn may increase in value. The $2 million in life insurance proceeds, while tax free, may or may not end up being invested by the other two heirs after the 50/50 split. Still, the initial distribution of wealth is more equitable, and more manageable, than it would be otherwise.

Buy-sell agreements can address major issues for business owners who want to hand their firms down to the next generation. A well-crafted buy-sell agreement can delineate the heir(s) in control of a company’s ownership and their degree of control. It can also clearly state when and how shareholders can transfer their shares in the business to others.

In pursuit of equitable estate planning, some families choose the blended approach. This method promises greater rewards for heirs who have made greater contributions to family wealth. It aims to distribute family assets equally, fairly, and equitably.

When the blended approach is used, the bulk of family wealth is divided equally among heirs in cash. Some assets are distributed fairly – select liquid or illiquid assets are handed down to this or that heir to suit individual priorities, needs, or wants. Then, a defined percentage of the estate is distributed equitably, based on involvement in the family business or similar criteria.

Whether you have done much or little estate planning, the matter of equitable division of assets must be considered. In terms of asset transfer, what seems equal at first consideration may not prove equal in execution.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110. 

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

7 Ways To Know If You Need An Estate Plan


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Some people say they are not able to bring themselves to prepare when it comes to estate planning, or think estate planning doesn’t apply to them. Creating an estate plan allows for you to determine how your estate will be distributed if something were to happen to you, rather than allowing the laws in your state to determine the distribution.  Not having a proper will or estate plan is an invitation for confusion and can invite turmoil down the road if your wishes are not followed.

Simply stated, estate planning is creating a plan to determine how to distribute your property during your life and at your death. It is the process of developing and implementing a master plan that facilitates the distribution of your property after your death and according to your goals and objectives. Preparing a solid estate plan can ensure financial stability and peace of mind for a surviving spouse, preserve assets for children and grandchildren, minimize taxes and expenses and ensure your wishes are carried out.

You may need to plan your estate, especially if any of the following apply:

  1. You have children who are minors or who have special needs
  2. Your spouse is uncomfortable with or incapable of handling financial matters
  3. You’re a business owner
  4. You have property in more than one state
  5. You intend to contribute to charity
  6. You have strong feelings about health-care decisions
  7. You have privacy concerns or want to avoid probate

Proper estate planning may help to make sure that your loved ones are provided for or additionally, avoiding probate or reducing taxes. Estate planning can be as simple as implementing a will (the foundation of any estate plan) and purchasing life insurance or as complicated as executing trusts and exploring other sophisticated tax and estate planning techniques. Estate planning is extremely important if you are wealthy or have a smaller estate. In fact, estate planning is more important if you have a smaller estate because final expenses will have a greater impact on your overall estate and financial picture. Misusing even a single asset may cause your loved ones to suffer from lack of financial resources.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

Planning for Future Health Care Costs

February 13, 2018
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The usual method for estimating spending needs in retirement is to take your post-retirement household budget and tack on an inflation rate, such as 3%. Some expenses may increase at a faster rate than the inflation rate you use, others at a slower rate, but overall, expenses such as housing, utilities, food, and so on, should rise with the general rate of inflation.   Not so for health care expenses. Projecting future health care costs in retirement can be tricky because there are several factors influencing the amount you will pay for health care in the future.

Your individual health care experience
General health care expenditures notwithstanding, you and your spouse will have your own individual health care experience during retirement. As the years go by, the odds of contracting a serious illness or chronic condition increase. Even with supplemental insurance, you could be forced to allocate a higher portion of your budget to out-of-pocket expenses such as copayments on drugs and doctor visits. You may not know exactly how much you’ll have to pay for health care when you’re 75 or 80 or 85, but you can be pretty sure it will be more than you are paying now.

Longevity
The mere possibility of a long life results in higher-than-average health care expenditures. Even if you are lucky enough to stay healthy all your life and pass away peacefully of natural causes at age 100 or 105, you still will have paid 35 or 40 years’ worth of premiums. Adding these up for Medicare, Part D and Medigap premiums and rising by 5% per year, a 65-year-old who lives another 35 years would end up paying quite a bit in premiums alone — even if he or she never enters a doctor’s office. With longer life expectancy comes a greater likelihood of the need for long-term care. Even in the absence of illness, the frailties of aging inhibit elders’ ability to care for themselves.

Potential loss of retiree health benefits
As health care costs continue to rise, employers are responding by reducing or eliminating retiree health coverage for new hires and requiring current retirees to pay more for the coverage they have. If you are counting on generous retiree coverage from your former employer, you may want to consider the possibility that such coverage may be reduced or eliminated in the future, requiring you to go into the open market to purchase supplemental insurance.

