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Episode #11 of Intentional Wealth:
End-Of-Year Financial Considerations that Contribute to Solid 2023 Planning with Cassandra Kirby, CFP®, EA

Intentional Wealth Podcast

Episode #11: End-Of-Year Financial Considerations That Contribute to Solid 2023 Planning with Cassandra Kirby, CFP®, EA

December 15, 2022

In Episode #11 of Intentional Wealth, host Amy Braun-Bostich is joined by Cassandra Kirby, CFP®, EA, a private wealth advisor at Braun-Bostich, to discuss what financial issues to consider before the end of the year.

At the end of each year, there are a multitude of financial-life decisions to make that could impact your financial planning moving into a new year. To help investors navigate these complex financial times, we felt that a checklist to review and implement EOY initiatives as applicable may help.

Listen as Cassandra and Amy talk through what may be prudent checks to have on your EOY checklist.

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Welcome to Intentional Wealth, a monthly podcast where, alongside notable financial professional guests, Private Wealth Advisor and Founder of Braun-Bostich & Associates, Amy Braun-Bostich, delivers useful insights and strategies that help YOU live your best financial life! Remember, when your goals are meaningful and your wealth has purpose, you can truly live with intention.

Now here's the host of Intentional Wealth, Amy Braun-Bostich.

Amy Braun-Bostich: Good morning listeners and welcome back to another episode of Intentional Wealth. My co-host today is BBA’s own Cassandra Kirby, who along with her client advisory work also serves as the firm’s COO and CCO… So suffice it to say, she's got her hands full!

With that, I welcome Cassie to Intentional Wealth to join me in discussing end of year financial considerations that contribute to solid 2023 planning. Happy you're joining me today, Cassie.

Cassandra Kirby: Thanks Amy. I'm so happy to be here. Let's get started

Amy Braun-Bostich: Okay. Let's start with a few investment related questions.

What are some of the things that people want to do as far as it relates to investment planning? One of the things that I was thinking about was just, is your portfolio currently aligned or have you seen asset class spread throwing you into much higher fixed income to equity ratios? I think we see that a lot, right… depending on how the market moves?

Cassandra Kirby: Yeah, and I think this year especially, there's been downward pressure on both equity and fixed income, so it's probably not a bad idea to just revisit your overall allocation, just to make sure you're still in line with your risk tolerance.

Amy Braun-Bostich: And get that rebalanced. But then we'll also have to address some tax issues that go along with that, and then some of the other things that we look at are Roth contributions, right? So many people that we work with can't do a Roth, right, because their income is too high.

Cassandra Kirby: Right, and you also, it's also important to remember that for the contributions to the Roth, you have until the following year, till mid-April, till the tax filing deadline to make those contributions.

So you still have a little bit of time to consider whether or not you can do it, but should we revisit the concept with the Roth that it's after tax. You don't get a tax deduction in the current year, but once it's in the Roth and you meet certain requirements it grows tax-free, and it's not taxed at the time of distribution. So, it's really a nice way to save for a tax minded approach.

Amy Braun-Bostich: Right. And then if you, if your income is too high, right? We've used that after tax IRA to Roth strategy. Do you wanna talk about that a little bit?

Cassandra Kirby: Yeah, sure. So in order to make a regular Roth contribution, there are income limits and one of the ways that you can still make a Roth contribution, it's called an after-tax or a backdoor Roth where you do an after tax contribution to a regular IRA, and then you turn around and convert that to a Roth IRA. Essentially there's no tax. You just have to be careful that if you have other pre-tax IRA monies they can be then tax pro rata. So you wanna be pretty cautious when you do that, but it's a good strategy to use.

Amy Braun-Bostich: And then we've also had clients actually roll their IRAs back to their retirement accounts, their 401k, so they could do this strategy. So that's one thing to consider otherwise you're gonna really get a tax build it, you really don't want.

Cassandra Kirby: The other thing to consider, aside from contributions to Roth, are Roth conversions, which is where you take a portion of your existing pre-tax traditional IRA, and you convert it into the Roth. Now with that, you do pay the tax at the time of conversion. So you know, we have some different guidelines that we use when we do this, we sometimes we have clients that will do a Roth conversion up to the point that they owe tax because we have some people that are in a, a really low bracket. Other times we will fill up their existing tax bracket.

Amy Braun-Bostich: So by that you mean that if they're in the 22% tax bracket and they've got another $20,000 before they tip into 24%, we would do a $20,000 taxable Roth conversion.

