What’s Included In a Financial Plan

Feb 23, 2023

What’s Included In A Financial Plan?

A well-written financial plan can mean the difference in your financial success. With it, you’ll be less likely to make poor financial decisions.

Despite the importance of a personal financial plan, many people don’t know what to include in their plans.
Financial planning is highly personal. This means that while plans feature similar ingredients, the quantities, when they’re added, and how they blend will vary based on your unique situation.

So, to give you a clear picture of what goes into a financial plan, let’s look at some of the most common elements:

1. Net Worth Statement

The first thing to include in your financial plan is an overview of what your financial situation looks like.
You can do this by performing an asset evaluation to determine your net worth. Start by taking an inventory of all of your assets (investment properties, bank accounts, valuable personal properties, etc.). You’ll need to determine the market value of all your assets.
After valuing all of your assets, you’ll need to take an inventory of all your liabilities (debts).
You can then calculate your net worth by deducting your liabilities from your assets’ value.
If your liabilities outweigh your assets, don’t fret. This is common when you’re just starting out, especially if you have student loans and a mortgage.

2. Financial Goals

Your financial goals are the next item to include in your financial plan.
Think about goals such as saving a down payment for a home, buying a car, paying off your student loans, kids’ college savings, retiring early, and other stuff that you’d like to accomplish.
These goals are the driving force of your financial plan. They will motivate you to follow through with your financial plan.
Decide how much money you’ll need to meet each of these goals. When your financial goals are crystal clear and have a number attached to them, your plan becomes more effective.

3. An Investment Strategy to Get You There

Once you have an idea of your financial goals and how much you’ll need to set aside to achieve them, your next step will be to create an investment strategy to help you meet each goal.
Design your investment strategy based on your personal goals, risk tolerance, and time horizon.
If you have a lengthy time to save, it might make sense to be more aggressive with your investment choices. If you’re approaching retirement, you might choose to be conservative in your selections.
After deciding the strategy you’ll take, jot down a personal investment policy statement to guide you when choosing your investments.
You can then select your investments while making sure to diversify as you build a portfolio.

4. Budgeting and Savings Plan

You cannot build wealth without having a handle on your expenses and knowing what you can save.
If you haven’t already, create a personal budget to track and categorize your monthly income and expenses. Adjust your spending as necessary and plan how to tackle high-interest debt, such as credit cards. Dedicate whatever’s left over to build your emergency fund then start working toward other goals.
A good financial plan should also have a savings plan. This is a plan for how much money you need to save from your income every paycheck or month to realize your goals.
Setting aside more money while you’re young with fairly low expenses is a smart choice. If you’re older, you’ll want to figure out how much you’ll need to set aside to retire comfortably.
A good rule of thumb is to save at least 20 percent of your monthly income.

5. Debt Management Plan

When used wisely, debt can be an excellent financial tool. But it can also be a drag.
Whether you have credit card debt, student loans, or other “toxic” high-interest debt, a debt management plan can help you to complete your debt payments quickly, allowing you to retire without continuing payments.
If you’re unsure where to start, a financial advisor can help educate you about debt and the various strategies you can use to manage or pay down debt.

6. Emergency Fund

While it’s impossible to plan for all risks, having an emergency fund to help you in case of an injury, illness, job loss, or another expensive event can help you stay within your goals and objectives.
Putting cash away for emergency expenses is the bedrock of any financial plan. Doing this can help you avoid tapping your savings account to make ends meet.
You can start small — 500 bucks is enough to cover small repairs and emergencies so that an unexpected expense doesn’t run up credit card debt.
Your next goal could be a thousand bucks, then one month’s daily living expenses. Continue increasing your target gradually until you have 3-6 months’ worth of basic living expenses stashed in a separate savings account.

7. Retirement Planning

A retirement plan lets you save money for the golden years of your life and ensures you can meet your needs comfortably.
By using different financial options that reinforce each other, you’ll be able to create a dependable income stream in retirement. An old rule of thumb says you will need 70-80 percent of your current income in retirement.
A financial plan prepares you for key risks — such as inflation, taxes, market volatility, and the probability that you may live longer than expected.

8. Tax Planning

Creating an income and property tax plan is critical for your overall financial plan as these taxes can undermine long-term savings.
Taxes are inevitable, but you should not pay any more than necessary.
Review your tax plan annually since tax laws and regulations change every year. Take advantage of opportunities like harvesting tax losses, bunching charitable donations to offset excess income, and using Roth IRA conversions strategically.
Hire a tax professional to decipher the deductions that you may be eligible to take. This way, you’ll be able to reduce the amount that you have to pay to Uncle Sam and keep more of your money.

