Keil Financial Partners believes in focusing on what’s in your control. One thing that you have more control over than you may realize is your taxes.
With many new changes coming into the tax planning world, Jeremy Keil is here to simplify some of the latest tax laws and how they could affect your planning. Jeremy breaks down key points from 2017’s Tax Cuts and Jobs Act, 2019’s SECURE Act, and this year’s CARES Act, highlighting areas you might want to take advantage of and where you might want to be more cautious.
In this episode, you’ll learn:
Three key considerations for charitable giving
How the new required minimum distribution age can impact your planning
Why your recovery rebate is not free money
What to consider before taking money out of your IRA or 401(k)
Tune in now to learn how you can make the most of the latest tax law changes!
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
Related Blogs & Podcasts
Tax Planning Blog
Tax Planning Blog
Tax Planning Podcast
Retirement Revealed Episode 13: The Trifecta of Tax Laws (TCJA, SECURE & CARES)
Are you ready to uncover your retirement solution? Learn more as Jeremy Keil and his guests guide you along the path of retirement and reveal the five steps you need to take to solve your retirement puzzle. Now onto the show!
Aric Johnson: Hello and welcome to Retirement Revealed with Jeremy Keil! If you're a regular listener, you're probably looking for part two of the two part series that Jeremy started on our last podcast, which is “Insurance is Your Protection Plan”. Now, Jeremy has decided to put this podcast right in between part one and part two because this one is very timely, and it's something that needs to be heard right now. So let's get to it. Today we're going to be talking about the SECURE Act and CARES Act. Jeremy, it sounds like we're talking about taxes today.
Jeremy Keil: Well, we talk about taxes a lot Aric because it's one of the most important things out there. It's one of the most important things you can control. Here we are in April of 2020. We're talking about tax planning. We just recorded some information a few months ago, and now the whole world is changing with the COVID-19. The government came out with this thing called the CARES Act, and we thought it was so important that we talk about how CARES affects you. There was also a recent change in December of 2019 called the SECURE Act, and you can’t forget what happened in 2017 with the TCJA, Tax Cut and Jobs Act, because we are still living under those rules. So we have three different tax laws. We’ve got to help you figure out and plan for this year in 2020 and actually even beyond, so if you’re listening to this a couple of years down the road, it’s still probably affecting you. We have to make sure we’re doing things with your finances that are relating to the 2017 Act, SECURE Act, and CARES Act right now.
Aric Johnson: All right. That is a lot of information. You and I have talked about the SECURE Act before, both on the podcast and off air, and it was pretty robust to begin with, and now we’ve got CARES which is very recent. So I’m just going to let you go because I’m here to learn. I need to know about this CARES Act and how it’s going to affect me and my family.
Jeremy Keil: Yeah. The CARES Act is important. It’s the most recent one, but we have to talk about the 2017 Act. Just a reminder of what’s going on right now, in 2017 they changed the tax laws, and those tax laws are the same until 2025. So we have 5 years down the road where that law is going to affect you, and one of the biggest things they did is bring down the taxes a little bit lower. That’s a help. That’s something to keep in mind because if you’re in a certain tax bracket, like the 12% or 22% bracket, expect in 2026 for that rate to go up. So maybe you ought to be looking at what you can do now to pay taxes at a lower rate today in order to avoid paying taxes at a higher rate later on. That’s a common guidepoint anyways. You should always be looking to pay lower taxes instead of higher taxes, and a lot of times that means that you are being proactive with your planning. Another part of the 2017 law that’s a big deal is they doubled the standard deduction. It helps out a lot of people. Also, if you are someone that had a mortgage or you are a big charitable giver, chances are you might not be itemizing. We still want you to be giving money to charity, but the way that you were doing it in the past may no longer be benefiting you tax wise. We need to be keeping an eye on that so that we make some decisions and do things a bit differently so that you are still getting the advantage tax wise for when you’re giving out money to charity.
Aric Johnson: Yes absolutely.