Cassandra Kirby: Yep. The one thing to be mindful of is when you do a conversion, you have to come up with the tax due from somewhere else, so you know, from your checking or your savings or a non-qualified account, you can't have anything withheld from the IRA that you're converting from. So that's just something to keep in mind.

Amy Braun-Bostich: And then something else that I think that we look at is also unrealized investment losses in the taxable accounts. So we're looking to harvest gains and losses. And even like this year, it's been such a bad year, we've tried to make some lemonade out of the lemons that we got this year by doing loss harvesting. But even in a normal year, if we have to sell something that has a gain, then later on we will go ahead and, and look for losses in the portfolio.

Cassandra Kirby: Yeah, earlier this year, we went ahead and took some gains at the beginning of the year, and then with the way the market performed, we were able to offset, you know, for a lot of the clients, most if not all of those, and then allow them the ability to write… You can write off up to $3,000 of realized losses against other sources of income on your tax return, and then you carry forward anything above that $3,000 that you aren't able to write off. You know, it's a way to kind of stockpile losses also for future years that you can use against capital gains down the road. So that's definitely something to be mindful of as you approach the end of the year.

Amy Braun-Bostich: Yeah. And then a lot of people own mutual funds, right, so mutual funds are tricky in that they have to distribute, and if they've done some selling on long held positions, sort of in a down market, that happens a lot where they've gotta liquidate positions to provide cash for people that are taking money out of their funds. You could have bought into that mutual fund earlier in the year and then got phantom capital gains, right. So those are, that's always very interesting and so if you've created losses or taken losses in other types of investments that you have, you can use those losses to offset those phantom gains that you might have in your mutual funds.

Cassandra Kirby: Yeah, I don't think people realize that necessarily that, that there may be these capital game distributions that can be pretty significant and expose them to additional tax when they file their return. And some of them will pay, they typically, they pay at the end of the year, but sometimes they'll pay semi-annually, sometimes they're quarterly. So you know, and you wanna be careful also when you buy into a mutual fund for that reason, and that kind of gets back to the Phantom issue.

Amy Braun-Bostich: Yeah. Right. So if you didn't participate in that fund for 10 years, but they've been holding Google for 10 years and then they end up selling it, you're gonna have… depending on how much you have invested in there, but you're gonna have some capital gains that you have to pay tax on.

And then if you are 72 and you're taking required minimum distributions, or if you've got inherited IRA that you have to take required minimum distributions, that's another source of income that sometimes people forget, right. They forget that they have to do that and that can knock them into other tax brackets.

Cassandra Kirby: Yeah. And you wanna be careful if you’re required to take a distribution that you do it before the end of the year, because that's one of the IRS's biggest penalties. It's 50%. So if you had, let's say your required minimum distribution was $20,000 and you forgot to take it, that could be an up to $10,000 penalty. So you just wanna be aware that you need to take it and that you do before December 31st .

Amy Braun-Bostich: And then the other thing that I think people forget is sometimes people leave money in 403b’s or 401k’s and then they have IRAs and, so they've got their money kind of spread around that are Required.

Minimum Distributions that has to come out of the 401k and it has to come out of the IRA, Right? So there's some aggregation rules with IRAs where if you had multiple IRAs, you could take it out of one and not have to take it out of all of it. But that doesn't cover the qualified plans. Cassandra Kirby: Yeah. While we're on the required minimum distributions, there's something called a qualified charitable distribution, which we do quite a bit with our clients.

So if you give to charity on a regular basis, or even not on a regular basis, you can give directly from your required minimum distribution to the charity, and then that portion avoids tax. So that's a really good way to meet your charitable intentions while also kind of saving. taxes. And maybe even, I've had some clients that have decided to give a little bit more because they knew they were gonna be getting a tax break.

Amy Braun-Bostich: Right. And so that works really well too, especially if somebody's taking what the standard deduction. As opposed to itemizing… and then you don't even really have to be taking required minimum distribution, you just have to be 70 and a half to do that, and you can do up to what, a hundred thousand?

This is particularly good strategy if you're trying to lower your adjusted gross income, right? Because if you have a deduction, if you're itemizing, so you have a deduction that doesn't lower your adjusted gross income, that lowers your taxable income, but what are some reasons why you might wanna lower your adjusted gross income?

Cassandra Kirby: Yeah. I think less of your social security might be taxable Medicare tiers, Right? Right. You have to be mindful of Medicare.

Amy Braun-Bostich: And that's really, it's kind of funny, but a lot of people really don't understand that the more they make, the more they pay for Medicare B and D. They think that it's the same for everybody, but it's actually not.

So that's all based on adjusted gross income. So you could be paying well over $500 a month for B f you tip into a higher tier. Whereas the actual, you know, the base amount is $170.10 this year, and I think it drops by $5, which hardly ever happens next year.