9. Estate Planning

This is something that a lot of people put off because they think that they have plenty of time to do it later or just don’t want to think about death.
It’s, however, important to understand that the worst can happen at any time. It doesn’t matter whether you have significant wealth or a small nest egg; everyone over 18 should at least have durable health care and financial powers of attorney in place.
If you become incapacitated and do not have a plan in place, for example, your loved ones may have trouble making vital medical decisions or accessing your bank accounts to pay your hospital bills for you.
Estate planning should also include plans for how your wealth will be distributed to your loved ones or special causes you care about after your death.
Comprehensive estate planning may include a handful of documents, such as wills, living wills, trusts, and advance directives.

10. Insurance Assessment

An insurance plan is another key component of a personal financial plan.
As you work toward building your wealth, you should also think about how to protect it.
The insurance needs of each individual will vary. Take time to evaluate your risks and determine how much insurance you need to offset each.
Your insurance needs might be affected by age, health, profession, assets, economic status, and family status.
At a minimum, include plans for your auto insurance, health insurance, disability insurance, homeowner’s/renter’s insurance, and life insurance.

Conclusion

Creating a financial plan will take some work, but the outcome can be life-changing.
Including all the elements mentioned above can lead you to greater financial health and a better future.
It goes without saying that your personal financial plan should not be static. You should treat it as a living document and review it as your life changes and your goals shift.

Contact Us

At WWM Financial, we take the time to assess your current financial situation, gain an understanding of your short- and long-term needs and goals, and put together a realistic financial plan to help you achieve everything your heart desires.

For help with your financial plan or to learn more about the services we offer, get in touch with a member of our team today.

Schedule Free Consultation

WWM Financial is an SEC Registered Investment Advisor

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

The Benefits of a Financial Plan

Nov 8, 2022

“Failing to Plan is Planning to Fail”

While the prognosis may seem daunting, there’s a lot of truth in this statement, especially when it comes to your finances.

Because there are lots of foreseeable and unforeseeable variables that can affect your finances, it’s essential to have a solid financial plan in place.

But before we discuss the importance of a financial plan, let us first understand what it means.

What is a financial Plan?

Put simply, a financial plan is your roadmap to actualizing your financial goals.

It comprises a budget, an emergency corpus, wealth-building investments, and retirement savings.

A financial plan is critical to helping you manage your daily finances, meet your changing financial needs, stay prepared for potential economic crises, grow your wealth, and save for retirement, while working towards achieving your big (and small) dreams.

Benefits of a Financial Plan

There are many benefits of financial planning which can have far-reaching positive effects on your life.

If you don’t have a financial plan, here are 6 good reasons why you should consider creating one:

1. Helps in Decision Making

A financial plan takes stock of your present as well as your future to provide guidance for action planning and decision-making.

Actions focused and coordinated on specific outcomes are much more effective.

With a financial plan in place, you would not take any wrong decisions that would affect your economic well-being.

2. Cushions Emergency Expenses

Have you ever wondered what will happen to you or your family if a sudden medical emergency, job loss, or roof repair comes knocking?

“Let’s borrow some money from the vacation fund.” There goes the trip to Disneyland you have been planning all those years!

A financial plan will come to your rescue here. It makes room for an emergency and helps you be ready for any curveball life may throw you.

Whether you like it or not, emergencies can arise at any time. Your car can decide to break down on your way to an interview after years of reliable travel. With an emergency fund that will keep you afloat during such an unforeseen crisis, you can restore your quality of life to what it was faster.

3. Improved Spending Habits

Spending more than what you earn is a common thing these days.

Many facilities like credit cards, installment services, ‘buy now, pay later’ schemes, etc., entice you to overlook your budget and spend more than necessary.

Whether it’s purchasing the latest tech or spending on experiences you can afford to save on, you find yourself in a sticky situation at the end of the month when the bills keep pouring into your mailbox.

The growing bills only take you further away from your long-term goals.

A financial plan thus helps infuse discipline in your life. By evaluating your spending habits, you can cut back on unnecessary expenses and save more instead of spending more.

4. You Enjoy a Better Standard of Living

A financial plan will improve the quality of life you live.

From wise investments early on in your career to being able to save on yearly taxes, you’ll be able to save more, grow your wealth, and finance the lifestyle you desire. Thus, you can attain your financial goals without compromising your standard of living.

With a realistic financial plan in place, being constantly broke will be a thing of the past. Money will rarely be tight. All those month-end woes will be history.

A financial plan will also help in ensuring you have access to cash for the smaller pleasures in life without having to dip into your personal savings.

