Obamacare (AKA, the PPACA) and Shared Responsibility Payments

The ever-politicized Patient Protection and Affordable Care Act (PPACA) branded “Obamacare” by those who never liked it was modified under Congressional budget rules in the Tax Cuts and Jobs Act the president signed into law last week. While actually modifying the provisions of the PPACA wasn’t possible in the parliamentary chicanery of the budget law, Congress did provide for changing the penalty calculations as they do have revenue effects. The two ways to calculate the penalty, which remains a “greater of the two” penalty, had their rates changed from 2.5 percent to zero percent of “household income in excess of the return filing threshold,” with a minimum that changed from $695 to $0. A creative approach, no? Leave the penalty in place, but reduce it to $0.

An aspect that may take some by surprise, however, is that the rate reduction does not take place until after 12/31/2018. So, dear clients, please make sure you have some kind of coverage to avoid what will be a painful fine for those without coverage.

Contact us through our contact form if you’d like to discuss options.

Tax Changes

Well, the president signed the tax bill so it is now law starting after December 31, 2017. We’ve gotten a lot of inquiries from clients about what this means so we’ll start unbundling the law as it applies to our client base over the next couple of weeks.

The first point that applies to all of our clients is that the new law doesn’t apply to the year that is about to end (Tax Year 2017). So, you’ll still be able to itemize just like always. That means:

  • getting all those charitable contributions made before the 31st

In addition, since this is the last time that many will be able to itemize (or, frankly, need to do so), take a look at these options:

  • Prepay property taxes due in 2018
  • Re-register personal property like vehicles in advance if there is a tax involved
  • Prepay items like alimony
  • Pile on medical expenses especially if you’ve hit your deductible — probably too late for most of us since our providers are on holiday vacations!
  • Prepay professional memberships like unions, chambers of commerce, the AICPA (in my case!), and the like
  • Make purchases that qualify as unreimbursed employee expenses this year rather than waiting till 2018
  • Pay your January mortgage payment in December (pay for two months in December)

What’s the common thread on all of these? They are items that you can deduct now but not next year and if you pay them in advance, you’ll be able to take the deduction on your tax return that you file before April 17, 2018. Scan your 2016 Schedule A for items you may be able to pay in advance since they won’t be deductible when you file your tax return in 2019 (for tax year 2018).

Note that in the fine print for this provision, the TCJA law’s implementation is going to require property owners to have a tax levy notice in hand in at the time of payment in order to take a deduction for prepayment of property taxes. Check with your county assessor or equivalent before attempting prepayment. Additional details are available at this IRS page but we read this stuff so you don’t have to.

If any of this is confusing, contact us for a one on one follow up.

To Buy or Not to Buy a New Car?

The genesis of this article was a brief conversation in which a colleague was justifying the purchase of a new car. Now, he already has a car, it’s not the car he’d buy today, and he’s still making payments on it. Recently, the air conditioner stopped working and he’s not yet troubleshot the problem. It could be the compressor, the clutch (something as simple as a fuse), a problem with the expansion valve or other evaporator problem. It could have a leak that allowed all the refrigerant to leak out. In any case, this problem is being used to justify taking on additional debt to get a more expensive, larger vehicle. He also wants an electric car, an issue that we’ll set aside for a later post.

The real issue, though, isn’t the pending repair bill. It’s the masking of a debt-financed consumption desire by the repair bill. This makes me think of an analysis I conducted years ago when faced with a similar decision.

Back then, I got a second job on the other side of town, almost an hour away by freeway driving time. I was driving a ten-year-old car at the time and it didn’t get the best mileage. The thought occurred to me that I might be able to get a new car and actually save money based on the increased fuel efficiency. But, before I jumped into a new car, and commensurately, a new car loan, I wanted to confirm the numbers. To my surprise and disappointment, the numbers just didn’t work out. Gas would have had to have gotten up above $5.00/gallon to make my decision work financially. So, with that off the table, I was reduced to considering a consumption rather than a financial decision.

As with any consumption decision, the issue is this: What do I want to give up to consume X [insert whatever you’re thinking of buying at the X]? Now, given my framework, I value consuming financial stability above everything except a place to live, necessary clothing, and food. Following stability is financial well-being and a long, relaxed, partial-retirement (what’s come to look like the “gig economy” except I can work when I want to and play when I don’t want to work). After that, my framework allows for entertainment, social considerations, and outright consumption like adult toys (all that sporting hobby equipment, not what you were thinking!).

Where did a new car come out then? It didn’t. I continued to drive the old car until it’s engine head warped (it was aluminum) and even then, I looked closely at dropping a new one onto the engine. One of our saving funds was new car purchases so we also shopped for a small subcompact and found a good deal for a Nissan Sentra, 5 speed, bottom-grade trim car. We were then off and running for another ten+ years. We sold that car overseas when we’d had it for 12 years.

Transportation purchases are one of the most common wealth-draining purchases people make. At this point, I’ve heard almost every rationalization known, and they are all just excuses. The real issue is to learn to manage wants versus needs. Conflating the two is what holds most people back from financial well-being. The tool to avoid this: Having a financial framework that allows you to produce a budget and stick with it. The framework will allow you to have a ready reference to how you prioritize what you do with your financial resources today and tomorrow.