Cassandra Kirby: I think… I've run into this too. This is kind of off topic from the required minimum distributions, but I think it's a good idea if you're still working to just check, or if you had like a job change mid-year and you had to submit a new W4, we've had a couple clients run into some problems with their W4. They did a new form that was supposed to be easier to fill out, and I personally have found it to be more complicated.

So it might not be a bad idea to just have your tax prepared, your advisor, check your wage withholdings to make sure that you're not under withholding because then you could potentially be penalized.

Amy Braun-Bostich: We actually had a client one time working for, was it a bank where they checked a box saying that she was non-taxable or something, and they weren't holding any money. Do you remember that?

Cassandra Kirby: Yeah. So she had no federal withholding. Amy Braun-Bostich: She had no federal withholding when we looked at her pay stub. So, mistakes get made all the time. Would you expect clients to do maybe bunch expenses and income into lower tax years? Do you wanna chat about that?

Cassandra Kirby: Yeah, but I also wanna touch on that donor advised fund too while we were talking about charitable giving, so, and this kind of… I think it'll segue into bunching things, but you can also give to a donor advised fund, which is, it's like a, just a side account where you get a deduction in the year that you give to it, and then you can have the money distributed at any point in time in the future to different charities that you choose. But you're able to take the deduction in the year that the money goes into the account.

So that's a good way. If you itemize on your tax return to increase your deductions, and maybe you would do that if you aren't taking required minimum distributions yet. You might do that in a year that you have significant income to help offset, you know, significant capital gains.

So those would be years when you would do something like that, or if you knew that you had like a high dental or a high medical expense, but it wasn't quite enough to push you over, you know, to give you the ability to itemize. You might do that in one of those years.

Amy Braun-Bostich: So you basically, I think what you're saying is you would, let's say that you gift $5,000 a year on a normal year, you could take three years’ worth and put $15,000 in a donor advised fund and take that off in that year and then distribute like you normally would in year two and three. Yep. Yea, that's a good idea.

Cassandra Kirby: Yeah, and another, as far as we're, we're talking about bunching things, sometimes you can double pay your real estate taxes or pay them because there's some limitations now that were put into place on, you can only write off, up to $10,000 on schedule A of state and local tax.

So depending on the state that you reside in. that could be a significant impact on your state tax liability. So, you know, there's a couple different ways that you can bunch things for state and local tax purposes as well to kind of give yourself a benefit in certain years.

Amy Braun-Bostich: So you would be able to bunch the expenses so that you get up to that $10,000 in one year, and then take the standard deduction in the second year.

Cassandra Kirby: Yep.

Amy Braun-Bostich: Yeah, I've seen people do that. Prepay some real estate taxes, but like you said, there's some rules associated with that.

Cassandra Kirby: Right. And it's also just kind of depends, I mean, every person's situation is unique and what happens throughout a year for you, you know, you may be able to do this one year and not the next. It just kind of depends. And you wouldn't think that your situation could change that much, but it does. I mean, things happen. Another thing to think about is if you are self-employed and you've got, you know, a good bit of income that you should fund some type of a retirement plan for yourself, like a SAP IRA or, or something like that to help get your adjusted gross income down.

Amy Braun-Bostich: The other thing, and we've had several clients do this, is they might come into some taxable money during the year. So they have enough cash that they could live off of till the end of the year. They might increase their 401k contributions to lower their, their taxes, right? So even though they're not getting, they wouldn't get much of a paycheck by doing that, they can live off of the cash they've come into and use that extra pre-tax deduction to help offset their taxes. So we have a couple clients that are doing that. They have capital gains, or they have money coming in from trust and things like that. And then also there's tax bracket thresholds, right, so you can very easily tip into a higher tax bracket. So some of these strategies can help with that.

Cassandra Kirby: Yeah, and Amy already mentioned the Medicare Part B, but some of these strategies will help you check the box on a couple different goals. So it's just, you know, it's just a good idea to really take a look at where you are as you approach the end of the year to see if there's anything that you can do before the close.

Amy Braun-Bostich: And then so, qualified dividends and capital gains are considered tax preferential items, right? Because they get taxed at lower tax rates. So there are some people that don't pay any tax on that, zero tax. So that would be, if you just flip into, accidentally are gonna flip into a higher tax bracket that could take you right from what, zero to a higher…

Cassandra Kirby: Yeah. 15 or 20 In the next…

Amy Braun-Bostich: Yeah, and not too much money would cause that to happen. So those are things to be mindful of. And also that net investment income tax, people always forget about that. So that's a 3.8% tax that was brought into being to help the Affordable Care Act funding.