5. You Secure Your Retirement

Most of us hate thinking about what retirement will look like, but a financial plan will force you to.

This is vital as saving up for retirement and potential healthcare costs that arise during this stage of life can make or break your post-working years.

Retirement is inevitable and ensuring you’re prepared for it is a crucial part of the personal financial planning process. At a time when you want to sit back and reap the fruits of your labor, your retirement assets will come in handy.

6. Creates Peace of Mind

A financial plan also encourages mental health.

Compared to people without any sort of financial plan, those with a financial plan are less stressed and tend to be more optimistic about their future.

With a plan in place, finances are less likely to keep you awake at night. Rather, they can provide clarity, thus lessening stress and anxiety while improving quality of life.

DIY Vs. Professional Help

Understanding why a financial plan is important is the first step toward a secure financial future.

While it sounds like an easy document to write, it’s advisable to draft a financial plan with the help of a financial planner or advisor.

Unless you have a strong background in finance, going alone means you could miss some vital components, which can prove disastrous.

For a working individual, insufficient retirement savings can lead to a miserable lifestyle later. For a business, poorly managed tax preparation could result in unexpected debt and a loss of carefully accumulated wealth.

Contact Us

For help with your financial plan or to learn more about the services we offer, get in touch with a member of our team today.

Schedule A FREE Consultation

WWM Financial is an SEC Registered Investment Advisor.

What is a Financial Plan?

Jun 14, 2022

What is a Financial Plan

We all have things that we would like to achieve before we die.

Life goals can include saving for your kids’ college education, owning a beach house, buying a yacht, retiring comfortably, or having more time to spend with family rather than Cara and Peter in the office.

To achieve these goals, you need to be focused and financially organized.

A financial plan helps you make sensible money decisions that can help you achieve your goals in life.

So, What Exactly Is A Financial Plan?

A financial plan is a detailed overview of your current financial situation, (short, medium, and long-term) financial goals, and an in-depth strategy to achieve them.

Besides helping you realize your dreams, a financial plan will make you feel in control and give you the comfort of knowing that your financial life is in order.

To be effective, a financial plan must be:

Written down. A financial plan doesn’t exist if it’s not written down
Touching every aspect of your finances
Realistic and achievable
Agreed with your partner (if you have one, i.e.)
Regularly reviewed and updated

Depending on your goals’ time horizon, a financial plan can stretch over months, years, or decades.

Benefits of A Financial Plan:

Having a solid financial plan brings forth an assortment of benefits that include:

Better management of personal income
Clarity in retirement objectives
Improved preparation for future expenses
Reduced risk of debt
Increased likelihood of personal and financial success
Decrease in anxiety, worry, and stress levels

“Money, if it does not bring you happiness, will at least help you be miserable in comfort.” – Helen Gurley Brown

Components of a Good Financial Plan

Understanding what goes into creating a financial plan can mean the difference in your financial success.

A financial plan is a broad umbrella that covers multiple aspects of your financial life.

To lay the groundwork for a solid financial foundation, it pays to understand what each of the aspects entails.

Here’s a quick crash course on the components of a good financial plan:

Financial Goals

Making a financial plan is useless if you have no idea what you want to accomplish with your money.

So, whether you want to make the plan yourself or work with a professional, it should start with a list of your goals, both small and big.

A good strategy is organizing your goals according to how soon you want them accomplished:

Long-term goals are those a decade or more away and can include buying a home or planning for retirement
Medium-term goals are those you intend to achieve in the next 5-1- years and can include starting your own business or putting a down payment on a property
Short-term goals are those you hope to achieve in the next 5 years or less and can include buying a new car or paying down debt

For each of the goals, specify a dollar figure and a target date. Being specific helps you to measure your progress towards the goals.

Budgeting

A budget is one of the most important personal finance tools, but it can be a scary four-letter word if you’ve never had one before.

Simply put, a budget is a plan for how to spend your finances. By creating a detailed written budget, you can see exactly where your money is going and make better spending decisions.

As you approach retirement, you’re faced with so many financial decisions, and keeping track of everything can seem like an Olympic sport. This can ultimately lead to overspending and debt.

A budget lets you see how much money you have, what you spend it on, and how much is left over.

Once you get a hold of the inflows and outflows of your cash, it’ll be easier to optimize your spending to cut back on unnecessary stuff such as unused subscriptions, morning lattes, takeouts, etc.

Emergency Planning

The bedrock of any financial plan is stashing money away for surprise expenses.

An emergency or rainy-day fund is a go-to pool of cash you can dip into when unexpected expenses come knocking. It will help you avoid tapping your long-term savings whenever the need arises.

