Top Things to Ask a Financial Advisor

Financial Planning Industry: Selecting an Advisor

“Life is Change, Growth is Optional”

I heard that book title the other day, and even though I haven’t read the book, I found myself considering the title in relation to my profession. As in the case of life itself, there exists a lot of change in the financial world. My job as an advisor is to stay informed and help my clients navigate their options. However, despite consistent advances in technology and an ever-changing landscape of regulations, I make sure three things remain constant for my clients — our relationship, our collaboration toward growing their wealth, and always being a good steward of their money.

I am reminded of the value financial advising offers and the critical impact we have to help shape future lives of our clients and their families in profound ways. Because of that, I cannot emphasize enough the importance of finding the right financial advisor for your own needs.

The first thing to consider when you’re looking for the right advisor is what information you are seeking and how it will impact your decisions now and for the future:

  • Is the advisor a Fiduciary? “Fiduciary” means an advisor pledges to act in the client’s best interests at all times. Any designation of Certified Financial Planner, Registered Investment Advisor or Investment Registered Advisor has fiduciary standards that must be upheld.
  • Does the advisor have a clean record? Do some research through FINRA Broker Check https://brokercheck.finra.org/ and SEC Action Lookup https://www.sec.gov/litigations/sec-action-look-up. Check for criminal convictions or investigations by any regulatory bodies or investment industry groups.
  • What is their fee structure or how do they get compensated for their work? Typically, there are commissions and fees included for advisory work, which can be charged as a percentage of assets or at an hourly rate. There is currently a big push for fee-only advisors as the fiduciary standard. However, the industry has been changing, and some options (such as insurance products) are only available on commission, so blended structures and hourly options might be worth considering.
  • What are services I can expect to receive? It is important for you to have the right expectations for what your advisor will provide other than just investment guidance and how/how often that will be delivered.
  • What is the investment strategy? You need clarity on how your advisor makes decisions. Ask if they have a process, access to resources or a team, and evaluate if these align with your values.
  • Why are they a financial advisor? Hearing how your advisor came to be in their position will help you better understand the person you’ll be trusting and why they have a passion for the work they do.

For me, being a financial advisor is an honor, and to be able to serve others with their wealth and prosperity is something that fills me with joy. I wish for you to find a great financial partner in your journey of navigating all of life’s changes. May it be filled with abundance and prosperity.

Kendra Erkamaa
Securities and Advisory Services offered through Harbour Investments, Inc.

Financial Planning Through Divorce – Tax Considerations

In this second of two articles in the series, we’re focusing on how taxes may affect the division of property during divorce. Divorce is already a painful process, but taxes have the potential to compound the pain more through confusion over new tax laws and changing finances with retirement and beyond.

In my opinion, the number one tax consideration through divorce should be how they are applied to assets and income. Remember that not all assets are created tax equal! We tend to categorize our assets into buckets:

Non-qualified/taxable assets
These assets have no special retirement tax laws and are subject annually to tax on income and capital gains. Examples are bank accounts, equity in real estate, individual and joint brokerage accounts, stocks, mutual funds and bonds that are all held outright. Also frequently overlooked are after-tax contributions to plans like a 401(k), which will require a phone call to the plan company to clarify. 

Pre-tax retirement accounts
Contributions to pre-tax retirement accounts are deductible at the time they are invested (subject to withdraw rules), grow tax deferred and are completely taxable when withdrawn as a distribution from the account.  Examples of these plans are Traditional 401(k), SEP IRA, Simple IRA and Traditional IRA.

Tax-free retirement accounts
These account contributions are made with after-tax funds (NOT deductible), grow tax deferred, subject to withdraw rules and tax free when withdrawn as a distribution after the age of 59 ½. The accounts may be subject to taxes and penalties for early withdraw prior to age 59 ½.  Example of these plans are Roth IRA, Roth 401(k), Roth 403(b) and any other Roth account. 

Life insurance products
Life insurance accounts have a deferral of taxes with income. Common examples of these are life insurance policies with cash value, fixed annuities and variable annuities.