Jeremy Keil: So a couple of things on that. If you are charitable, and you’re giving money to charity, there are three things we want you to do. Think about if you can bunch together your charitable contributions. The government is not forcing you to give money in December and January. You could choose to double up in December or skip December and give more money in January. So that is called bunching, where you intentionally take out maybe one or two years worth of deductions or contributions and put them into one tax year.
Aric Johnson: Okay. So if you are regularly giving to your church as a regular donation, can you take the entire year’s worth of tithe or offering and put that all together? Maybe in December you have given all year, and then you’re going to “pre-give” for the next year all in December and take that as part of a tax cut?
Jeremy Keil: That’s exactly it. That’s called the bunching idea. If you’re somebody that maybe gives $5,000 a year to charity, instead of doing $400 a month for two years straight, maybe you do that the first year, but perhaps in December if you get the chance you take five grand and give it to charity right away in December. That way you get $10,000 in one year and zero in the next. As far as the tax laws are concerned, the church got the same dollar amount. They get it a little quicker, which they probably don’t mind. But when you bunch it together into one year, you’re more likely to get that itemized situation. We do this with a lot of our clients, and we have another one we’ll talk about real quick too called qualified charitable distribution. So we had a client come in, somebody that was over the age of 70 and a half, and they have the ability to take money from IRAs and give it directly to their charity. They had been working with another advisor, and the way they were doing it before was that they were taking their required minimums, taking money out of their IRAs in the early part of the year and writing checks to their charities at the end of the year. We saw that when they were doing this, they no longer get this itemized deduction. We looked at their taxes. We look at people’s taxes all the time. For them, they were no longer getting the itemized deduction. Then we took a look at it and said, why don’t you take your IRA money and give that directly to charity using this rule called qualified charitable distribution. We ran the numbers. They were saving $2,500 a year by using this rule called qualified charitable distribution. They did nothing different. Instead of filling out a form, getting the money, and then writing a check to charity, they actually saved some time by filling out the form and sending it directly to charity. By doing that they were able to get this big tax help with qualified charitable distribution. So look at bunching your contributions. Try to take maybe two years worth of contributions and stuff them into one year. That’s one help. If you’re over 70 and a half, another thing to do is that qualified charitable distribution. Take your IRA money and send that directly to charity. I’m thinking about another new client, and in the last year they had some extra money in their bank account. They are really good consistent givers. They give $10,000 a year to the church. So they said, how should we invest this $30,000. Well, when we looked at their taxes, they were no longer getting that itemized deduction. We suggested that they take that $30,000 and put it into something called a donor advised fund. They were able to get a tax deduction that year and then let that donor advised fund pay out the charity consistently over time. So they basically took three years worth of contributions. They put the $30,000 into this donor advised fund. Now they don’t have to write a check out to charity for the next two or three years. They’ll just let their fund pay out to charity for the next two or three years. But they are able to get all the deductions showing up in that one tax year. For them, they said that their refund was over $4,000 better than what they were expecting, and that had a lot to do with that donor advised fund. That’s kind of a way to supercharge those bunching of deductions.
Aric Johnson: Yeah, I mean that is a perfect example because you’re going to itemize one year and then maybe the next two years you’re not itemizing at all, but you get such huge benefits. I don’t know anybody personally who wouldn’t like to save an extra $2,500 in a year.