It would be best if you tried to save 3-6 months’ worth of living expenses (housing, utilities, transportation, and groceries) in a separate, highly liquid savings account.

Don’t put any of this money into an investment that will be hard to convert to cash at short notice (read immediately).

Also, only dip into the emergency fund when you have an urgent and pressing expense. Buying the latest iPhone is not an emergency expense.

Investment Plan

Your financial plan should include an investment plan/strategy.

If you have a long time before retirement, it may make sense to be more aggressive with your choice of investments.

If retirement is fast-approaching, be conservative in your choices as you build a portfolio.

It would be best if you also diversify your investment portfolio by picking stocks, bonds, and funds that suit your risk tolerance and time horizon.

Diversification means that if one of your investments dips, another will balance things out.

Beware of investment scams that promise you quick returns. The safest way to double your cash is to fold it and put it in your wallet.

Credit and Debt Strategy

Using credit and taking on debt is not necessarily a bad thing.

Generally, there are two kinds of debt: bad debt and good debt,

When you take a mortgage loan to buy a home, you may be taking on a lot of debt, but the lower interest rates and appreciating property value make it an acceptable form of debt.

On the other hand, doing impulse shopping using a credit card with a 20 percent APR without paying it off in full every month is bad debt. This is because you’re purchasing things that don’t grow in value and, in the process paying steep interest.

If you have high-interest debt that contributes to the reduction of your income, you can write it down and determine the best way to pay it off to avoid trouble. In the words of Earl Wilson, “if you think nobody cares if you are alive, try missing a couple of car payments.”

Getting out of debt can be a painstakingly difficult undertaking. You can tackle debt using approaches such as the Avalanche method, Snowball method, and Debt consolidation.

Retirement Planning

With the uncertainty of Social Security and fewer American companies offering full pension plans, it is now more important than ever to start saving and planning for retirement.

Retirement savings should become a priority instead of an afterthought.

The IRS has made saving for retirement more attractive with special tax-advantaged accounts such as individual retirement accounts (IRAs), employer-sponsored plans, and special retirement accounts for the self-employed.

Tax Strategy

Creating an income tax plan is vital for your overall financial plan.

Not planning for taxes can lead to a negative financial impact during tax season.

To minimize the impact, ensure you allocate a fixed amount of income towards tax.

Since tax laws and regulations change every year, your tax plan needs to be reviewed annually. Organize a sit-down with a tax professional to determine the deductions that you may be eligible to take.

Insurance

You have worked hard to build a solid financial foot for yourself and your loved ones. You now need to protect it.

Disasters and accidents can and do happen, and without the right insurance, they could lead to financial ruin. Some of the covers to consider include auto insurance, homeowner’s insurance, life insurance, health insurance, and disability insurance.

But be careful; there’s a fine line between having sufficient insurance and being over-insured. To avoid being over-insured, evaluate your financial situation and ask yourself where the insurance gaps are.

The following factors might affect your insurance needs:

Age
Health
Economic status
Family status
Profession
Assets

Also, review and adjust your coverage wherever necessary to ensure you’re protected against every possibility.

Estate Planning

Estate planning involves arrangements for the benefit and protection of your heirs.

Your estate plan should include plans for how your assets will be distributed upon your death, as well as who will be authorized to make key financial and medical decisions for you in case you’re incapacitated.

Many people put off estate planning either because they don’t want to talk about death or because they think they have plenty of time to do it later. It’s vital to understand that death is inevitable and can happen anytime. In fact, estate planning is essential for anyone above 18 years of age.

Without an estate plan in place, your loved ones may have trouble accessing your accounts. Aim at having at least healthcare and financial powers of attorney in place.

Why is Financial Planning an Ongoing Process?

Often, Americans set up financial plans with good intentions. However, these plans fail to meet their expectations because of the lack of an ongoing review against their original objectives.

Your financial plan shouldn’t be treated as a static document.

Financial planning is an ongoing process because things change and when they do, they can significantly impact the direction your planning may need to follow.

These could be personal changes in your:

Personal circumstances like divorce, ill-health, death in the family, change of job, etc.
Income – may increase or decrease
Expenditure – may also increase/decrease
Liabilities – may start, stop, increase or decrease
Assets – you may land a windfall or inherit property
Change of risk appetite

Or the changes could be outside your controls:

A change in the political environment
A change in government policy
Property market changes
Stock market highs and lows

As a rule of thumb, aim at reviewing your plan annually and making changes as needed.

Seek Help

While you can craft a financial plan yourself, it’s a remarkably difficult process. You can instead enlist the help of a professional financial planner.

