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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.

Filed Under: Blog Posts, Industry News

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. 

Filed Under: Blog Posts, Industry News, Lauri Salverda, CFA, CFP®, AIF®

Do You Know What a Fiduciary Is?

November 10, 2017 By Lauri Salverda, CFA, CFP®, AIF®

If you know what a fiduciary is, you’re in the minority of Americans. In April of 2016, entrepreneur and life coach Tony Robbins stood on a Manhattan street and interviewed passersby, finding that the only respondent who could define the word was a fiduciary. Although it’s not a prayer, it is, as one respondent guessed, “something awesome”.

Obviously, there are a lot of questions on the topic that need answering.

So, what is a fiduciary?

A fiduciary is a financial advisor who is required by law to put the client’s interests ahead of their own, and to disclose any possible conflicts of interest.

Don’t all financial advisors put client interests first?

Unfortunately, this is not the case. The majority of financial advisors are held to a suitability standard. Meaning, these advisors need only suggest items that are suitable for your objectives, income level and age. Suitable doesn’t always mean best. Additionally, they do not need to disclose any conflicts of interest.

Is disclosing a conflict of interest that important?

It really is. According to a recent article by Bloomberg, there are half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market. That’s more than ten times the number of advisors who adhere to a fiduciary standard.

Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations made by brokers and sales agents posing as advisors related to retirement plans. This, to put it bluntly, helps explain why so many Wall Street brokers are insulted if their annual bonus is in the low seven figures.

Why is working with a fiduciary so important?

Let’s put it in perspective:

Say you’re looking for a restaurant for dinner tonight. You want a place that’s not too far away, and is open on a Thursday night. A quick online search will turn up a whole host of “suitable” options. But how will you know which one is going to best cater to your customer experience? Do you take the top “sponsored” result on your search? Or do you turn to outside resources, like Yelp, where feedback is based on the diner experience, not sponsored by their marketing department? More than that, you probably confirm multiple sources — asking your foodie friend for a recommendation, and checking the restaurant’s rating on Google, too. You don’t trust a single biased source for dinner, and you certainly shouldn’t trust an advisor who has motives other than your best interests in mind.

How do I find out if my financial advisory is a fiduciary?

Just ask! If you are currently working with or looking for a new financial advisor, simply ask, “Are you acting as a fiduciary at all times? Will you sign an oath stating that you will always put my interest above all others?” They’re obligated to answer, and if they can’t, or won’t, be prepared to find someone who can, and will.

Remember, at Castle Rock, your interests always come first.

Filed Under: Financial Planning, Industry News

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