How much will you need?
The amount will depend on, among other factors:

  • The age at which he or she retires
  • Length of life after retirement
  • The availability of health insurance coverage after retirement to supplement Medicare and the source of that coverage
  • Health status and out-of-pocket expenses
  • The rate at which health care costs will increase
  • Interest rates and other rates of return on investments

The healthiest of us may need to save the most for health care. This may seem paradoxical, but think about what many people in their eighties or nineties experience: years of declining health and mobility, and accompanying high health care expenses.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

Talking to Your Heirs About Your Estate Plan


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They should not be left ill-informed or unaware.

Talking about “the end” is not the easiest thing to do, and this is one reason why some people never adequately plan for the transfer of their wealth. Those who do create estate plans with help from financial and legal professionals sometimes leave their heirs out of the conversation.

Have you let your loved ones know a little about your estate plan? This is decidedly a matter of personal preference: you may want to share a great deal of information with them, or you may want to keep most of the details to yourself. Either way, they should know some basics.

Having this talk can become easier when it is a values conversation, not a money conversation.

Values driven estate planning. You can let your heirs know that your values are at the core of the decisions you have made. You need not tell them how much they will inherit. You may let them know about the planning steps you have taken to make a difficult time a bit easier.

For example, you can tell your loved ones that you have a will and/or a revocable living trust. In all probability, your executor or successor trustee has been informed of his or her future responsibilities – but other heirs may not know who the executor or successor trustee will be.

You can tell them that you have an advance health care directive in place and inform them who you have named as an agent to make health care decisions on your behalf if you cannot do so.

Do people beyond your household need to know any of this? Think about it for a second. If you have grandchildren, nieces, or nephews, do they figure into your estate plan? Is it appropriate to let them know that you have made an estate-planning decision or two on their behalf? How about charities or non-profits you have supported – have you notified them of your intent to make a gift from your estate and could knowledge of your decision better facilitate the process? How about your business partner(s)? Do they need to be informed of particular estate-planning intentions you have?

Obviously, you must keep certain details close to the vest. Keeping everything to yourself, however, can be problematic. Are your heirs aware of the location of a copy of your health care proxy? Might they discover that you have planned for some of your estate to transfer to charity only after your death? Dilemmas and surprises like these may be avoided through communication – the type of communication that anyone planning an estate should make a priority.

A 2017 poll determined that just 42% of Americans had gone so far as to draw up a will, let alone an estate plan. So, if you have planned for the transfer of your wealth, you are ahead of many of your peers. Just see that your intentions, and some specific details, are effectively communicated.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

What to Do Financially When a Spouse Dies


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Steps to see that financial matters remain in good order.

When a spouse passes away, the emotion and magnitude of the loss can send our lives reeling. This profound change can also affect our finances. All at once, we have a to-do list before us, and the responsibility of it can make us feel pressured. With that in mind, this article is intended as a kind of checklist – a list of some of the key financial matters to address following the death of a spouse.

The first steps. These actions should come first. Some of these steps do require locating some documentation. Hopefully, your spouse kept these documents where you can easily find them – either at home, in a safe deposit box, or in an online vault.

  • Contact family members, friends, and your spouse’s employer to tell them of your spouse’s passing. (As a courtesy, your spouse’s employer should put you in touch with the person overseeing its employee benefits plan or human resources department.)
  • If your spouse owned a business, check to see what plans are in place for its short-term continuation. Will a partner or key employee take the reins for the time being (or for the long term) as a result of a defined succession plan?
  • Arrange payment for funeral expenses.
  • Gather/request as many records as you can find to document your spouse’s life and passing – birth and death certificates, a marriage certificate or divorce decree (if applicable), military service records, investment, insurance and tax records, and employee benefit information (if applicable).

The next steps. Survivor/spousal benefits. These important benefits may help you to maintain your standard of living after a loss.

  • Contact your local Social Security office regarding Social Security spousal and survivor benefits. Also, go online and visit www.ssa.gov/pgm/survivors.htm.
  • If your spouse worked in a civil service job or was in the armed forces, contact the state or federal government branch or armed services branch about how to file for survivor benefits.

Your spouse’s estate. To settle an estate, several orderly steps should be taken.

  • You and/or your attorney need to contact the executor, trustee(s), guardians, and heirs relevant to the estate, and access the appropriate estate planning documents.
  • Your attorney can also let you know about the possibility of probate. A revocable living trust (or other estate planning mechanisms) may allow you to avoid this process. Joint tenancy and community property laws in many states also help.3
  • The executor for the estate should obtain an Employer Identification Number (EIN) from the IRS. Visit: www.irs.gov/businesses/small/article/0,,id=102767,00.html
  • Any banks, credit unions, and financial firms that your spouse had a financial relationship with, should be notified of his or her death.
  • Your spouse’s creditors will also need to be informed. Any debts will need to be addressed, and separate credit may need to be established for you.