Jeremy Keil: Why not? And of course everyone is different. That’s the whole point of tax planning is to take what the government gives you with these tax laws and project out how it might look in the next few years. By doing this you can have an idea how your actions today might affect you over time, and you can make some good decisions that’ll save you some tax money. So this new SECURE Act and CARES Act, that doesn’t change at all the importance of tax planning. It just gives you some new information, some new ways to go about it and look at it. We’ll talk about two things real quick on the SECURE Act before focusing on the CARES Act, but the idea is that the SECURE Act was really focused on retirement type of stuff, and the two big changes is that they moved the required minimum distribution day until you’re age 72. It was 70 and a half, which how many people celebrate their 70 and a half birthday? So 72 is a lot easier to understand. It’s really odd because we have had clients where the husband was born in June and the wife was born in August. So he hits 70 and a half in one year. She doesn’t until next year. They’re thinking that they are the same age, but they were in completely separate years because of this whole half birthday deal with the required minimums. So it just makes things a little bit easier. Required distributions now are at age 72, so the year you turn 72 is when you have to take that required minimum distribution. What’s also important about that too, I believe, is that they still left the qualified charitable distribution age to 70 and a half. So you might turn 70 and half and not be forced to take money from the IRA, but you may want to take money from your IRA to make use of that rule. So still keep in mind, 70 and a half is a big deal if you’re somebody that has an IRA and gives money to charity. I think that just about describes every client that we are working with. Second part of it that changes, and this is a big deal too, is this thing called stretch IRA, where you used to be able to leave money to your kids or grandkids, and they could take that money out slowly over time over their life expectancy, perhaps 30 or 40 years. Now they shrunk that down to 10 years. So it’s a lot quicker that this money has to come out. So it’s important if you have a trust that you talk to your financial advisor and attorney. If you have a trust that you are planning on putting your IRA money into and then have that money go to your kids and grandkids, you might want to take a look at that. There might be some things you have to change with the money coming out in 10 years instead of 30 or 40.
Aric Johnson: Yup. Absolutely.
Jeremy Keil: Well, let’s talk about CARES. The CARES Act passed in March of 2020. It was a big deal and had a lot to do with COVID-19. What they’re trying to do is change some rules around to keep people working and to help people still paying rent or mortgage. What’s important with a lot of this stuff is things we knew three months ago are completely changed now, and some parts of it you just have to know. Some parts of it you may want to take advantage of and other parts of it you need to be careful of. So a few things you ought to know is that they extended the tax filing date and the tax payment date until July 15th. So now you have three extra months to file your taxes if you haven’t done that already. That is a nice thing. It gives us a little bit more time to do that. Also, if you’re somebody that can contribute to a HSA, which is a health saving account, traditional IRA, or Roth IRA, now you have until July 15th to go make that happen for the prior year. So now is a good time to revisit and ask yourself if you have extra money and if you should be adding that extra money into your HSA, IRA, or Roth IRA for last year. Now we start talking about some money, right? They came up with these things called recovery rebates, and what’s interesting about it is it’s not a subsidy. It’s not them giving everyone a certain dollar amount. They call it a pre-refundable tax credit.
Aric Johnson: What is that?
Jeremy Keil: Yeah. Well, it’s actually been used before. That’s how they subsidize, in a way, the Affordable Care Act. Technically when you the Affordable Care Act and they’re giving you a subsidy, it’s not truly a subsidy. They’re just giving you this thing called a pre-refundable tax credit. They’re giving you a tax credit situation, but they’re giving it to you ahead of time. That’s where the pre-refundable comes in, but the reason we’re talking about this is so that you understand that even when you get that money, that $1200 or whatever it happens to be for you, you’re still going to have to have that situation showing up on your tax returns for 2020. This is pre-refundable. They give it to you early, but it’s related to the tax credit. So don’t be surprised a year from now when you are filing in the spring of 2021 for this year’s taxes, they might be asking you some questions about that. They may be looking at your income and making sure that you qualified for that situation. Basically what they’re doing is they’re giving out $1,200 per person and $500 per kid. What they want to do is make sure that the money really gets to people that need it. In their definition, if you are single and you make $75,000 or below, you get to keep the whole thing. If you make more than that, then they start taking back a little of that. They figure that if you’re making a lot of money that you are going to be fine. If you are an individual who is married, it’s $150,000 right? So where this comes into play is if you have not filed your 2019 taxes, you obviously have filed your 2018 taxes. They’re just going to look at either or and whichever one’s a higher number, they are just going to say you qualified based on that. So if in 2018 you had low income, but for some reason in 2019 you had high income, you might not qualify. You might not get that tax credit. So what’s important here is if you had a really high tax year in 2018 and you had a low tax year in 2019 and you did not yet file for 2019, you might want to go and file so that you get that lower income from 2019 in there. But then the opposite is true. If you had lower income in 2018 and you had higher income in 2019, maybe wait till July 15th, right? Maybe take that full length of time and don’t file yet. Don’t give them that higher number that would give them a reason to not send that $1,200. So that’s a little complex there, but if you are somebody that had this up and down type of income, think through whether you should be filing your 2019 income taxes as soon as possible so you get a lower year in there and get the tax credit, or whether you should be holding it off because you don’t want to let them know about that big tax year so that they still give you that tax credit then.
