Blog | Castlerock Financial Planning | Mendota Heights, MN 55118

Goodbye Marriage Penalty—Almost

August 17, 2018 By Guest Blogger

One of the unexpected gifts from the Tax Cuts and Jobs Act of 2017 was the virtual elimination of the so-called “marriage penalty.” But at the same time, the new tax regime imposes a new “stealth” marriage penalty which will show up for taxpayers in higher-tax states.

The marriage penalty is roughly defined as assessing higher federal taxes on married couples with two incomes than would be assessed on the same couple if they had filed individually. For example, under the old regime, two single filers making $50,000 would each pay at a 25% tax rate. But a couple who each earned $50,000 ($100,000 total household income) would have been assessed at a 28% marginal rate.

Obviously there was no penalty if the family had only one income; in fact, for those increasingly rare households, there would be a marriage bonus. If the sole breadwinner, under the old tax regime, were single, and that person was making $50,000, he or she would still have been subject to a 25% tax. But if the breadwinner happened to be married, and moved into the “married filing jointly” category, his or her income would then have been taxed at a 15% rate.

2018 Personal Income Tax Rates
Rate	Married Filing Jointly	Single
10%	$0 – $19,050	$0 – $9,525
12%	$19,050- $77,400	$9,525 – $38,700
22%	$77,400 – $165,000	$38,700 – $82,500
24%	$165,000 – $315,000	$82,500 – $157,500
32%	$315,000 – $400,000	$157,500 – $200,000
35%	$400,000 – $600,000	$200,000 – $500,000
37%	over $600,000	over $500,000

Source: Nolo.com

So how has this changed? As you can see from the chart, the tax brackets for “married filing jointly” are exactly twice as high as the “single” brackets—up to the very highest brackets, when a marriage penalty finally kicks in. A couple earning $50,000 each, under our current tax regime, would pay income taxes at a 22% rate, whether they were married or filing individually.

It gets a bit interesting at the highest two brackets, however. As you can see from the chart, if two individuals were to make, say, $350,000 in any tax year, they would each fall comfortably into the 35% bracket. However, if they get married, suddenly they must pay tax at a 2% higher rate (37%) for the first combined $100,000 they make over the $600,000 threshold. It’s not a lot of difference, but there is clearly a penalty involved.

What about the stealth marriage penalty? The new tax law sets a hard $10,000 limit on the amount that you can deduct for state and local taxes—including state income or sales taxes and property taxes. That applies to individuals, and the same limit applies to households. Single persons would get to deduct up to $10,000 for these various taxes, each, but when they get married, their deduction gets cut in half: only $10,000 for the household as a whole.

Of course, this only applies to people who would have significant state and local tax obligations—some states impose zero state taxes—so for some, there is no stealth marriage penalty at all. To get up to where they have to worry about the marriage penalty, they would also have to join the 1%.

Thanks to Bob Veres for this guest content.

Budgeting for Philanthropy

July 1, 2018 By Lauri Salverda, CFA, CFP®, AIF®

When things get tight, many people get insular. That is, they cut ties and obligations with anything that doesn’t protect themselves, and their own. However, this is when charitable giving is needed the most. Don’t look at budgeting for philanthropy as an either-or situation. It’s not either I help myself and my family or I have money for charitable giving. It’s about getting smart in how to do both.

Make it a family value.

Charitable giving isn’t all about having a big budget. It’s about making an impact. You can incorporate volunteer work into your family’s set of values. Budgeting time is just as important; create a regular schedule of events that the whole family can participate in.

Be a transparent advocate.

Talk to people about their philanthropic giving. Ask about how they make charitable giving choices, when they give, how much they give (if you have that level of trust). These conversations connect you with causes you might not have heard about any other way. If you’re a transparent advocate for giving, even if you’re not able to give as much as others, you’ll be doing good for the world. Your word of mouth support of your causes (and even just giving as a way of life) may help someone you know prioritize it in their budget.

Work with percentages.

As you earn more income, ensure your charitable giving grows too. Think critically about how you can be generous; if your income decreases, can you donate time? Statistically, wealthier people actually tend to give a smaller percentage of their income to charity. This trend leaves the people who most benefit from the services that charities provide shouldering more of the burden. Those who have been or are currently in need know first-hand the benefits charities can provide. If you’re not currently or haven’t ever been on the receiving end, be extra generous.

Do the math.

The biggest change with the current tax laws is that the benefit for giving has been greatly reduced, except for those who donate a large amount. There are a few simple ways to work this system, if you can’t donate enough to qualify for the tax break every year. Save what you would be donating one year, and add it to the next year’s donations, bringing your total up to the threshold, just every other year. Or, better yet, set up a donor-advised fund which you can contribute to every year, or every other year, while still supporting you and your family’s causes annually.