Your own taxes & investments. How does all this affect your own financial life?

  • Review the beneficiary designations on the IRAs, workplace retirement plans, and insurance policies that are in your name. With the death of a spouse, beneficiary designations will likely have to be revised.
  • Consider your state and federal tax filing status. A change in status may significantly alter your tax picture.
  • Speaking of taxes, there may be tax implications surrounding any charitable gifts you and your spouse recently arranged or planned to make. (If a deceased spouse leaves property to a surviving spouse or a tax-exempt charity, that property is exempt from federal estate tax. Any property gifted by your late spouse prior to his or her death is not subject to probate.)
  • Presuming you jointly owned some assets, it is time to retitle them. In addition to real estate, you may have jointly owned bank accounts, investments, and vehicles.

Things to think about when you are ready to move forward. With the passage of time, you may give thought to the short-term and long-term financial and lifestyle consequences of your spouse’s passing.

  • Some widowed spouses ponder selling a home or moving to be closer to adult children in such circumstances, but this is not always the clearest moment to make such decisions.
  • If you have minor children to take care of, will you be able to sustain the family lifestyle on a single income? How do your income sources compare to your fixed and variable expenses?
  • Do you need to address college funding in a new way?
  • If your spouse owned a business or professional practice, to what extent do you want (or need) to be involved in it in the future?

This article is intended as a checklist – a list of the important financial considerations to address in the event of a tragedy.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Comprehensive Financial Planning: What It Is, Why It Matters

January 25, 2018
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Your approach to building wealth should be built around your goals & values.

Just what is comprehensive financial planning? As you invest and save for retirement, you may hear or read about it – but what does that phrase really mean? Just what does comprehensive financial planning entail, and why do knowledgeable investors request this kind of approach?

While the phrase may seem ambiguous to some, it can be simply defined.

Comprehensive financial planning is about building wealth through a process, not a product. Financial products are everywhere, and simply putting money into an investment is not a gateway to getting rich, nor a solution to your financial issues.

Comprehensive financial planning is holistic. It is about more than “money.” A comprehensive financial plan is not only built around your goals, but also around your core values. What matters most to you in life? How does your wealth relate to that? What should your wealth help you accomplish? What could it accomplish for others?

Comprehensive financial planning considers the entirety of your financial life. Your assets, your liabilities, your taxes, your income, your business – these aspects of your financial life are never isolated from each other. Occasionally or frequently, they interrelate. Comprehensive financial planning recognizes this interrelation and takes a systematic, integrated approach toward improving your financial situation.

Comprehensive financial planning is long range. It presents a strategy for the accumulation, maintenance, and eventual distribution of your wealth, in a written plan to be implemented and fine-tuned over time.

What makes this kind of planning so necessary? If you aim to build and preserve wealth, you must play “defense” as well as “offense.” Too many people see building wealth only in terms of investing – you invest, you “make money,” and that is how you become rich.

That is only a small part of the story. The rich carefully plan to minimize their taxes and debts as well as adjust their wealth accumulation and wealth preservation tactics in accordance with their personal risk tolerance and changing market climates.

A comprehensive financial plan is a collaboration & results in an ongoing relationship. Since the plan is goal-based and values-rooted, both the investor and the financial professional involved have spent considerable time on its articulation. There are shared responsibilities between them. Trust strengthens as they live up to and follow through on those responsibilities. That continuing engagement promotes commitment and a view of success.

Think of a comprehensive financial plan as your compass. Accordingly, your financial professional will work with you to craft and refine the plan can serve as your navigator on the journey toward your goals. The plan provides not only direction, but also an integrated strategy to try and better your overall financial life over time. As the years go by, this approach may do more than “make money” for you – it may help you to build and retain lifelong wealth.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Establishing a Budget for 2018


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Do you ever wonder where your money goes each month? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial budgeting goals.

Examine your goals
Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses
To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget
Once you’ve added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you’re on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don’t worry! All it will take is some determination and a little self-discipline, and you’ll eventually get it right.

Monitor your budget
You’ll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don’t have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track

  • Involve the entire family: Agree on a budget up front and meet regularly to check your progress
  • Stay disciplined: Try to make budgeting a part of your daily routine
  • Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
  • Find a budgeting system that fits your needs (e.g., budgeting software)
  • Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
  • Build rewards into your budget (e.g., eat out every other week)
  • Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will continue to increase

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Getting (Mentally) Ready to Retire

January 18, 2018
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Even those who have saved millions must prepare for a lifestyle adjustment.

A successful retirement is not merely measured in financial terms. Even those who retire with small fortunes can face boredom or depression and the fear of drawing down their savings too fast. How can new retirees try to calm these worries?

Two factors may help: a gradual retirement transition and some guidance from a financial professional.

