Client Service April 24, 2018

Tax Time Is Over, But It’s Still a Great Time to Talk Taxes

An analysis from the American Institute of CPAs shows how clients can use their recently filed tax returns to map out a more efficient budget and investing plan for 2018.

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Instead of “filing and forgetting it,” the American Institute of CPAs (AICPA) is encouraging Americans to use the information in their 2017 tax return to develop a plan that will put them on the path to securely reach their financial goals.

“The stress of the 2017 tax-year filing deadline has passed and, though many Americans may be eager to put away their financial records, now is the perfect time to plan for the future,” AICPA argues in new survey report, created in collaboration with Harris Poll. According to a survey of 507 affluent Americans—defined here as those with $250,000 in investable assets or more than $200,000 household income—nearly eight in 10 are likely to use the information on their tax return to guide their financial plan. 

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“This underscores the bridge between taxes and financial planning,” AICPA says. “A tax return can double as a roadmap to a more prosperous financial future. In it, Americans can find details of their cash flows, important investment information, insights to retirement and estate planning and identify overlooked strategies to help them achieve their financial goals.”

As AICPA and Harris Poll lay out, with the significant changes brought about by the Tax Cuts and Jobs Act now in effect for the 2018 tax-year, Americans should revisit their overall financial plan while all their documents are readily available.

“By not taking advantage of various tax planning strategies, Americans could be leaving money on the table every year that could have gone towards their children’s education, their family’s healthcare savings, or towards retirement,” says Andrea Millar, Raleigh-Durham, North Carolina-based director of financial planning for AICPA. “In today’s dynamic tax environment, taking some time after tax season to ensure your financial plan is in synch with the current law will allow you to feel more confident you’re on track to meet your financial goals.”

The survey data shows nearly a quarter of affluent adults (23%) overpaid taxes in at least one of the past 10 years and were owed a refund. In addition, 14% underpaid and owed the Internal Revenue Service (IRS) money in at least one year.

“Over or under withholding payroll tax can be a strategic move,” researchers note. “But winding up with a big tax bill or a large refund can also indicate that adjustments are in order. And with updated withholding tables from the new tax law in effect, now is a perfect time to do this.”

Tax data highlights potential strategy shifts

According to AICPA and Harris Poll, life events such as having a child, experiencing a divorce or purchasing a home can all have a major impact on an individual’s tax situation—and by extension on their budgeting and investing plans.

“Alarmingly, less than half of affluent adults said it is likely that a major life event would cause them to adjust their financial plan to be more tax efficient,” the analysis states. “Of those who would be likely to make changes, the leading causes cited were health issues, followed by retirement, becoming disabled, getting divorced and having children.”

The survey further shows that affluent adults appreciate the value of a financial planner with substantial tax expertise—and they also value non-CPA advisers who can make connections between clients and niche experts. But “financial planning is not just for the wealthy. Every American can benefit from knowing where their money is going and taking advantage of opportunities to incorporate planning strategies available to them in the tax law.”

With tax-filing season having just concluded, CPA financial planners suggest a few themes to think about for next year’s taxes. First, “make your 2018 contributions as early as possible.”

“Taxpayers should make their contributions to tax-advantaged accounts, such as IRAs, 529s, and workplace retirement plans, as early in the year as possible. By making these contributions earlier rather than later, taxpayers will benefit from additional tax-free compounding growth, which can be substantial over time,” the research points out. “For families with kids going to private elementary or high school, take advantage of the new 529 provision that allows you to pay $10,000 per year, per child, from a 529. If your state gives you a deduction for amounts contributed (check with your state’s plan to find out any limits on each year’s deduction), even if you don’t have a 529 established, it could make sense to deposit up to that deductible limit in the account first before paying education expenses, which can lower your state income taxes.”

Again, a tax expert can help advisory clients “work out the logistics.”

Another strategy suggested is to consider other benefits beyond the 401(k), and how these could impact tax burdens. “Tax time can be a good opportunity to review your employee benefits and determine if any changes need to be made during the next open enrollment period. Lots of companies are offering ways to save their employees money such as health savings accounts or pre-tax commuter benefits.”

Finally, AICPA urges investors to consider bunching medical expenses into 2018, according to the following logic: “If you have been putting off a procedure or visiting a medical specialist, now may be the best time to schedule that appointment. Under the new law, the 7.5% of income medical deduction threshold will be in place only for the 2017 and 2018 tax years. After that, the threshold reverts back to 10% of income. For what is and isn’t deductible, visit the IRS website.”

Data & Research April 24, 2018

Retirees Less Confident in Ability to Handle Health Expenses

Retirees are less likely than last year to feel confident in their ability to handle basic expenses and feel less confident in their ability to handle medical expenses, according the Employee Benefit Research Institute’s (EBRI) 28th annual Retirement Confidence Survey (RCS).

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Retirees’ confidence in their ability to live comfortably in retirement remains higher than employees’ confidence, with 32% of retirees very confident and 44% somewhat confident, according the Employee Benefit Research Institute’s (EBRI) 28th annual Retirement Confidence Survey (RCS).

However, retirees are less likely than last year to feel confident in their ability to handle basic expenses and feel less confident in their ability to handle medical expenses. More than four in 10 retirees report that their health care expenses in retirement are higher than they expected and one-quarter say long-term care costs have been higher.

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The RCS found that being healthy increases retirement confidence: 46% of retirees who are confident are in good health, compared to 14% who are not confident. The same is true for employees: six in 10 employees who are in good health are confident, compared to 28% of those not confident. The survey report says retirees in fair or poor health are more likely to have difficulty managing their money in retirement, including maintaining their pre-retirement lifestyle, managing day-to-day finances and managing health care costs.

Only 39% of retirees and 19% of employees have tried to calculate how much money they will need to cover health care costs in retirement. The survey finds that retirees who made this calculation are less likely to have experienced higher-than-expected health care costs are and more likely to say costs are as they expected. Seven in 10 employed workers and six in 10 employed retirees say workplace education on health care planning for retirement would be helpful.

The survey also found two-thirds of retirees report that converting their assets into income is a relatively easy task for them. Asked about their withdrawal strategies from defined contribution (DC) plans and individual retirement accounts (IRAs), many retirees aren’t withdrawing much from them. Four in 10 draw only the legally required minimum, and among those who withdraw more than the minimum, many withdraw only as needed.

This confidence in retirement income could be because more than four in 10 retirees report that a defined benefit (DB) plan is a major source of income, and two-thirds report Social Security is a major source of income. Comparatively, only about one-third of employees believe Social Security will be a major source of retirement income, and only 32% expect a DB plan to be a major source of income.

EBRI’s 2018 RCS report is here.

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