So that really can take a chunk if your modified ingested gross income is over $200,000 for a single or $250 for a joint filer. What are some other things that we could talk about?

Cassandra Kirby: Well just back onto the Roth real quick, I think. Some people they don't know, you know, should they do a Roth or shouldn't they?

I think this comes up a lot, and I guess the rule of thumb is if you think that you're going to be in a higher tax bracket in retirement, then a Roth would be a good idea because you're not gonna have to pay on the Roth. You're not going to have to take distributions out of the Roth. Should we talk about that a little bit? Amy Braun-Bostich: Yeah, I think, I think that's one of the greatest investments that people can own are the Roths.

Cassandra Kirby: And while maybe you don't know what, like if you're young, you've got, I don't know, 20 years to retirement or 30 years to retirement, we have no idea really of knowing what brackets will look like then, but you do have the certainty of knowing that the Roth is not gonna be taxed.

Amy Braun-Bostich: Well, I think people also forget that tax cuts that were put in place during the Trump administration will be sunsetting in 2025. Right. So we do know with almost a hundred percent certainty because I don't think that they're gonna lower taxes again, that people are gonna be paying more.

Cassandra Kirby: Right, so for example, if you were in the 25% tax bracket, you've been now in the 22% bracket for the last four or five years. That started in 2018, I think. But after 2025, you're gonna go back up to the 25% bracket. Same as if you were in the 15%, now you're in the 12%, so that's gonna be about a 3% on average increase in tax based on where you fall.

Amy Braun-Bostich: It doesn't sound like a lot, but it ends up, if you have a, you know, a fairly good chunk of income coming in, it could really push your, the amount that you have to pay in tax. And then people also, they get these, we have a lot of clients with royalty income now.

So it's coming in and sometimes they don't pay enough in estimated taxes. So when that happens, there's penalties, right? And interest payments due on unpaid estimated taxes. What are some of the… so, In the past we've kind of used required minimum distribution sometimes to offset that, right?

Cassandra Kirby: Yeah. So if you withhold tax from an IRA distribution, the IRS assumes, or it's received as if you've been making equal installments throughout the year. Whereas if you're making quarterly payments, that's not the case. So if you need to pay additional tax and you've, maybe you missed a quarterly estimate, you can use your IRA distribution and have tax withheld from that, and then you avoid penalty doing it that way.

Amy Braun-Bostich: So if you've been, if you've underpaid your taxes, but you still have to take your required minimum distribution, I think what you're saying is you can even withhold a hundred percent of your Required minimum distribution, and the accounting for that is if it came in equally throughout the year. So no penalties, no penalty, no interest due…

Cassandra Kirby: Right, and no writing checks and having vouchers.

So that's a really pretty efficient way to pay in. The other thing that I think people should really just be mindful of is like major life changing events for the year. Like, did you get married? Did you have a child? Or is this the first year that you're filing as a widow? Amy Braun-Bostich: Right, that's important. So widow tax is big. People don't realize that when your spouse dies, your income goes down, but your tax bracket goes up.

Cassandra Kirby: Right? Because you're losing deductions. If you had been filing jointly and your spouse passes away, you can still file jointly for the year in the year of death, but the following year you're gonna file single, which means your deductions are coming down.

Likely you're gonna pay more on your social security. It just really, I don't think people realize that, but from a tax standpoint, you end up owing more tax when you file single.

Amy Braun-Bostich: Right On Less income. So that's, that could be pretty painful. Cassandra Kirby: And then if you have a child, you know, you'll keep in mind that you'll get the deduction, that you'll have the child tax credit.

If you wanted to establish a 529 for education, you can get a state tax break for contributions. In Pennsylvania, it's a direct offset to your taxable income, which is pretty nice. And you can get, for 2022, it was up to $15,000 per beneficiary, so per child. So if you had two kids and you put $15,000 into each of their 529s, then you're gonna get a $30,000 deduction on your state taxable income. It's pretty substantial.

Amy Braun-Bostich: Yeah. And that comes in handy even if your child is already in college. A lot of times people will stop making those 529 contributions because they're making those distributions. But if you're in one of those years where you know it's getting close to the end of the year and you realize, oh my goodness, you know, I'm gonna have this huge state tax bill if I don't do something. That's a, that's a great way to help lower that.