An abrupt break from the workplace may be unsettling. As a hypothetical example, imagine a well-paid finance manager at an auto dealership whose personal identity is closely tied to his job. His best friends are all at the dealership. He retires, and suddenly his friends and sense of purpose are absent. He finds that he has no compelling reason to leave the house, nothing to look forward to when he gets up in the morning. Guess what? He hates being retired.

On the other hand, if he prepares for retirement years in advance of his farewell party by exploring an encore career, engaging in varieties of self-employment, or volunteering, he can retire with something promising ahead of him. If he broadens the scope of his social life, so that he can see friends and family regularly and interact with both older and younger people in different settings, his retirement may also become more enjoyable.

The interests and needs of a retiree can change with age or as he or she disengages from the working world. Retired households may need to adjust their lifestyles in response to this evolution.

Practically all retirees have some financial anxiety. It relates to the fact of no longer earning a conventional paycheck. You see it in couples who have $60,000 saved for retirement; you see it in couples who have $6 million saved for retirement. Their retirement strategies are about to be tested, in real time. All that careful planning is ready to come to fruition, but there are always unknowns.

Some retirees are afraid to spend. While no retiree wants to squander money, all retirees should realize that their retirement savings were accumulated to be spent. Being miserly with retirement money contradicts its purpose. The average 65-year-old who retires in 2018 will have a retirement lasting approximately 20 years, by the estimation of the Social Security Administration.

Retirement challenges people in two ways. The obvious challenge is financial; the less obvious challenge is mental. Both tests may be met with sufficient foresight and dedication.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

A New Year can bring a new outlook!


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A New Year can bring a new outlook, new opportunities and new chances to improve your financial standing. As we welcome a new year, it is worth considering how you want to make the most of the next 12 months. A New Year is an opportunity and you may even say New Year’s Day represents page one. All the pages are blank to begin with and you now have the chance to write all the chapters and make this year a classic. You also have a chance to write a new chapter in your financial life by making the most of opportunities that may make the years ahead even better for you.

The New Year is a wonderful time for recommitting ourselves to things that are important to us. What could be more impactful than a fresh start and starting anew? With 2018 here, this can be an optimum time to set your goals and refine your investment philosophy and goals. The New Year tends to signify a fresh start and leaves us open to new possibilities, strategies and aspirations. If you set aside time to plan, it can set the tone for the entire year. This small practice can allow you to make decisions and goals that are in line with your vision, and that ultimately will impact your year to allow some meaningful change. You may want to reflect on the following as you begin the year:

What are your goals for the Year? Not only do you want to reflect on financial goals, but any goal you’d like to work toward or achieve in the New Year that may have financial consequences. For example, during the past year did you get married or divorced, have a child, decide to work less, change jobs or change short-term or long-term goals?

What’s truly important to you and your family? Setting specific goals and scheduling dedicated time to achieve them is a powerful tool for realizing those goals. It not only clarifies what you have to do financially to achieve the goals, it prompts you to achieve them within a specific time. Review the goals you had last year, refresh what you are focusing on, restructure your investments and schedule dedicated time with your advisor to prepare.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

 

Tax Cut and Jobs Act – Things to know!


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Tax reform was swept through at the end of 2017, with changes that will affect virtually all tax-paying adults in the country. Here is what you need to know about various tax brackets, thresholds, limitations, and exemptions for 2018.

After years of tax-reform talk and little action, the Republican-led Congress managed to overhaul the tax code in late 2017, enacting sweeping changes to tax rates and provisions likely to affect just about every tax-paying adult in the U.S. in 2018.

It would be a stretch, however, to say that the goal of simplification was achieved. While individual taxpayers might welcome the doubling of the standard deduction—a move likely to encourage more people to forgo the hassle of itemizing—they’ll still have to wrestle with seven tax brackets, the same number as in 2017.

And while some deductions were eliminated—most notably, perhaps, the eradication of personal exemptions and deductions for miscellaneous expenses and alimony payments, plus new limitations on deducting property taxes and state and local income taxes—others were maintained and even expanded. Consider that the rules for the medical expense deduction were eased: For 2017 and 2018, taxpayers’ medical costs need exceed only 7.5% of adjusted gross income, rather than the 10% threshold that had been the law.

One of the biggest changes likely won’t be noticed by most taxpayers: the law changes the way that inflation adjustments are calculated, relying on the chained consumer price index, which tends to rise more slowly than the previous measure used, the consumer price index. Over time, that will increase individuals’ tax bills as their income grows and the tax brackets are adjusted at a slower pace.

Taxpayers will need to be mindful, too, of the fact that numerous provisions were enacted temporarily, often sun setting at the end of 2025, while others were made permanent.