Aric Johnson: Okay. So let’s make an easy example and say that with my taxes I’m going to completely breakeven. I’m not going to have to send a check in. They’re not having to send a check out to me. Am I going to owe them money because of the money they gave me?
Jeremy Keil: That’s what’s interesting. I’ve read three separate articles about this. The way the rules are written right now, if you got tax money and you got this recovery rebate in 2020 and it turns out you didn’t qualify, you don’t have to pay it back. That just seems too good to be true. We have a lot of time between now and when taxes are due in 2021. I have got a feeling that they’re going to fix that. You know, in my personal opinion they ought to fix that if they sent out money to somebody because they thought they were lower income and it turns out 2020 was a good year. The big example here is if you are a toilet paper manufacturer, right? 2020 might be a good year for you. And they might say, wait a second, we’re all paying premium dollars for toilet paper right now, and they’re going to get a tax credit. What do we need to do here? So I have a feeling that they are going to figure out a way so that if 2020 was a good year for you, you might have to pay that credit back. That’s just conjecture. We don’t actually know. The way the law appears to be written right now it’s not actually the case, but we’ve got a lot of time. The reason we brought this all up is that just because you get a check doesn’t mean it’s done with right? It’s not just free money. It has something to do with your 2020 taxes. Even if you aren’t paying anything back, you’re going to be writing stuff on your tax forms about it. But don’t be surprised if they change the rules later on. We’ll let you guys know if they do change the rules, but don’t be surprised if this year happens to be a good income year. Hopefully that’s the case for you, but don’t be surprised if you do have to pay it back in some way.
Aric Johnson: Got it. All right. What's the next thing we're going to cover with the CARES Act?
Jeremy Keil: Yeah. Well, a couple of things on here we want to be kind of careful about is that the government allowed all of us to take up to a hundred grand out of IRAs and 401ks without this 10% penalty. If you’re below the age of 59 and a half, usually there’s a 10% penalty because they don’t want you to take money out of your IRA because it’s for retirement. But they figure that now is a big situation. You might need some money out early, so they are letting you take the money out early without the 10% penalty. The part to be careful of is people hear no penalty and think no taxes right? You still owe the taxes on your IRA. So just because there’s no penalty doesn’t mean there’s no taxes, right? So keep that in mind. The other part too is if the market’s down 20-30%, is that really when you want to be selling? Or would you rather let it rebound and come back up? If you really need the cash, maybe that’s a place you can go to now and not have that 10% penalty, but it’s worthwhile to figure out if you really, really need the cash. A lot of times you don’t, and a lot of times you might be better off just letting the money stay in the IRA and 401k while letting it rebalance and come back up again. A couple of other things. If you are somebody with a required minimum distribution, you don’t actually have to take it out this year. What we’re loving about our clients is they are saying that while they know they don’t have to, they want to give extra money to charity this year because they really need it. So we’ve had a lot of clients calling us up knowing they don’t have to take out the requirement this year, but they’re still making use of that qualified charitable distribution. They are still sending money out to charity. That is an awesome thing.
Aric Johnson: Yeah. Absolutely!
Jeremy Keil: A couple of other things too. If you’re a business owner, you need to look into this thing called the Paycheck Protection Program. It’s a way to get a loan from the government that they’re probably going to mostly forgive. The whole point is they want small business owners to stay in business in order to keep people employed. So take a look and call a Small Business Administration lender and ask them about the Paycheck Protection Program. It is a great way to get some money from the government assuming you follow the rules and keep your folks employed.