Your giving is creating the world you want to see, the one you hope your children will grow up in! It teaches many beautiful things about the value of humanity. It’s definitely worth including in your budget.

Are you ready to prioritize charitable giving? We can help you stay philanthropic and reduce your tax liability through donor-advised funds. Contact us today to start the conversation.

Changes for 2018 Taxes: What You Need to Know

April 15, 2018 By Lauri Salverda, CFA, CFP®, AIF®

The new tax laws that went into effect at the start of 2018 are making many paychecks a little larger and many people a little happier. The last thing we want, though, is to have this positivity take a turn at the end of the year. One thing many don’t know, or maybe aren’t thinking about yet, is how the decreased deductions and exemptions may impact your tax bill come April. It may turn out that you have a larger tax bill than in previous years despite lower tax rates. In this spirit, we took stock of some of the key points of the new tax law, so you won’t be caught off guard in a few months.

What we know for this year.

Changes to Individual Taxes

Tax Brackets – There will still be 7 tax brackets.

Top Tax Rate -For individuals is reduced from 39.6% to 37%.

Personal Exemptions – Drop from $4,050 per exemption, i.e. yourself and your dependent children, to $0.

Standard Deduction – Increase from $12,700 (Married Filing Joint, “MFJ”) to $24,000 MFJ; $6,350 (Single, “SGL”) to $12,000 SGL; $9,350 (Head of Household, “HOH”) to $18,000 HOH.

Child Tax Credit – Increased from $1,000 to $2,000 (for children under age 17).

Investments – Capital gains rates, the ability to choose which lots of investments are sold and net investment income tax will all remain as they are.

Education Funding – Student loan interest deductions up to $2,500 will remain; Tuition deduction of up to $4,000 will be retained; and American Opportunity Tax will remain at the maximum of $2,500 for 4 years (this cannot be used in combination with the tuition deduction).

529 Plans – In 2018, will be able to be used for education costs from elementary education through college rather than just college, as it is currently.

Changes to Itemized Deductions

State and Local Taxes – Currently both state and local taxes are deductible. Starting this year, these will be limited to a combined $10,000 in 2018, including property taxes and state and local income taxes.

Mortgage Interest Deduction – Currently, up to a $1,000,000 in loans which can be up to 2 homes. This will be changed to up to $750,000 in loans which can be on up to 2 homes.

Home Equity line of Credit Interest Deduction– Currently, interest on a home equity line of credit up to $100,000 is deductible under Mortgage Interest Deductions. This will be eliminated in 2018.

Medical Deduction – Currently amounts greater than 10% of Adjusted Gross Income (“AGI”), are deductible, in 2018 it will be amounts greater than 7.5% of AGI.

Charitable Deductions – Currently up to 50% of AGI, will increase to 60% of AGI in 2018.

Miscellaneous Deductions – Currently the greater than 2% of AGI are deductible. These will be eliminated in 2018. (These include unreimbursed employee expenses, tax preparation fees, investment expenses, trust fees)

Casualty and Theft Losses – Currently, amounts greater than $100 and 10% of AGI. This will be eliminated in 2018.

What will change in the longer term.

We don’t know what additional changes will come up at the close of 2018. Some of the above itemized deduction changes may shift again, or perhaps there will be more new shifts to individual taxes. We do anticipate a change in regards to alimony. Currently, alimony paid is deductible for the payor, and alimony received is included in income for the recipient. For divorces occurring in 2019 and beyond, this will be repealed. (Divorces having occurred previously will retain these income modifications.)

We will keep you up-to-date as new information is published in the coming months.

What you can do to help yourself.

Take some time to read about the new laws, and consult with an accountant to help determine how the changes will impact you. The IRS has created a wonderful, user-friendly withholding calculator that we are recommending to all our clients and friends! Find it here: https://apps.irs.gov/app/withholdingcalculator/

If you have additional questions or would like to talk about the tax reform, call our offices at 651-294-0013.

How to Choose a Financial Planner

February 15, 2018 By Lauri Salverda, CFA, CFP®, AIF®

The search for a good financial planner should be exactly that: a search. This is a person who is going to get to know a lot about you, so don’t just pick the first one your search engine kicks back.

First, take some time to identify between three and five people you want to interview. Before someone makes your short list, be sure they are a certified financial planner. How do you know? In their biography or on their website, look for CFP® following their name. For no cost, you can visit www.napfa.org or www.letsmakeaplan.org to find qualified planners.