The most important decision you will make is at the start when you select the professional with whom you’ll co-create your financial plan. Only registered financial professionals can give formal advice. These are regulated and adhere to strict planning and advice guidelines set forth by FINRA and the SEC.

At WWM Financial, we understand that everyone is different, and no two people will have the same needs.

We help you build a unique, solid financial plan by following 6 steps of the financial planning process:

Initial consultation to establish your short, medium, and long-term goals in life
Work out what assets and liabilities you have
Evaluate where you are today relative to your financial goals
Co-develop a route map for achieving your unique goals
Implement your plan
Monitor and review your plan at least yearly and adjust when needed

Our success at WWM Financial has been founded on three simple maxims – professionalism, integrity, and impartiality.

We offer a high-quality bespoke service to our clients over the long term. This ethic has helped us build excellent relationships and earn loyalty from our clients and other professionals with whom we work.

The Takeaway:

Creating a financial plan is undoubtedly one of the best things you can do with your income. Once you implement your plan, attaining personal goals and financial freedom becomes a step closer.

A goal without a plan is just a wish – Antoine de Saint-Exupery (French writer).

If you would like to get started with your own financial plan or have us review your current plan schedule a free consultation by clicking on the link below.

Schedule A FREE Consultation

WWM Financial is an SEC Registered Investment Advisor.

Estate Planning – What to Expect in 2022

Apr 29, 2022

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In this episode, Gita Nassiri, CPA, JD, MBT and Catherine Magaña, CFP® discuss Estate Planning for 2022 and some changes that have occurred.

So if you want to prepare your estate for your heirs, understand the new gifting and estate tax exclusions, and ensure your estate does not go into probate so you can have peace of mind, tune in now!

In this episode, you’ll discover:

Estate Planning Tips For 2022
Gift and Estate Federal Tax Exemption Updates
Annual Gift Tax Exclusions
Step Up in Basis for Assets
Importance of Titling
Beneficiary Designations
A Misconception of Estate Planning
What Can Occur If There Is Not a Will in Place
Proposition 19

About Gita Nassiri

Gita Nassiri, CPA, JD, MBT is an expert in Estate Planning whose accomplishments include:
Practicing since 1994

Graduated with her law degree from Whittier College
Master’s degree in business taxation with honors from USC
Active member in California Bar Association Trusts and Estates Section.
Fluent in French and Spanish

Thanks for listening!

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A Conversation About the 2021 Biden Tax Plan and Federal Tax Proposals

Aug 19, 2021

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A Conversation About The 2021 Biden Tax Plan and Federal Tax Proposals

In this episode Catherine and Rachel Ivanovich discuss the 2021 Biden Tax Plan proposals including, the child care tax credit, long term capital gains, tax gains at death, 1031 exchanges and more.

Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ and Managing Partner at WWM Financial in Carlsbad California.

Rachel is the founder and Chief Leadership Officer of Easy Life Management, Inc. She is a business coach, an Enrolled Agent and earned an MBA from San Diego State University with an emphasis in Finance and Taxation in 2010.

You can learn more about Rachel at elmtax.com.

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WWM Financial is an SEC Registered Investment Advisor.

Transcript of video below:

Catherine:
Welcome to our podcast on financial planning. I’m Catherine Magana, a Certified Financial Planner™ professional. Today, we’re going to focus on an important topic of financial planning, which is tax planning. Tax planning, we really look at financial situations from a tax perspective. We actually want to find an efficient way of using the tax code and look at financial planning, and they really do go hand in hand together. So we thought it was important for us today to cover the 2021 Biden tax plan and federal tax proposals. Even though there are several items that we’re going to talk about today that aren’t even approved yet, we thought it was important to start the conversation and start thinking ahead.

Catherine:
So we’ve collaborated with an enrolled agent and tax strategist, Rachel Ivanovich, with Easy Life Management, for today’s talk. So thank you for joining us. We’re really happy to have you here with us today. Let’s go ahead and get started, and maybe we can talk a little bit about kind of some of the income taxes that may come up with these changes. Any thoughts on that?

Rachel Ivanovich:
Thanks, Catherine.

Catherine:
You’re welcome.

Rachel Ivanovich:
Thanks for having me today. It’s really great to be here. Honestly, like you said, these are proposals.

Catherine:
Yes.

Rachel Ivanovich:
Tax planning, as you said, is a very important topic, and I believe that a lot of people don’t consider this until it’s too late. So given that these are just proposals, I think it’s really important also to differentiate between what has already been enacted and what is potentially coming down the pipeline at us. As you were saying, it’s really hard for us to know, is it going to be next month? Is it going to be six months from now? Is it actually going to be retroactive, if it actually then does take effect before the end of the year? Let’s just have a conversation kind of about what proposals are on the table.