Table 1: 2018 Tax Rate Schedule

Taxable income ($) Base amount of tax ($) Plus Marginal tax rate Of the amount over ($)
Single
0 to 9,525 0 + 10 0
9,526 to 38,700 952.50 + 12 9,525.00
38,701 to 82,500 4,453.50 + 22 38,700.00
82,501 to 157,500 14,089.50 + 24 82,500.00
157,501 to 200,000 32,089.50 + 32 157,500.00
200,001 to 500,000 45,689.50 + 35 200,000.00
Over 500,000 150,689.50 + 37 500,000.00
Married filing jointly and surviving spouses
0 to 19,050 0 + 10 0
19,051 to 77,400 1,905.00 + 12 19,050.00
77,401 to 165,000 8,907.00 + 22 77,400.00
165,001 to 315,000 28,179.00 + 24 165,000.00
315,001 to 400,000 64,179.00 + 32 315,000.00
400,001 to 600,000 91,379.00 + 35 400,000.00
Over 600,000 161,379.00 + 37 600,000.00
Head of household
0 to 13,600 0 + 10 0
13,351 to 50,800 1,360.00 + 12 13,600.00
51,801 to 82,500 5,944.00 + 22 51,800.00
82,501 to 157,500 12,698.00 + 24 82,500.00
157,501 to 200,000 30,698.00 + 32 157,500.00
200,001 to 500,000 44,298.00 + 35 200,000.00
Over 500,000 149,298.00 + 37 500,000.00
Married filing separately
0 to 9,525 0 + 10 0
9,526 to 38,700 952.50 + 12 9,525.00
38,701 to 82,500 4,453.50 + 22 38,700.0
82,501 to 157,500 14,089.50 + 24 82,500.00
157,501 to 200,000 32,089.50 + 32 157,500.00
200,001 to 300,000 45,689.50 + 35 200,000.00
Over 300,000 80,689.50 + 37 300,000.00
Estates and trusts
0 to 2,550 0 + 10 0
2,551 to 9,150 255.00 + 24 2,550.00
9,151 to 12,500 1,839.00 + 35 9,150.00
Over 12,500 3,011.50 + 37 12,500.00

Source: House and Senate Conference Report (PDF p. 535)

Standard deduction. The tax-reform law almost doubles the amount of the standard deduction in 2018, to $24,000, from $12,700 in 2017, for married-filing-jointly filers; to $12,000, from $6,350, for single and married-filing-separately filers; and to $18,000, from $9,350, for head-of-household filers. This is a temporary change, effective only until December 31, 2025.

The tax reform law keeps the additional standard deduction amounts as they were for 2017. Thus, people who are blind or over age 65 receive an extra deduction of $1,300. The additional deduction for those who are blind or over 65 and unmarried (not a surviving spouse) is $1,600.

Table 2: Standard Deductions

Filing status 2018 2017
Single or married filing separately $12,000 $6,350
Married filing jointly and qualifying widow(er)s $24,000 $12,700
Head of household $18,000 $9,350
Dependent filing own tax return $1,050* $1,050

*Cannot exceed greater of $1,050 or $350 plus the individual’s earned income
Source: 
House and Senate Conference Report (PDF p. 538)

Personal exemption. The ability to take personal exemptions has been eliminated under the new law, a change which to some degree tempers the benefit of the higher standard deduction. In 2017, the personal exemption amount was $4,050. The provision to eliminate personal exemptions is scheduled to sunset after December 31, 2025.

Limitations on deductions. Before the Tax Cuts and Jobs Act, the Pease and PEP provisions reduced the value of deductions for wealthy taxpayers. The new law ends the limitation on deductions, but only until the end of 2025.

Capital gains and dividends. Tax rates on long-term capital gains and qualified dividends generally are unchanged, at 0%, 15% and 20%. For 2018, the 15% rate applies to capital gains or dividends that push taxable income above $77,200 for joint returns and surviving spouses, $51,700 for heads of household, $38,600 for single and married-filing-separately taxpayers, and $2,600 for estates and trusts.

The 20% rate applies to long-term capital gains or qualified dividends that propel taxable income past $479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married-filing-separately filers, and $12,700 for estates and trusts.

Tax on net investment income. Some high-income taxpayers owe the Net Investment Income Tax (NIIT) of 3.8%, which is levied on the lesser of net investment income or modified adjusted gross income over specific thresholds (see thresholds below). Net investment income includes taxable interest, ordinary dividends, capital gains and other income categories, and some expenses can be subtracted.

Table 3: 3.8% Tax on Lesser of Net Investment Income or Excess of MAGI Over

Filing status 2018
Married filing jointly $250,000
Single $200,000
Married, filing separately $125,000

Source: IRS Net Investment Income Tax FAQs

Deduction for medical expenses. The House of Representatives proposed entirely repealing the medical expense deduction, but the Senate’s proposal to expand the tax break won the day. Under the Tax Cuts and Jobs Act, for tax years 2017 and 2018, taxpayers who itemize can claim a deduction for medical expenses if those expenses exceed 7.5% of adjusted gross income, a decrease from the higher 10% threshold that had been required for 2017.