Aric Johnson: Got it. Good point.
Jeremy Keil: Yeah. And last thing with the CARES Act. If you’ve got kids or grandkids with student loans, they can defer their payment until September 30th. They don’t have to pay their student loans back until September 30th. What’s interesting is that everyone is banking online now, and they have automatic payments set up. Well if you’re set up on automatic payments, those payments are going to keep on happening. You might want to call in and tell them to take you off of the automatic payments on those student loans so that you can defer those student loans. So if you keep on paying it automatically, they’re not going to give you your money back, but if you are in that situation, you need to call in to stop those automatic payments in order to make use of that part of the program. So the CARES Act is going to affect us this year and for many years, but there’s some things that still haven’t changed. One of the things that hasn’t changed is that tax planning is still important. Every single time they come up with new tax laws, it’s even more important. You have to keep up with these tax laws. You have to take advantage of them. That’s why we focus so much on the tax planning piece of it. We believe that it’s something that you can control. You obviously can’t control the market.
Aric Johnson: Yeah, absolutely. Great points today Jeremy. This was a really good podcast. A lot covered. If people want to reach out to have more of a discussion about these very important changes, what’s the best way to reach out in order to get a conversation going?
Jeremy Keil: Yeah. I’ll tell you that real quick and then we’re going to go through five things you can and need to do right now based on the CARES Act. So if you need some help with your retirement and investments give us a call at 262-333-8353 or check us out online at keilfp.com. We have some great information on there about tax planning, about the coronavirus, and about all these different rules out there. If you’re sitting here thinking, what can I do? Based on all of this the number one thing when it comes to the CARES Act is just find things out for yourself. Find out if you’re going to have higher income in 2019, and if you’re going to have higher income in 2019, you may want to delay filing your tax return. If your 2019 income is lower than 2018, you might want to file it all right away. If you’re somebody that owns a business, you need to go out there and check out the Paycheck Protection Program through the Small Business Administration. You need to look into that. That’s going to help you keep your business afloat and help keep people employed. That’s the whole reason they came up with this act. If you’re somebody who is charitable, take a look at this thing called qualified charitable distribution. Take a look at bunching your deduction all into one year. Take a look at that donor advised fund. If you’re somebody that has a 401k or traditional IRA while the market is down, you can do something called a Roth conversion. We just helped out somebody a week ago where we said the market’s down 35%, let’s do a Roth conversion. We converted more than we normally would have because we figure that at some point the market will come back up, and when it comes back up, it’ll be inside of that Roth IRA at a tax free situation for them. And the last thing is that before you do anything you need to create a plan. It really helps if you have a guide to help you through that plan. When you need to act on that plan, act on the plan. Don’t react to what the markets are doing. If you follow all of those rules, I think you’ll be alright.
Aric Johnson: Yeah, absolutely. Again, I think that’s where you really put the exclamation point in this podcast: act on your plan. Get somebody to work with, whether it’s Jeremy or your current advisor. Start making some phone calls because you have to have a plan so that you are prepared for what’s coming. I mean we have three different tax laws that are still going to be affecting you for years to come. That's nothing to play around with. We want to make sure that everybody is secure and knows exactly how to take advantage of the positive things and how to avoid the negative things that are coming from all of these different laws. So Jeremy, again, wonderful podcast. Thank you so much for your time today.
Jeremy Keil: Thank you, Aric. We'll talk soon.
Aric Johnson: All right, sounds good to me. For the entire audience I want to thank you for listening to the Retirement Revealed podcast with Jeremy Keil. If you have not subscribed to the podcast yet, please click the “Subscribe Now” button below. This way, when Jeremy comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today. For everyone at Keil Financial Partners, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.
Thank you for listening to the Retirement Revealed Podcast. Click on the subscribe button below to be notified when new episodes become available. Visit Retirement-Revealed.com to learn more. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.