CFP® professionals, when providing financial planning, are required to act as fiduciaries as a condition of their certification. Why does that matter? Simply put, it means they’re bound to put your interests first when offering advice. And only those with certain certifications are required to do this!

What to Ask a Financial Planner

After you’ve got your list of qualified (on paper) candidates, it’s interview time. Make a list of questions and bring some notes about yourself. Do you know what you’re looking for in a financial planner? “I’ll know it when I see it” isn’t very helpful, so be concrete and think about your values and your situation. Do you want someone experienced with locally-based investments? Someone who shares your values around philanthropy? Someone who works with a lot of single parents?

As you sit down with each planner for an interview, look up from your notes long enough to check that the individual is really listening to you. Are they multitasking? Or are they focused on you, and even taking notes themselves? Second, how does the conversation make you feel? Are you instantly comfortable, trusting and excited about working with this person? If there’s no rapport, you should keep looking.

As you’re keeping tabs on those less concrete aspects of the interview, you can run through the 10 questions to ask provided by letsmakeaplan.org. For example, ask about their experience, qualifications, services, costs, and how the office runs their client relationships. Take notes, take the answers away and consider if they match what you’re looking for. With solid information about each person you’ve interviewed, choosing the right planner should happen almost automatically.

What You’ll Learn About Lauri

We look forward to a productive conversation with all potential clients, where we can get to know one another better. Here’s a brief sneak peek into what you’ll learn about how Lauri operates as a CFP®:

- She knows her clients personally. Lauri will get to know your likes, fears, comfort level with financial conversations, values, goals, and how your needs are changing over time. This way, when you call her with an issue, she hones her advice to what’s most important to you.
- She educates her clients. Lauri believes you should feel empowered to make your own decisions, not be told what to do. For example, if an advisor recommends you roll your 401k into an annuity, you should understand why, on top of knowing the other options.
- She understands that all areas of a client’s life are interrelated. Your values influence who you are and what you need. For example,
  - If a person is philanthropic, giving is important to them. How does this impact their retirement goals?
  - If a family has an active lifestyle that includes boats, trampolines, and other recreational items, their insurance coverage should reflect that.
  - If a couple is making decisions about putting their kids through college, their values come into play. Perhaps their parents didn’t pay for college, so they value teaching their kids the discipline of working through school. How do changes in today’s rising college costs influence the reality of this?

Take your time, make your list, and come to your interviews prepared. We’ll be here when you’re ready.

Managing the Emotional Side of Finances

January 15, 2018 By Lauri Salverda, CFA, CFP®, AIF®

In our experience, one emotion new clients often bring to our first meeting is guilt. We have heard apologies from folks who think they should have made their appointment months ago, who feel they aren’t organized enough when they come in, and still others who are dwelling on past mistakes. Our first piece of advice in cases like this: acknowledge the emotions that are present, so you can manage them and move forward towards a more productive financial future.

An empowered financial future

While the title on our office door may say “financial planning”, we do more than just crunch numbers. We work with clients to replace their guilt with a sense of empowerment. Before we can make a solid go-forward plan, it’s vital that clients forgive themselves and move away from any negative emotions clouding their decision-making. It doesn’t matter what happened in the past; it can’t be changed. Instead, we help our clients learn how to focus on what can be done from this moment forward.

Easy actions make a big impact: Take Control of Your Finances

The way forward will vary some from person to person, considering individual goals, aspirations, history, current income and investments, and more. However, we have a go-to list of easy actions anyone can take to start on the right foot for the future. We can almost guarantee that after you make just a few adjustments, your feelings about your financial future will be better and brighter.

- Automatically send money to savings. You won’t miss what you can’t see. Even a small amount going into your savings account every month will add up faster than you think.
- Put pay increases towards retirement. Every time you get a raise, put that amount into your 401K. Your take-home income will look the same, and you’ll painlessly increase your retirement income. You’ll be amazed at how this small addition compounds over time.
- Be realistic about spending. If debt is weighing on you, start a new monthly check-in practice. Always pay off what you spent that month, the interest, and a little more. If you’re not doing that, you’re spending too much.
- Eliminate impulse purchases. If credit cards are causing your debt to rise, leave that card at home! If you have to make an extra trip to buy that special something not in your budget, or on your list, you’re much less likely to follow through.

Start today

If feelings of guilt, or hesitation, or uncertainty have been keeping you from your financial goals, its time to make a change. Take stock of what is preventing you from moving forward, acknowledge it and let it go! There are simple things you can start doing today that will alleviate feelings of being overwhelmed, unsure or unprepared. You can become an empowered, intentional person who is achieving goals and laying the groundwork for a bright financial future. We can help.