Sales tax deduction. Taxpayers who itemize can choose whether to deduct state and local sales taxes or state and local income taxes, but the Tax Cuts and Jobs Act limits the total deduction for property taxes, state and local income taxes, and state and local sales taxes (paid as an individual taxpayer, unrelated to a business) to $10,000 a year.

Alternative minimum tax. The Tax Cuts and Jobs Act temporarily increases the AMT exemption amounts. In 2018, the exemption amounts rise to $109,400 for married-filing-jointly taxpayers, up from $84,500 in 2017; $70,300 for single filers, up from $54,300 in 2017; and $54,700 for filers who are married filing separately, up from $42,250 in 2017.

The new amounts are indexed for inflation, and scheduled to sunset at the end of 2025. The new law doesn’t address estates and trusts, the exemption amount for which is scheduled to rise to $24,600 in 2018, up from $24,100 in 2017.

The 28% tax rate applies to income over $95,750 for people who are married filing separately and $191,500 for all other taxpayers. The exemption amounts phase out at income of $1 million for married-filing-jointly taxpayers and $500,000 for all others (except estates and trusts which, under existing law, phase out at $82,050 in 2018).

Kiddie tax. The Tax Cuts and Jobs Act subject’s children’s unearned income to the tax brackets for estates and trusts. For qualified unearned income up to $2,600, they pay 0% tax; on qualified unearned income from $2,600 to $12,700, they pay a 15% rate, and on qualified unearned income above $12,700, they pay a 20% rate.

Estate tax. The Tax Cuts and Jobs Act essentially doubled the amount excluded from tax, to $10 million for the estate of a person who dies in 2018 (indexed to inflation after 2011), up from $5.6 million in 2017. The top federal estate-tax rate remains 40%.

Gift tax. The value of gifts one person can give another without reporting it on a gift tax return is $15,000 in 2018, up from $14,000 in 2017.

Tax-free IRA distributions to charity. People aged 70½ or older can make tax-free distributions of up to $100,000 from an IRA directly to a charity. The distribution will count as a required minimum distribution.

Education credits & deductions. As lawmakers worked on proposals during the tax-reform process, it looked as though some education credits and deductions might be reduced or eradicated. For example, the initial bill approved by the U.S. House of Representatives would have repealed the Lifetime Learning Credit, ended new contributions to Coverdell accounts, and eliminated the rule that makes savings bond interest tax-free when used for higher education. However, the final law retained those provisions as well as much of the same education benefits as existed in 2017.

There are some changes that are of note: The new law allows up to $10,000 a year in 529-plan distributions to pay for qualified private-school K-12 education costs (excluding home-schooling), a provision which might encourage taxpayers to focus on 529 plans rather than Coverdell’s. (Previously, for a 529 distribution to be qualified, it had to be used for higher-education costs, whereas K-12 expenses have been a qualified expense for Coverdell plans.) The new law also allows rollovers from 529 plans to ABLE accounts for disabled beneficiaries until December 31, 2025.

American Opportunity Tax Credit. Taxpayers with qualified education expenses can reduce their tax bill by up to $2,500 (and the credit is partially refundable) thanks to the AOTC, if their modified adjusted gross income doesn’t exceed $80,000 ($160,000 for married-filing-jointly filers). At that income level, the credit starts to phase out. A partial credit is available to people with income up to $90,000 ($180,000 for married-filing-jointly). The credit is not available to taxpayers at incomes above $90,000 ($180,000).

Lifetime Learning Credit. This nonrefundable credit is worth up to $2,000. In 2018, the credit starts to phase out for taxpayers with modified adjusted gross income of $57,000 ($114,000 for married-filing-jointly filers). The Lifetime Learning Credit offers two main advantages over the American Opportunity Tax Credit: The LLC can be claimed for an unlimited number of tax years (the AOTC is limited to four tax years per eligible student) and the student doesn’t need to be pursuing a degree (the AOTC requires the student is pursuing a degree or other credential).

Student loan interest deduction. The House of Representatives proposed repealing this tax benefit, but the final law didn’t include that repeal. The student loan interest deduction allows taxpayers to reduce their income, via an above-the-line deduction that doesn’t require itemizing, by up to $2,500. The deduction starts to phase out once modified adjusted gross income reaches $65,000 ($135,000 for married-filing-jointly filers) and is unavailable to taxpayers with modified adjusted gross income higher than $80,000 ($165,000 for joint filers).

