Increasing Your Return on Life.®

Frank Talk - 1st Quarter Newsletter (2018)

Published: 02/21/2018

Table of Contents


Written by: Frank Fantozzi

There’s much to celebrate as we enter this new year with the economy on a positive trajectory, the stock markets breaking through another all-time high in January and sweeping tax law changes expected to benefit many families and business owners while having a potentially favorable impact on the economy later in the year. But before we go there, we want to take a moment to thank you for the opportunity to assist you and your family in providing solutions and strategies that directly support the goals that are most important to you in life. We’ve always believed that a goal to simply increase your assets, in and of itself, is not a strategy. The focus should always be on implementing strategies to help support and sustain the lifestyle you desire.

That’s an important distinction. While it’s probably safe to say that on the surface none of us would turn down more money, it’s also important to consider “at what cost?” That’s where risk management comes into play. At Planned Financial Services (PFS), our focus is on helping you pursue your stated goals and desires and solve for the challenges you may face along the way. That includes carefully managing your assets aligned with your personal tolerance and preference for risk. So, know that we perpetually have our eye on the ball, watching out for your best interests, and adjusting portfolios as needed to help maintain appropriate risk parameters.

We’re also keeping a close eye on how the recent changes ushered in under the Tax Cuts and Jobs Act will impact our clients in the months and years ahead. We’ve always been firm believers that a personalized wealth management strategy that incorporates tax planning is critical to helping you capture opportunities and avoid unintended consequences. That’s why our experienced team of wealth advisors includes Certified Public Accountants (CPAs) and an IRS-licensed Enrolled Agent. So, please don’t hesitate to reach out to us in the weeks and months ahead if you or someone you know has questions or concerns about how tax reform may impact your personal or business finances.

What’s in it for you?
At-a-glance guide to your 1st Quarter 2018 FrankTalk newsletter:

  • 2017 Year in Review
  • 2018 News & Recognition
  • Upcoming Events
    • 10th Annual Economic Summit
    • Smart Business: Smart Women Awards
  • Smart Business Northeast Ohio Family Business Conference
  • Market & Economic Update
  • Educational Articles

2017 Year in Review

In keeping with tradition, below is a brief snapshot of 2017 highlights and accomplishments that have further strengthened our team over the past 12 months for the benefit of our clients.

Cynthia Yang, CFA®, CIPM, was named “One of America’s Top Next-Generation Wealth Advisors.” The prestigious listing, published on was based on research conducted by SHOOK Research, LLC and considered advisors born in 1980 or later with a minimum 4 years of relevant experience who have built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both.*

Wealth Advisor Dan Goldfarb joined the PFS team - We welcomed Daniel (Dan) M. Goldfarb, ChFC®, CRPC® to your award-winning Planned Financial Services team in 2017. For more than a decade, Dan has helped accomplished individuals and families align their values and goals with their financial assets through insightful financial and investment planning. A Chartered Financial Consultant® and Chartered Retirement Planning CounselorSM, Dan earned an MBA with a dual concentration in finance and operations management from the Weatherhead School of Management at the Case Western Reserve University; a Master of Policy Sciences with a concentration in Political Science from the University of Maryland - Baltimore County; a Master of Arts from Towson University; and a BA from Rutgers College - Rutgers University. He resides with his wife and two sons in Solon, Ohio.

PFS was awarded the Weatherhead 100 for the 6th time by the Weatherhead School of Management, Case Western Reserve University in September 2017. Established in 1988, The Weatherhead 100 awards are the premier celebration of Northeast Ohio’s spirit of entrepreneurship and the companies leading the way in Northeast Ohio. Each year, the organization recognizes an elite group of companies who are the best example of leadership, growth and success in our region. Companies that make the list are recognized for their percent of revenue growth over the past five years.**

Our 9th Annual Cleveland Economic Summit was held in May 2017 at the Cleveland Botanical Garden. We were grateful for the opportunity to once again host so many clients, friends, and local business leaders for this event featuring our two distinguished speakers: Emily R. Roland, CIMA®, Head of Investment Research at John Hancock Investments and Eric Embacher, Visitor Experience Program Manager at Destination Cleveland.

Elite Advisor Forum - Frank moderated a panel discussion of his peers at the 2017 LPL Private Client Elite Advisor Forum in Boston, discussing relevant opportunities and challenges facing the wealth management industry today. Topics of discussion included how to best structure a team, changing client needs and expectations, and collaborating with outside professional advisors, among others.

