Castle Rock Financial Planning

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lauri@castlerockfp.com
651-294-0013

How Meaningful Donations Can Save You Money

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After the 2017 Tax Cuts and Jobs Act went into effect in 2018, standard deductions went up—but other deductions also disappeared. As a result, many donors no longer have a tax incentive to be philanthropic, and charities have been hit hard.

The changes to deductions are technical, but well worth understanding.

  • In 2018, the standard deduction was raised for single filers from $6,500 in 2017 to $12,000 in 2018 and $12,200 in 2019. Similarly, standard deduction for married filing joint filers went from $13,000 in 2017 to $24,000 in 2018 and $24,400 in 2019.
  • Although this appeared to be a good thing, it was combined with the limitation of State, Local and property taxes to $10,000 and the reduction of mortgage interest deduction to the primary residence (not cabins or second homes) and no home equity loans except those used for actual renovations completed on the main home.
  • Additionally, miscellaneous deductions were eliminated, which included tax preparation and investment management fees. These changes made it much more difficult for individuals to accrue enough deductions to itemize rather than take standard deductions.

Still, charitable donations can be a bright spot in itemizing deductions. Here are some tips to have donations make a bigger impact on your taxes:

1. Donate Appreciated Assets

Gift appreciated assets instead of selling stock or funds to give a cash donation. Most charities have the ability to accept stocks and mutual funds, especially if you give them a little notice. By donating the appreciated asset, you can claim the appreciated value as the donation value and the capital gains are not reported on your taxes.

2. Qualified Charitable Donations

If you are over the age of 70 ½ and must take required minimum distributions out of your pre-tax retirement account, those can be donated directly to a charitable entity. If you have all or any part of your required minimum distribution sent directly to a qualifying charitable organization, that withdrawal is not considered income to you. It will not affect your Adjusted Gross Income or be considered in the taxability of Social Security.

3. Combining Annual Donations into Every Other Year

If you were to combine 2 years of charitable contributions into one year rather than the same contribution every year, this can potentially increase deductions and save on tax payments.

Here is an example: Sam and Donna are married and are filing joint taxes. Their charitable donations are $10,000 per year. Their additional deductions for state and property taxes are $10,000 and mortgage interest is $4,500. Here is what their deductions look like in both scenarios:

Annual Deduction
Tax Year20182019
Charitable Deductions10,00010,000
Other Deductions14,50014,500
Total Itemized Deductions24,50024,500
Deduction FilingItemized DeductionItemized Deduction
Deduction Amount24,50024,500
Total 2-year Deductions49,000
Concentrated Giving
Tax Year20182019
Charitable Deductions020,000
Other Deductions14,50014,500
Total Itemized Deductions14,50034,500
Deduction FilingStandard DeductionItemized Deduction
Deduction Amount24,40034,500
Total 2-year Deductions58,900

This second scenario allows for an additional $9,900 of tax deductions over 2 years.

4. Combine Option #1 and/or #3 with a Donor Advised Fund

A Donor Advised Fund is an account funded by one or more individuals and is used to make charitable donations. Donors take a tax deduction in the year they put money or appreciated assets into the account and can then disburse the funds to charities over multiple years. This helps the donor make the most of their deduction, while supporting charities that may have a difficult time accepting a large donation one year and then nothing the following year. Additionally, you can still donate appreciated assets to a charitable organization if they are not able to accept stocks or mutual funds.

There are many options of places to set up donor advised funds. Local community foundations, such as the St. Paul Foundation, Minnesota Foundation, or Minneapolis Foundation, have a lot of knowledge of the good work charities are doing. If you know what kind of impact you want to make, but don’t have a charity in mind, setting up a donor advised fund at a community foundation can give you access to a wealth of information and charities that have been reviewed by experienced philanthropic experts.

A Donor Advised Fund is a great opportunity to educate our next generation of charitable givers. An example would be to let each family member choose a charity to which they would like to donate. Have them research what the charity does and discuss why it is important to them. If they are able to make a strong enough case, write the check and allow them to take it to the charity.

Another opportunity to educate our next generation of money managers!

Castle Rock Named one of St. Paul’s Top 15 Financial Advisors by Expertise

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laurels surrounding an award reading "best financial advisors in St. Paul 2019"

Thanks to review specialist Expertise for ranking Castle Rock as one of 2019’s Best Financial Advisors in St. Paul! Expertise reviewed dozens of financial advisors serving the St. Paul area. Castle Rock is thrilled to have made the shortlist of the Top 15 Financial Advisors in St. Paul! Thanks to the team at Expertise for their research, focus on quality, and commitment to ensuring all consumers can make confident decisions in the experts they select.