Tax-free savings bond interest. In 2018, the ability to enjoy tax-free interest from savings bonds that are redeemed to pay for higher-education costs starts to phase out for taxpayers with modified adjusted gross income of $79,700 ($119,550 for joint filers) and completely disappears for those with income above $94,700 ($149,550 for joint returns).

Coverdell Education Savings Accounts. Parents and others who want to save for a student’s education costs can contribute a maximum of $2,000 to these accounts (contributions are after-tax, like a Roth IRA), and then withdraw the contributions and investment earnings tax-free if the funds are used to pay qualified education expenses. The maximum contribution starts to phase out for taxpayers with modified adjusted gross income of $95,000 ($190,000 for married-filing-jointly filers), while taxpayers with income above $110,000 ($220,000 for joint filers) are prohibited from contributing to such accounts.

Retirement plan contribution limits

There were rumors that the tax reform law would lead to significant changes in retirement plan contribution limits, but those changes never came to pass. The total amount that employers and employees combined can contribute to a 401(k) or similar defined-contribution plan rises to $55,000 in 2018, up from $54,000 in 2017. The maximum annual employee contribution increases to $18,500, from $18,000 a year ago, while the catch-up contribution for people aged 50 and older remains $6,000. The limit on how much compensation can be counted under a qualified plan rose to $275,000, from $270,000. Meanwhile, the basic annual benefit limit for defined-benefit plans rose to $220,000, from $215,000.

Table 4: Retirement Plan Contribution Limits

  2018 2017
Annual compensation used to determine contribution for most plans $275,000 $270,000
Defined-contribution plans, basic limit $55,000 $54,000
Defined-benefit plans, basic limit $220,000 $215,000
401(k), 403(b), 457(b), Roth 401(k) plans, elective deferral limit $18,500 $18,000
Catch-up provision for individuals 50 and over, 401(k), 403(b), 457(b), Roth 401(k) plans $6,000 $6,000
SIMPLE plans, elective deferral limit $12,500 $12,500 $12,500
SIMPLE plans, catch-up contribution for individuals 50 and over $3,000 $3,000

Source: IRS

Individual retirement accounts

In 2018, taxpayers who save for retirement in a traditional IRA or Roth IRA are limited by the same contribution maximums as applied in 2016 and 2017: $5,500, plus a $1,000 catch-up for those 50 and older.

Deductible IRA. Taxpayers who aren’t participating in a retirement plan at work generally can fully deduct their contributions to a traditional IRA. However, income thresholds limit the deductibility of such contributions for taxpayers who are participating in a workplace plan (or if their spouse participates). The following table details the income thresholds, which are slightly higher in 2018, due to IRS inflation adjustments.

Table 5: MAGI Limits for IRA Deductibility in 2018 if Covered by a Qualified Plan at Work

Filing status Full deduction Partial deduction No deduction
Single, head of household Less than $63,000 $63,000–$73,000 More than $73,000
Married filing jointly Less than $101,000 $101,000–$121,000 More than $121,000
Married filing jointly—deduction if taxpayer not covered by qualified plan, but spouse is Less than $189,000 $189,000–$199,000 More than $199,000
Married filing separately N/A 0–$10,000 More than $10,000

Source: IRS

Roth IRA contributions. Income thresholds limit who can contribute to a Roth IRA (there are no such income limits on Roth conversions), and those limits increase slightly in 2018 for most taxpayers, except for couples who are married, filing separately.

Table 6: AGI Limits for Roth IRA Contributions in 2018

Filing status Full deduction Partial deduction No deduction
Single, head of household Less than $120,000 $120,000–$135,000 More than $135,000
Married filing jointly Less than $189,000 $189,000–$199,000 More than $199,000
Married filing separately N/A 0–$10,000 More than $10,000

Source: IRS

Health savings accounts

Health savings accounts offer the rare tax trifecta: Contributions are made pretax, enjoy tax-free investment returns, and money comes out tax-free if used for qualified medical expenses. The downside is that such accounts currently are available only to those who are enrolled in a high-deductible health plan, which can pose steep up-front costs for consumers. For 2018, the minimum annual deductible for a qualifying health plan is $1,350 for an individual plan and $2,700 for family coverage. The maximum deductible contribution to an HSA in 2018 is $3,450 for individuals. For family coverage, the maximum deductible contribution is $6,900.

Table 7: Health Savings Accounts 2018

  Contribution limit Minimum annual deductible Maximum out of pocket (deductibles and copays) 55+ catch-up contribution
Single $3,450 $1,350 $6,650 $1,000
Family $6,900 $2,700 $13,300 $1,000

Source: IRS Revenue Procedure 2017-37

Long-term-care premiums

Taxpayers who are paying for long-term care generally can deduct a portion of their premiums as a qualified medical expense. The deductible varies based on the taxpayer’s age. See the table below for the specific amounts, which increase slightly in 2018.

