Tax Savings Strategy; As Easy as 1-2-3

When working with clients, we find that everyone wants to save on taxes and be smart with their money. However, many times we see clients missing out on some strategies that could produce smart savings right now. Here are some of the top ones that could make a difference for you right now:

1) Truly leveraging 529 education savings accounts!

a. If you are paying for college tuition or private school tuition for a son or daughter, niece or nephew, or grandchildren, this is one of the best ways to save and grow money, and at the same time take advantage of some in-state tax deductions! Also, you can be fairly creative with this if you would like to be.

For example, if you are paying K-12 private school tuition, did you know that you can put money into a 529 account, which is deductible up to $5K per married couple per year, and then you can take it right back out to fund the school tuition? If you have multiple children, you can do $5K per year per child. If you have three children, instead of just paying $30K per year for their private school tuition, you could deposit $15K ($5K per child) into a 529, and keep it in cash, and then take it out the following week to go towards their private school tuition. You are still paying $30K, but you are getting $15K as a tax deduction in Maryland! (A point of note: each state has different relative state deductibility limits. For this article, I am specifically referencing the Maryland plan administered through T. Rowe Price. Also, for K-12, you can only pull out $10K per year from the 529, but for college you can pull out as much as you want.)

b. Did you know that you can front-load funding a 529 for up to 10 years? If you would want to fund a child’s college in full today, you could deposit $50K right now, and claim the $5K deduction this year and then roll over the next 9 years of tax deductions into following years!

c. Did you know that you can open 529 accounts for nearly anyone – your children, your nephews, and even for yourself, and can transfer it to any beneficiary? So technically, a parent could open up a 529 account for the Mom and Dad and also their Son/Daughter and deposit $5K in each account and then transfer the Mom and Dad’s accounts to the Son/Daughter to obtain a $15K state of Maryland tax deduction per year!

2) Taking advantage of charitable tax deductions!

a. If you are over 70.5 years old and need to take out Required Minimum Distributions(RMD’s) from your IRA’s, and you are already giving to charity each year, this could be a great way to give instead! The reason this is a great benefit is because if you gift your RMD directly to the charity, you don’t pay any income tax on this distribution and neither does the charity! This would be a far better way to give money to charity in retirement than just cash gifts!

b. If you have appreciated stock or securities in a non-retirement account, you can gift that stock to a charity instead of recognizing capital gains. For example, if you bought Apple

Stock many years ago and it has significantly appreciated, and you don’t want to pay the capital gains tax on it, you can gift that stock to the charity and neither you nor the charity would pay taxes on it!

c. Have you heard of a Donor Advised Fund? If you are taking the Standard Deduction and not necessarily benefiting from the charitable itemized deduction because of that, then you can instead decide to fund several years’ worth of contributions in one year to a Donor Advised Fund. In that one year, it may make more sense to itemize your deductions and include your charitable contributions. A Donor Advised Fund is a fund you can setup in your name that is like a savings or investment account that can be used towards charitable contributions. In practice, every few years you can do this, and in the years that you take the Standard Deduction, instead you can take withdrawals from the Donor Advised Fund to give to your charity of choice.

d. Did you know your retirement accounts upon your death can go to charity. This can be a great way to gift as your children won’t have any taxes to pay on the retirement accounts nor will the charity. And instead of gifting the money to your children through retirement accounts, another option could be for you to obtain more life insurance which will be received by your children tax-free anyway!

I hope this was helpful and your head is not spinning! These are some great everyday strategies that can create for you and your family some serious tax savings - if you do it right!

A Sky Full of Stars; Inflation Concerns

The Bureau of Labor Statistics announced that the prior 12 months had 4.2% inflation for the past 12 months, the largest increase in 12 years.

So what does this mean and what has happened?

Inflation is simply prices going up.  There has always been inflation and will continue to be.  If you think back to how much it cost to go to a family dinner and movie in the 1950’s it may have cost a family of five $1.50 total for that night out!  Today, that may cost $150 total.  That is inflation in a nutshell.

Many people talk about the Federal Reserve and this notion that they create inflation, but that is actually part of their mandate – to have a low unemployment and create modest inflation.

The opposite of Inflation is Deflation - in which prices go down instead of up. Generally, we have been in a deflationary world for a long time, but people have talked less about this.  We don’t notice the deflation in our lives, as much as we notice the inflation.

For example, seeing the price of a laptop that is better and faster than it was 10 years ago, now costs only $1K instead of previously costing $2K.  This is deflation.

Overall, large scale deflation is bigger problem than inflation, and the government is very interested in not having deflation.  

I believe we are in a period of Transitory Inflation, in which there have been certain factors that have caused some recent inflation, but it will go away and will be solved.  

Here are some recent examples of things that caused Transitory inflation:

1. When Russians hacked a colonial pipeline, there is a sudden increase in the price of oil

2. When a shipping truck blocks the Suez Canal, and things cannot be delivered on time

3. When people get stuck inside for more than a year due to a Pandemic and cannot spend money and the government gives out stimulus checks and PPP money to businesses.  Then people emerge when the pandemic is over and want to spend lots of money on boats, and restaurants, and vacations, etc.

What should you do about it?

Well, there is nothing you can truly do about it.  But it is not all a bad thing.

The cost of borrowing has come down with drops in interest rates.  For example, while a house’s price may cost more, mortgage interest rates have come down, and overall, the affordability of houses has improved due to this.

Many people can be winners in this type of situation.  If inflation drives the value of your house value up, and your wages up, and you refinance your mortgage to a lower monthly payment, all of that is good for you.

You also can think about how you are invested:

1. If inflation costs 3-4%, and you are all invested in cash which is earning 0%, or bond earning only 2% or less - that can be problematic.

2. Meanwhile, if you are investing in stocks or real estate that is earning 7% for example, that can be a good thing.

However, it still makes sense to have some money in bonds and cash to have money available if things hit the fan and there is a market drop.

As Warren Buffet says – cash and bonds are a short-term safe haven, but long term money should be invested for growth using stocks.

I hope this provides some brief and concise education-101 on what is going on and you find this helpful!