The Greatest Gift to Leave Your Children & Free End of Life Checklist

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fountain pen writing on paper

I have seen it over and over: a beloved parent dies and the adult children do not know where to start.  The first question is always, “What do you think they would have wanted?”

Once the question is out, then the arguments begin.  All relatives have opinions informed by their own experiences, and they rarely agree. “She told me this.” “She supported this.” “She would never have done that.” It causes strife during a time when people could be focused on grieving and carrying out their loved one’s wishes.

The sad part is it does not end there. Beyond the practices for mourning and celebrating their loved one’s life, adult children are responsible for details and logistics too. “Do you know what her passwords were?” “No. What about their financial accounts, do you know who we should call?” “What about insurance, did she have insurance?” Finding passwords, locating and inventorying accounts, managing insurance policies, and determining who needs to be contacted—the list goes on.

Unfortunately, too many times this crucial information—where everything is, what their wishes are and who to contact—dies with the person. The greatest gift you can leave your children is clear, organized information.  It is so important to provide this information so when the time does come when they have to say goodbye, they have time to grieve and celebrate your life, rather than being put under the pressure of wondering what your wishes were or where to find everything. 

Some of the items that are often forgotten and forever lost include:

  • End of life wishes;
  • Retirement or Pension Plans at old employers;
  • Stock purchased through the company;
  • Burial plots or policies purchased;
  • Intellectual property;
  • Electronic property;
  • Relatives unknown to children; and
  • Valuables that the children were not aware were valuable.

There are a number of ways you can share this information. One option, which many people find overwhelming, is to sit down and have an end of life discussion with your loved ones. This also has the potential drawback of people misremembering or forgetting details when the time arrives. Another option is to fill out an end of life checklist and to alert your family members to its existence. Filling out an end of life checklist may be difficult, but no one wants to leave surviving loved ones with arguments, fights, or lawsuits that last lifetimes.

Because I’ve seen how critical this is for the well-being of families, I’ve created a free end of life checklist that you can download by signing up for our e-mail list. You can also contact your own financial advisor for a list. Most people would gladly give up their inheritance to know what their parent would have wanted. Take the time to do it now—start today, this week. It’s hard emotional work, but it is a gift that can only come from you.

Financial Literacy Month

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April is Financial Literacy month! What a great opportunity to talk to our children and young adults to find out what they know and how to improve on it.

a hand holds a pencil to a blank page, ready to write

High school students do most of their learning about money and finances from parents. But many parents do not feel equipped to teach their children about financial issues. In 2018, the research group Brookings Institute published a large-scale review of youth financial literacy, which showed a continued failure of U.S. high school students to pass simple financial literacy tests. In fact, in a 2008 literacy test by Jump$tart, high school seniors averaged 48.3%—more than 10 points lower than a passing grade. We need to do better for the sake of our children. And we can start both at home, but also in supporting our schools.

Talk to your children’s teachers and school administrators and discover what they provide in financial literacy. In 2011, Minnesota passed the Minnesota K-12 Social Studies Standards that went into effect in the 2013-2014 school year. The goal of these Standards was to provide Minnesota students with some training in economics. Of the 34 economic education benchmarks for students 1-12 grade, 5 are related to personal finance.

While most schools do not have the funding to add programs, there is support available for schools. BestPrep is a Minnesota based non-profit organization that provides educational programs to students in grades 4-12. They have developed many programs which are available at no cost to schools. One such program is Money Matters. They provide volunteers from the financial industry who go into schools and teach classes about personal finance. They have financial experts volunteering to develop presentations that not only address the Social Studies Standards, but go beyond. They work with students on understanding money basics like budgeting, credit vs. debit, and credit scores. Additionally, BestPrep provides volunteers e-mentors for classrooms as they discuss financial topics. The students can e-mail questions to their e-mentors who respond not only with answers, but with new ways to look at their personal finances.

Another way you could be involved is to volunteer with a group of students and participate in the Stock Market Game. You do not need to be a financial expert to run this game. BestPrep provides training and on-going support. The curriculum not only provides students with an education in business, economics, and financial literacy, but also gives students a richer understanding of the U.S. economic system, current events, and teamwork. To see all that BestPrep has to offer go to www.BestPrep.org.

There are many organizations that not only work with students, but provide individual guidance for any adult interested in helping youth achieve financial literacy. Check out some of the great resources listed below to learn more about what you can do!

Share Save Spend – www.sharesavespend.com

The Financial Educators Council –  www.financialeducatorscouncil.org

The Mint.org – www.TheMint.org

Goodbye Marriage Penalty—Almost

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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.

Contact Information

Castle Rock Financial Planning
2267 Waters Drive
Mendota Heights, MN 55120
lauri@castlerockfp.com
651-294-0013

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