Catherine:
Sure. No, I would agree. I mean, I think you get a lot of calls. I get a lot of calls, and everybody wants to know what should we be doing now.

Rachel Ivanovich:
Absolutely.

Catherine:
I think it is important to cover some areas that are critical or we think that might be servicing. One in particular, I think, that’s come up is kind of the childcare tax credit. I think that’s definitely something that’s-

Rachel Ivanovich:
Absolutely.

Catherine:
… prevalent.

Rachel Ivanovich:
It’s top of mind because the advance payments are starting to roll out this month. It’s July of 2021. People are excited, a little extra cash in their pocket. We’ve been chatting with clients about does it make sense to take the money right now, or does it make sense… Because these are advance payments, and that’s really important to understand, because if you take and receive the payment now, you won’t be able to use that to offset tax next-

Catherine:
Later.

Rachel Ivanovich:
Yeah, next spring.

Catherine:
Oh, okay.

Rachel Ivanovich:
I think that’s a really important factor for people to consider because you can opt out of receiving the advance payments. Why would you do that? I don’t know. Honestly, I think a lot of people want to have the money, and it’s going to stimulate the economy, they say. But at the same time, tax planning is what we’re here to talk about. If you’re thinking… currently for 2021 only, and this is already law, so we’re going to talk about proposed versus actual.

Catherine:
Okay.

Rachel Ivanovich:
In the past, the child tax credit… there are two credits that were kind of on the table here. One is the child and dependent care tax credit, and the other is the actual child tax credit. In the past, the child tax credit was $2,000 per child, and it expired… Basically, you got the tax credit up until the child turns 17. So that’s to differentiate between this new enhanced child tax credit that’s on the table currently for 2021.

Catherine:
Got it.

Rachel Ivanovich:
So in the past, you’d get the $2,000 credit, a portion of which was considered refundable. The other portion is non-refundable. To explain the difference between those two and why it’s important to understand why this is a great feature for the enhanced child tax credit. The refundable credit functions like a payment, whereas a non-refundable credit just reduces tax liability. Oftentimes, you’ll have a tax situation and you’re doing planning. If you’re looking at what your tax liability is, that non-refundable credit would reduce your tax to zero, but then the remaining portion of the credit, if it’s refundable, you’ll actually get a refund.

Catherine:
Oh, okay. Excellent.

Rachel Ivanovich:
Okay? Yeah. There are two different kinds. This new enhanced child tax credit makes it completely refundable, so it’s money in your pocket.

Catherine:
Nice. Definitely good to think about and know. Especially, like you said, down the line, if you’re planning to do your taxes and if you’ve already taken the credit, then you don’t want to do it twice.

Rachel Ivanovich:
Yes, absolutely. You’re looking at the credit, and previously the credit was $2,000 per child. Now the credit is, if your child’s under age six, you’re getting $3,600, which is a great benefit. Then also, the enhanced child tax credit is $3,000, but it’s up until age 17, including age 17. So I think this is a great benefit for families.

Catherine:
Another one that I’ve heard a lot about and it really affects some of the clients that are investing or have properties and investments are there’s a long-term capital gains and dividends being taxed at ordinary income with taxable income over a million dollars. That’s kind of a big deal.

Rachel Ivanovich:
It’s huge. Yeah, it’s huge. Okay, so just to differentiate, this is proposed.

Catherine:
Correct, yes.

Rachel Ivanovich:
Who knows what’s actually going to happen? What I’ve heard is for individuals whose taxable income or income is under $400,000, there will be no changes. That’s a sigh of relief for a lot of people, a lot of families. But if your income is over $400,000 and if you are approaching that million dollar mark, you definitely want to start thinking, “Should I start planning ahead?” Clearly, a lot of clients have called the office who have… they work for a corporation, they receive a large amount of their compensation as stock options. It may be time to diversify. Meet with a financial advisor and really look at your portfolio, and should I sell now?

Catherine:
Well, and some other things I was thinking about is perhaps between now and the end of the year, if it does come into play, then there’s some tax loss harvesting. Are there things that maybe… Are there some losses that you can take?

Rachel Ivanovich:
Absolutely. It’s definitely a really good time to meet with your financial advisor to look at your portfolio. Because, as you were saying, this proposed rate, they’re looking to tax long-term capital gains and qualified dividends as ordinary income. What that translates into is currently there are three long-term capital gain rates or preferential rates. If you hold assets more than a year and a day, then the gains on those assets are taxed at lower rates. Therefore, currently, if you make less than $40,000, which you don’t pay anything. There’s a 0%. If you are up to, I want to say from 40-ish thousand to 446,000, if you’re single, you’re going to be paying 15% on those long-term capital gains and your qualified dividends.