There’s also a maxim at play here. “Don’t let a bad decision cause you to make more bad decisions.” Say, for example, you don’t like the car you bought. Perhaps you deem it to be unreliable. To come to terms with a reasonable decision, given your financial framework (or philosophy some call it), run the numbers, throw in some probabilities, assess the ranges, figure out what you have to give up (all the other possibilities for those dollars) and then make your decision. In this case, there’s likely little way that the most expensive air conditioning repair will justify driving another car off the lot.

The money you save by controlling consumption impulses will allow you to focus on building wealth. Financial freedom and non-working retirement years require income streams. Only productive capital can produce those streams. Every time we buy something that isn’t productive, we’ve taken a step back from financial freedom.

While this is not a financial lifestyle blog, the reality is that you do have to save money in order for us to help you build tax-advantaged wealth. Once you are accumulating savings, don’t forget to have a chat with us about where you are, financially, and where you want to be.

Year-End Tax Review

As we come to the end of 2017, there’s a final chance to take advantage of remaining 2017 opportunities and to begin positioning for 2018. If the House and Senate agree on and pass a tax code revision this year (and the President signs it), we’ll publish our take on what that means for the various components of our clientele. This article focuses on remaining 2017 opportunities.

Fund Your IRA

Even if you participate in your employer’s 401(k) plan, consider setting up (if you don’t already have one) and funding an IRA this year (or making a contribution if you have one). For many of our clients, your IRA contribution won’t be tax deductible and they won’t qualify for a Roth IRA. But, in 2017, the opportunity to make a non-deductible contribution remains open for everyone and clients have the right to change their minds later on and recharacterize that contribution to a Roth.

We’ve written previously about the wonder of self-directed IRAs for opening up the investment horizon to rental real estate, tax liens, promissory notes, and other options not available through brokerage-administered IRAs. All that remains true and we’re working on an update.

For clients who are hitting their maximum deferred compensation limits of $18,000 for 2017, reducing any unmatched amounts to allow for an IRA contribution makes sense since clients then have more control of their investment options. This is even true for those who have access to the Federal government’s Thrift Savings Program — we recommend that any amounts saved for retirement beyond 5% of pay be contributed to an IRA rather than the TSP (yes, we’ve taken the ultra-low-cost TSP administration fees into account in making the recommendation). The same logic applies to 401(k) plans in general. Clients should plan on making an IRA contribution in 2018 and adjust their payroll withholdings accordingly.

Charitable Contributions

Charitable contributions remain deductible for 2017 so we recommend clients take a few minutes to review their charity list from previous years and to take a look at funding some new ones. Many states have a “double dipping” list of charities and even tax credits that make giving to specific types of charities a dollar-for-dollar reduction up to the taxpayer’s state liability. In Arizona, for example, donations to charities that qualify as “Qualifying Charitable Organizations” that support foster care or the working poor reduce taxpayer liability in the amount of the contribution up to $400. Arizona allows these contributions to made up to the return due date of April 17, 2018.

We hope folks don’t forget local schools contributions as an option either especially if there is a local tax credit available in their states.

Tax-Free Medical Funds

Many clients set aside pre-tax funds in the various options (MSAs, HSAs, FSAs). Review those if yours has a “use-it-or-lose-it” component and get to the dentist or whatever. If an individual or family has met their health plan’s deductible, getting elective procedures or tests done this year will save, especially if meeting the deductible next year isn’t likely. Think about how much to set aside for 2018 and remember that FSAs now have the ability to roll over limited amounts rather than simply losing them.

Tax Loss Harvesting

If clients have had a windfall sale during the year, now’s the time to sell portfolio holdings at a loss, especially if a similar (but not identical) asset (not the same one) is available for immediate purchase with the freed up funds. Clients should avoid triggering the IRS’s wash sale rules by repurchasing the exact same asset just sold.

Prepaying Tuition

This may be the last time this one works. The Hope or Lifetime Learning credits are still available for 2017.

Small Business Deductions

This is the true engine of wealth generation — investing in productive assets. Major asset acquisitions that can still be deferred to 2018 may get a better treatment by doing so. For most filers, though, this won’t make a difference and we recommend taking the deduction in 2017.

Summary List

This list summarizes the article’s points and adds items to consider for your upcoming filing.

  • Penalties for early withdrawal of savings
  • Alimony paid
  • Student loan interest
  • Prescription eyeglasses, contacts, and hearing aids
  • Crutches, canes, and orthopedic shoes
  • Medical transportation costs
  • Cost of alcohol or drug abuse treatments
  • Charitable contributions
  • Local and state income taxes
  • Personal property taxes or real estate taxes
  • Points paid for a mortgage or refinancing a home
  • Unreimbursed employee business expenses
  • Mileage and other expenses associated with volunteer work
  • Casualty and theft losses
  • Tax preparation software and tax-preparation fees

As always, our articles are not intended to be specific advice. We publish them to stimulate discussions with each client so please contact us with your thoughts and questions regarding the points you found interesting or relevant to your situation. We’re awaiting your email or message.