In divorce, try to equalize asset divisions throughout these “buckets.”  If there is an offset, accounting for taxes may be important, which can be tricky, especially when some funds won’t be accessed until retirement. 

As always, being informed and working with a trusted financial professional who is certified in divorce financial analysis can help make an already daunting and stressful process a little less complicated.

Until next month, be wealthy and wise!

Securities and Advisory Services through Harbour Investments, Inc.  Member SIPC.

Tax Reform Article

On Friday, December 22, the President signed the Tax Cuts and Jobs Act (TCJA) of 2017 into law. We have separated the tax discussion into four major parts: individual provisions, pass-through provisions, corporate provisions, and estate provisions. These items are effective for the 2018 tax year.

Individual Provisions

Most individuals will see a tax decrease with the passing of the TCJA. The number of tax brackets will stay the same, but the rates will be generally be lower for all individual taxpayers. Also, the standard deduction will be nearly doubled, while personal exemptions will be repealed. Also, if a taxpayer does itemize their deductions, they will only be able to deduct a combined $10,000 of state income tax and property taxes. However, the changes that are described in the table below are only applicable through the 2025 tax year. Starting with the 2026 tax year, the rules will revert to the rules as they stand currently.

Issue Current Law Tax Cuts and Jobs Act
Tax Brackets (See Charts Below) 7 Tax Brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) 7 Tax Brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%)
Preferential Tax Rates on Investment Income Dividends and Long-Term Capital Gains are subject to 0%, 15%, of 20% rates depending on income Retains the 0%, 15%, or 20% tax rate on long term capital gains and qualified dividend income
Net Investment Income Tax 3.8% of Net Investment Income Retained
Personal Exemptions $4,050 per individual Repealed
Standard Deduction $6,350 – Single Filers$9,350 – Head of Household$12,700 – Joint Filers $12,000 – Single Filers$18,000 – Head of Household$24,000 – Joint Filers
Itemized Deductions: Itemized deductions are limited if a MFJ filer has more than $311,300 of AGI. Limitation on itemized deductions is eliminated.
Medical Expenses Deduction for unreimbursed medical expenses greater than 10% of adjusted gross income. Deduction for unreimbursed medical expenses greater than 7.5% of adjusted gross income.
State and Local Income Tax and Property Tax Able to deduct state income tax and property tax. $10,000 limit on state income tax and property tax deduction
Home Mortgage Interest Able to deduct home mortgage interest for primary and secondary home and interest on home equity lines of credit on loans up to $1M and $100K respectively. Able to deduct home mortgage interest for primary and secondary home on new loans up to $750K. Suspends the HELOC interest deduction.
Charitable Contributions Deduction allowed up to 50% of AGI. Contributions for the right to purchase seating at athletic events are 80% deductible. Increases overall charitable deduction to 60% of adjusted gross income. No deduction for the right to purchase seats at athletic events is allowed.
2% Floor Itemized Deductions (Unreimbursed Employee Expenses,Tax Preparation Fees, Investment Expenses) Deductions are allowed if they total more than 2% of AGI. Repealed
Alternative Minimum Tax AMT is calculated under current law. AMT is retained but the exemption amount is increased.
Child and Family Tax Credits $1,000 per qualifying child. Increases child tax credit to $2,000 with phaseout beginning at $400,000 for joint filers.

Tax Brackets

Current Law

Single Heads of Household Joint
10% >$0 >$0 >$0
15% >$9,525 >$13,600 >$19,050
25% >$38,700 >$51,800 >$77,400
28% >$93,700 >$133,850 >$156,150
33% >$195,450 >$216,700 >$237,950
35% >$424,950 >$424,950 >$424,950
39.6% >$426,700 >$453,350 >$480,051

Tax Cuts and Jobs Act

Single Heads of Household Joint
10% >$0 >$0 >$0
12% >$9,525 >$13,600 >$19,050
22% >$38,700 >$51,800 >$77,400
24% >$82,500 >$82,500 >$165,000
32% >$157,500 >$157,500 >$315,000
35% >$200,000 >$200,000 >$400,000
37% >$500,000 >$500,000 >$600,000

Pass-Through Provisions

The pass-through provisions might be the most complicated change of the TCJA. Pass-through businesses include partnerships, S corporations, trusts, estates, and sole proprietorships. Currently, pass-through income is passed through to shareholders and ultimately reported on the shareholders’ returns. That will not change with the TCJA, but there will be an additional deduction that will be allowed for certain taxpayers with pass-through businesses that have income. There are a lot of limitations that will be applied and it remains to be seen how exactly these will be calculated. The table below describes the high-level changes to pass-through income and also discusses technical terminations.