Table 8: Amount of LTC Premiums That Qualify as Medical Expenses

Age before close of tax year 2018 2017
40 or younger $420 $410
41 to 50 $780 $770
51 to 60 $1,560 $1,530
61 to 70 $4,160 $4,090
Over 70 $5,200 $5,110

Source: IRS Revenue Procedure 2017-58

Social Security

Social Security beneficiaries may be glad to learn they’re set to receive a 2% cost of living adjustment to their benefits—a bit better than the zero adjustment in 2016 and 0.3% in 2017. The estimated maximum monthly benefit is $2,788 in 2018, up from $2,687 in 2017. The maximum taxable wage base in 2018 is $128,400, up from $127,200 in 2017. The tax rate remains the same: 6.2% each for employer and employee (12.4% for self-employed people).

Tax on Social Security benefits. Sometimes retirees are surprised to find their Social Security benefits are taxed. Table 9 below shows the income thresholds at which benefits start to be taxed. To figure their bill, beneficiaries must compute their “provisional” income, which is also known as “combined” income. Combined income = income + nontaxable interest + one-half of Social Security benefits.

Table 9: Income Brackets for Tax on Social Security Benefits

Filing status Provisional income Amount of Social Security subject to tax
Married filing jointly Under $32,000
$32,000–$44,000
Over $44,000
0
Up to 50%
Up to 85%
Single, head of household, qualifying widow(er), married filing separately and living apart from spouse Under $25,000
$25,000–$34,000
Over $34,000
0
Up to 50%
Up to 85%
Married filing separately and living with spouse Over 0 Up to 85%

Source: Social Security Administration

Full retirement age. The so-called “full” or “normal” retirement age for claiming unreduced Social Security benefits is 66 for people who were born from 1943 through 1954. For those born after 1954 but before 1960, full retirement age is 66 plus some number of months, depending on the birth year. For those born in 1960 or later, full retirement age is 67.

The earliest anyone can claim benefits is age 62, though claiming before one’s full retirement age leads to a permanently reduced monthly benefit amount. On the other hand, delaying benefits past one’s full retirement age can lead to higher benefits—as much as 8% a year higher up to age 70. The decision of when to claim benefits is a complex one; the best answer will vary depending on an individual’s circumstances. Note that even if someone delays Social Security benefits, he or she should sign up for Medicare at age 65 to avoid a late-enrollment penalty.

Retirement earnings test. When Social Security beneficiaries earn money from working, they risk a temporary reduction in benefits if their earnings exceed a certain amount—this only applies to people who are younger than their full retirement age. For every $2 in earnings above an income threshold, $1 is withheld from their benefits. That earnings threshold is $17,040 in 2018, up from $16,920 in 2017. In the year that the beneficiary reaches full retirement age, $1 of benefits is withheld for every $3 of earnings above $45,360, up from $44,880. There is no reduction in benefits after full retirement age. Once the beneficiary reaches full retirement age the benefit is adjusted to remove the actuarial reduction for those months in which a benefit was withheld.

Medicare

The standard premium amount in 2018 is $134, though some Part B beneficiaries pay less (an average of $130 in 2018) due to the “hold harmless” provision that protects them if Social Security benefits rise slower than Medicare premiums. The people who pay the higher figure include those signing up for Medicare Part B for the first time, those who don’t receive Social Security benefits, those who don’t have their Part B benefits automatically deducted from their Social Security benefits, and others. Meanwhile, some higher-income beneficiaries will pay more than the $134 standard premium (see Table 10 below).

Table 10: 2018 Medicare Premiums and Deductibles

  2018 2017
Part B (outpatient services) premium $134 (Average of $130 if held harmless) $134 (Average of $109 if held harmless)
Part B deductible $183 $183
Part A (inpatient services) deductible for first 60 days of hospitalization $1,340 $1,316
Part A deductible for days 61-90 of hospitalization $335/day $329/day
Part A deductible for more than 90 days of hospitalization $670/day $658/day

Source: Centers for Medicare and Medicaid Services

Medicare premiums for high-income taxpayers. There are higher Part B premiums for wealthier taxpayers that vary based on income. See the table below.

Table 11: Medicare Premiums for High-Income Taxpayers

2016 MAGI single 2016 MAGI joint Part B premium Part D income-related adjustment
$85,000 or less $170,000 or less $134.00 (Average of $130.00 if held harmless) $0.00
$85,001–$107,000 $170,001–$214,000 $187.50 $13.00
$107,001–$133,500 $214,001–$267,000 $267.90 $33.60
$133,501–$160,000 $267,001–$320,000 $348.30 $54.20
More than $160,000 More than $320,000 $428.60 $74.80

Source: Centers for Medicare and Medicaid Services

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