Catherine:
Yikes.

Rachel Ivanovich:
Over that, it’s 20%.

Catherine:
Correct. It’s really those that make over a million that are really going to get dinged on this.

Rachel Ivanovich:
Yes, and really need to start planning and/or thinking about planning. Because the other thing that they’re talking about, they’ve proposed, is bumping the highest tax bracket from 37% up to 39.6%.

Catherine:
Yeah, that’s a big deal.

Rachel Ivanovich:
Yes. It is a big deal. Definitely want to look ahead and… It isn’t law yet, but it’s hard to say what’s going to happen.

Catherine:
Yeah. Another one that comes up a lot is the tax gains at death for unrealized gains. Being above a million dollars, that you’re now going to be taxed.

Rachel Ivanovich:
Yes.

Catherine:
Kind of taking a step back and know that, once again, this is being proposed, so it’s not in effect yet.

Rachel Ivanovich:
Absolutely.

Catherine:
Currently, if somebody gets an inheritance, then there’s a step up in basis, and they can use that step up or the six-month date of death valuation.

Rachel Ivanovich:
It is really important to look at this because they have put this on the table. It’s hard to say if it’s actually going to happen. But currently, as you were saying, the step-up in basis, they are talking about taking that off the table. The step-up in basis is if you hold assets and you bought it for, I don’t know, $5 a stock, and now it’s worth $100 when you pass away, whoever inherits it, their basis or what their investment in it is that date-of-death value. They’re thinking of taking that off the table.

Catherine:
Which is a big deal.

Rachel Ivanovich:
It’s a big deal.

Catherine:
Once again, so the new proposal then is if it’s over a million dollars, then at that point, they’re going to be taxed.

Rachel Ivanovich:
Correct. Then there are a couple of different proposals that I’ve heard, and therefore, that’s why it’s really hard to do the planning and to dig into it. I guess at the end of the day, the question is, well, what should I do now?

Catherine:
Yeah.

Rachel Ivanovich:
As you mentioned previously, tax loss harvesting and really taking a hard look at your portfolio and looking at what is in there. Is it diversified? What can I do based on the current law? Because even though they’re proposing certain things, it doesn’t necessarily mean it’s going to come to fruition. I mean, also they’ve thrown out 1031 exchanges may go away.

Catherine:
Yeah, I saw that or over $500,000.

Rachel Ivanovich:
Correct.

Catherine:
Which is another big deal-

Rachel Ivanovich:
It’s huge.

Catherine:
Because a lot of people have real estate, and they’re doing 1031 exchanges. So once again, here we are.

Rachel Ivanovich:
The question is should I sell? Should I do a 1031? So a 1031, for those of you who aren’t familiar, is if you hold rental real estate and you have appreciated a property and you sell at a gain, you can buy another rental property, which is like-kind… They’re sometimes called like-kind exchanges.

Catherine:
Correct.

Rachel Ivanovich:
It’s been a great tax planning tool for those who own real estate.

Catherine:
A lot of people own real estate-

Rachel Ivanovich:
Yes.

Catherine:
Especially real estate’s gone up so much in value.

Rachel Ivanovich:
Absolutely.

Catherine:
So that’s a really, really big deal.

Rachel Ivanovich:
Yes.

Catherine:
The other thing that kind of comes to mind with some of these potential proposals are revisiting maybe life insurance or your estate plans.

Rachel Ivanovich:
Yes, absolutely.

Catherine:
Those are some areas I think that can be looked at. Perhaps we can talk a little bit about kind of the estate planning aspect of some of the proposals.

Rachel Ivanovich:
Estate planning is definitely a topic that people should be considering right now, even if the proposals that are currently on the table don’t go through the current lifetime exemption. Every individual has what’s called a lifetime exemption, which is $11.7 million. Current law is it will go down at the end, or what they’re saying, the language is it’s going to sunset back to pre Tax Cuts and Jobs Act, which was the end of 2017. It’s supposed to go from $11.7 back down to $5 million. What’s on the table currently is that it’ll even go down further to $3.5 million. Definitely looking at different planning tools and charitable remainder trusts.

Catherine:
I think one of the things that… Yeah, grantor remainder trust.

Rachel Ivanovich:
Exactly.

Catherine:
One of the things that we often see is the annual gifting. So the $15,000 per donee per year, and if you’re married, then you can give-

Rachel Ivanovich:
30.