Issue

Current Law

Tax Cuts and Jobs Act

Pass-Through Income Subject to individual’s ordinary tax rates Still subject to individual’s ordinary tax rates. However, there is a 20% deduction of pass-through income subject to:

  1. 50% of partner’s share of W-2 wages or
  2. 25% of W-2 wages paid plus 2.5% of the partner’s unadjusted basis of all qualified property

The above does not apply to service corporations unless taxable income is less than $315,000 for MFJ. Service corporations no longer includes Architecture or Engineering.   

Terminations Technical termination rules apply. Repeals the technical termination rules.

Corporate Provisions

The corporate tax provisions changed in the TCJA were the biggest tax cut included in the overall bill. Included in this bill was a drop in the corporate rate. Currently, the corporate rate is a maximum 35% with a lower rate for lower income corporations. With the passing of the TCJA, the corporate tax rate will now be a flat 21%. There were also many other things changed, such as alternative minimum tax being repealed, the depreciation expensing of assets, interest expense, and net operating losses. The table below discusses the current law as it applies and how the TCJA changed certain items.  

Issue

Current Law

Tax Cuts and Jobs Act

Tax Rate Graduated rate with a maximum 35% rate Flat 21% (Fiscal-Year Filers would apply a blended rate for the year straddling January 1, 2018)
Alternative Minimum Tax Corporations with gross receipts greater than $7.5M must calculate AMT. Repealed
Dividends Received Deduction 80% DRD for 20% owned corporations. 70% for less than 20% owned corporations. 65% for 20% owned corporations and 50% for less than 20% owned corporations.
Capital Investment – Bonus Depreciation 50% bonus depreciation in 2017, 40% in 2018, and 30% in 2019. 0% after 2019. 100% bonus depreciation on qualified property acquired and placed in service after September 27, 2017, but before January 1, 2023. Phases out from 2022-2026.
Capital Investment – Section 179 Expensing $500,000 limit up to $2M of assets placed in service Limits deduction to $1M. Phaseout begins at $2.5M
Interest Expense Deduction Deductible Generally limited to amount of interest income plus 30% of taxpayer’s earnings before interest, taxes, depreciation, and amortization (businesses with less than $25M of receipts are not subject to this provision). Formula is changed to earnings before interest and taxes starting in 2022.
Net Operating Losses 2-year Carryback, 20-year Carryforward. Able to offset 100% of taxable income, 90% of Alternative Minimum Taxable Income. No Carryback. Unlimited Carryforward period. Able to offset 80% of taxable income.
Like Kind Exchanges Available for both real and personal property. Repealed for personal property but retained for real property.
Domestic Production Activities Deduction (Section 199) Available Repealed
Cash Method of Accounting & UNICAP Rules Eligible for businesses with less than $5M of receipts for cash method of accounting and $10M for UNICAP. Eligible for business with less than $25M of gross receipts.
Business Credits All credits mentioned in the proposed law are available for years 2017 and earlier. Modifies the following:

  • Rehabilitation Credit
  • Orphan Drug Tax Credit
  • Retains the following:
  • Research and Development Credit  
  • Low Income Housing Credit  
  • Work Opportunity
  • Tax Credit  
  • New Markets Tax Credit

 

Estate Tax Provisions

The only change worth noting with respect to estate tax is the threshold for whether a taxpayer is subject to the estate tax nearly doubled from $5.49M to $10M. Just like the individual tax provisions, this change only applies through 2025.

Issue Current Law Tax Cuts and Jobs Act
Threshold $5.49M $10M
Step-Up in Basis Yes Retained
Eventual Repeal of Estate Tax Retains the Estate Tax

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