Cassandra Kirby: One other thing, when you have losses or when your income is lower or you have room in your tax bracket, we have a lot of people that have savings bonds that are no longer accruing interest. And so those years where your income is low, you, you should really consider taking advantage of surrendering or cashing those bonds in, pay the tax due on the interest and then put it into something where you can earn interest. And this year we're talking about turning lemons into lemonade. There you can actually find CDs now and alternative cash options where you can make a little bit of money on your cash.

Amy Braun-Bostich: Right. And then we, we did briefly talk about opening up a retirement plan if you have a small business, but there are other things that you can look at if you've got a small business as well, right?

So there's qualified business deduction, where you're able to offset 20% of your income. So that's one thing that you can do. The other thing is that you can defer income, right? You could bill late and push income into the next year. Or you could accelerate income if it's been a terrible year and recognize income in the current year. So those are some things that small business owners can do. Or this is the last year if you're a small business owner, that you can buy a vehicle with a $6,000 GVWR and write the whole thing off. So that goes away next year. Well, it goes away, I think after the end of this year.

So if you need a write off and you're a small business owner, you know, get a big SUV or a truck for a company car and you get to write the whole thing off in one year. And then so towards the end of the year, we sort of reflect on everything that we've spent, right? Like, did we waste money? Do we have subscriptions we don't use? Are we budgeting appropriately?

So I always found that those are good exercises, not just for clients, but also for me personally, to see where all the money is going. And then that may end up freeing up money next year for other things such as, increased retirement plan contributions or paying tax on Roth conversions, those types of things.

Cassandra Kirby: Yeah. And next year, so every year there's a little bit of an increase in what you can put away. So for 2023, you can put $6,500 maximum into a Roth IRA or a traditional IRA with a catch up of $1,000. For this year, it was $6,000 into your 401k. It's going up from $20,500 with a catch up of $6,500 to $22,500 with a catch up of $7,500.

So something to keep in mind if you are saving into a retirement plan and you're maxing out that you wanna make sure that you increase that because you can put a little bit more in which is a great way to reduce your taxes. So you need to, you wanna, you know, try to do that earlier. The sooner that you do that the less it impacts your cash flow throughout the year.

Amy Braun-Bostich: And just to be clear, the catch up is for people that are 50 plus. And then also one thing to be mindful at the end of the year are flexible savings account balances, but you can roll some of that into the next year. Right? I think they'll give you a grace period until March 15th of the following year to spend that money.

But one of the things I like even better than those are health savings accounts. I think that is really something that people don’t give much thought to, but I think they're fantastic savings vehicles. You can get a high deductible medical plan, couple it within HSA and some employers are even putting money into it.

Cassandra Kirby: Right. And you contribute pre-tax. So again, you're reducing the amount of your income that's taxable. And then if you have a medical expense come up, you can draw from that account. It's tax free…you can use it in retirement for medical expenses. There are a few circumstances where you can't use it and I think, I don't think you can use it to pay Medicare premiums.

Amy Braun-Bostich: That's correct, yeah. You can't use it for that, but you can use it for all, all kinds of stuff, even though over the counter and then you can use some of that, I think you told me for a spouse too, right? Cassandra Kirby: Yep. You can use it for braces for your kids. I mean, there's a lot of different things…

Amy Braun-Bostich: So, we usually tell clients, you know, if you can avoid it, you know, don't touch it, just let it grow. Because in retirement you have a 401k, and when money comes out of that, it's taxable, but with these HSAs, you can have the money come out and it be nontaxable because it's paying for all these kind of medical payments that normally you'd have to pay with after tax money.

Cassandra Kirby: Yeah. it's probably a good idea if you're still working, to really talk to your employer about your benefits, what you know, what are your benefits. A lot of people might have just passed over open enrollment. You know, what do you qualify for? What are you currently doing and what could you do? Because I think people get, you know, they just set it and forget it and they might be missing out on some of these different, like the flex savings account or an HSA, they're not even thinking about doing that.

But those are things that you could do through your employer that could make a really big difference over time.

Amy Braun-Bostich: Yeah, and even like 401ks now, some of them have after tax accounts or Roth 401k is attached to them. So that just gives you even more flexibility. So you couple those types of things with HSAs and FSAs, and you can really do miracles with your taxable income. Well, I don't know, I think we've covered a lot here. Anything else that you can think of?

Cassandra Kirby: No, I think just being aware of your assets and your investments and working with an advisor or a tax planner to kind of bring some of these things to light for you is probably a really good idea.

Just even if it's once a year to make sure that you're not avoiding or unaware of something that could benefit you in the long run.

Amy Braun-Bostich: Well, thanks again for co-hosting with me today. I really, I know that it's been incredibly informative for our listeners with takeaways, and hopefully it'll help with future planning, so your insight is really sincerely appreciated.

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