Catherine:
… up to 30. I think those are some things that may be revisiting.

Rachel Ivanovich:
Those are absolutely huge to consider right now, is to really look at that $15,000 annual exclusion. There’s zero reporting requirements for that. As you mentioned, you can give $15,000 to any one individual. A lot of people should be thinking about 529 accounts, which are a great, great investment tool. They’re governed by gift tax rules, meaning you can put up to $15,000 per individual per year. You don’t have to file a gift tax return for that. So definitely something-

Catherine:
Yeah, 529 plans, especially of those that have grandkids or even kids or want to gift money-

Rachel Ivanovich:
Yes, nieces and nephews.

Catherine:
Yes, and it grows tax deferred-

Rachel Ivanovich:
Tax free.

Catherine:
And it comes out tax free if they use it for education.

Rachel Ivanovich:
Exactly, yeah.

Catherine:
There’s definitely some amazing benefits there.

Rachel Ivanovich:
What I’ve also heard, and I don’t know if this is… Well, clearly proposed. I mean, I’ve heard so many things, but I have heard that large gifts… It may be a good time to be considering larger gifts at this point, because if you look at gift and estate tax planning over the years, you’ll have that lifetime exclusion amount and the gift… Or if you make a large gift, if it is over the $15,000 annual exclusion where there is no reporting requirement, it’ll just carve away from your exclusion. I have heard that those large gifts, that if you give them pre American Family Plan actually being enacted, you may be grandfathered in under the old rules. I do think that’s something to consider if, if you’re thinking about making a large gift to a family member or a child.

Catherine:
I know we talked a lot about the unknowns, and we’re getting a lot of questions, and we do think, yes, we want to plan ahead. I know I’m a planner. You’re a planner.

Rachel Ivanovich:
Yes.

Catherine:
It is hard when we don’t have the actual information or know for sure.

Rachel Ivanovich:
Absolutely.

Catherine:
A lot of things might get retro or grandfathered and we don’t know. In the past, we’ve also seen things get approved last minute, and so I think it’s just being mindful of what’s to come. Are there some things that perhaps you may want to do, maybe along the way as you know things might come down the line? But part of this is also maybe planning, but then waiting to see what comes up.

Rachel Ivanovich:
Absolutely. As we all know, there are certain tools that are already in place that you can use. You can plan for Roth conversions. I think it’s a case-by-case situation. Every individual really wants to look at if you have money in an IRA account, is this a good year to do a conversion?

Catherine:
I absolutely love Roth conversions as well. Once again, it is case by case, but for those that are potentially in some gap years for retirement or collecting Social Security or Medicare and just different things that perhaps you factor that in. I think it is… there is potential ways to reduce your… taxes now than later.

Rachel Ivanovich:
Absolutely. Yeah, and maybe if your businesses is having a down year, it might be a good year to consider that as well, to do that conversion in a year when your income’s a little bit lower.

Catherine:
Is there anything else that we didn’t touch on that maybe-

Rachel Ivanovich:
We didn’t mention the net investment income tax, because that is something that you can plan for. I do think that working with a tax advisor, a tax strategist, working with your financial advisors, because as we were saying, the long-term capital gains rates currently do have that preferential treatment of the lower rates. If that does go up to be taxed as ordinary income, you’re not only looking at the 39.6%, but you’ve also got the additional 3.8 net investment income tax to consider. And if you’re in a high income state, such as California, New York, New Jersey, you may be paying 51% in taxes on long-term capital gains and qualified-

Catherine:
That’s a big change from what we’re used to.

Rachel Ivanovich:
It’s a huge change. If you actually look, that would put the United States as the highest, yes, country in the world for-

Catherine:
For gains?

Rachel Ivanovich:
… for long-term capital gains.

Catherine:
Oh, interesting.

Rachel Ivanovich:
Yeah, it was very interesting for me to see. It’s hard to say what’s going to happen.

Catherine:
Yeah. Well, I thought today we wanted to talk a little bit about tax planning. Once again, doing financial plans, it all goes hand in hand. Rachel, thank you for your time today.

Rachel Ivanovich:
Absolutely. It’s my pleasure.

Catherine:
Is there a way that people can contact you if needed? Do you have a phone number, email or anything?

Rachel Ivanovich:
Absolutely. They can reach out to me at Rachel@elmtax.com or they can call me at my office 760-730-1817.

Catherine:
Great. Well, thank you so much for joining us today. We hope you learned something and it was worthwhile for you. Thank you, and you’ll hear from us again. Thanks.

Rachel Ivanovich:
Thank you.

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