Smart Business: Smart Women Awards - In April 2017, Planned Financial Services participated as a program sponsor for the Northeast Ohio Smart Business magazine’s Smart Women Breakfast in Westlake, Ohio. As a member of the host committee, Frank was honored to be a presenter during the Smart Women Awards segment of the program recognizing the achievements of leading businesswomen and effective women’s programs.

2017 Family Business Conference and Achievement Awards – We were proud to participate as a sponsor of the Smart Business Northeast Ohio Family Business Conference and Achievement Awards interactive workshop on September 7th at the Corporate College East in Cleveland, Ohio. Frank participated for the second time as a panelist among a distinguished lineup of industry experts and family business owners where he provided real life examples of what separates family business success stories from failures. He also shared his perspective on why today’s economic, financial market, and tax landscape have become increasingly complex for privately held businesses to navigate.

2018 News & Recognition

Elisabeth Plax Retires - Executive Wealth Advisor, Elisabeth Plax, Ph.D., CFP®, retired in January after more than three decades as a wealth advisor, CERTIFIED FINANCIAL PLANNERTM practitioner, and advocate for financial literacy throughout the Northeast, Ohio community. Join us in wishing Elisabeth well as she embarks upon this next exciting chapter in her life. Elisabeth founded Plax & Associates in 1993 which was later acquired by Planned Financial Services in September 2014. To read more about Elisabeth’s celebrated career and contributions to our community, click here: Cleveland Wealth Advisor, Educator and Arts Advocate, Elisabeth Plax, Announces Retirement.

Frank Fantozzi is 2018 DMSA Award Recipient - Frank was recently named a 2018 Distinguished Marketing and Sales Awards (DMSA) recipient. The annual award, which is presented by the Sales & Marketing Executives of Cleveland (SME Cleveland), is the profession’s premier honor to acknowledge excellence and provide community recognition for outstanding sales and marketing achievements. Each year, SME Cleveland recognizes an elite group of executives in the Northeast Ohio region who demonstrate exemplary leadership and management skills, outstanding sales and marketing achievements, strong community involvement, and innovative programs, services and business strategies. Frank will be honored among his peers at a February 22, 2018 banquet and awards ceremony at Executive Caterers at Landerhaven.

PFS Welcomes Veronica Kalinski, EA, to the Team - Veronica Kalinski, an IRS Enrolled Agent (EA), recently joined our team as a tax associate with seven years of experience as a tax practitioner. Veronica earned a Bachelor of Arts degree at the University of California Los Angeles (UCLA) in Psychology in 2001. She went on to earn five separate associates degrees from DeAnza College in Cupertino, CA in Business Information Systems; Accounting: General Practice; Accounting: Taxation; Environmental Studies: Energy Management; and Environmental Compliance & Pollution Prevention. In 2003, Veronica was the first Student Associate in the Mission Society of Enrolled Agents, part of the California Society of Enrolled Agents. She is an active member of Ohio Society of Enrolled Agents and has been a member of the National Association of Enrolled Agents (NAEA) for three years. For three consecutive tax seasons, she has taught classes focused on educating volunteer student preparers with the IRS in conjunction with the Volunteer Income Tax Assistance (VITA) program. Veronica resides in Cleveland, Ohio.

Cynthia Yang, CFA® Earns CIPM Designation - Please join us in congratulating Cynthia Yang, CFA®, CIPM, on receiving the Certificate in Investment Performance Management (CIPM) designation. CIPM is an international professional accreditation in the field of investment performance analysis. It includes investment performance measurement and attribution and is offered by the CIPM Association, a body associated with the CFA Institute.

Visit our online Newsroom to learn more about recent PFS news, awards and recognition.

Upcoming Events

PFS to Host 10th Annual Economic Summit - Planned Financial Services will host its 10th Annual Economic Summit this spring. Watch for more information on dates, venue and featured speakers in the weeks ahead.

2018 Smart Business: Smart Women Awards - For the second consecutive year, Planned Financial Services will participate as a program sponsor for the Northeast Ohio Smart Business magazine’s Smart Women Breakfast at the LaCentre Conference & Banquet Facility located at 25777 Detroit Road in Westlake, OH on April 26, 2018.

Smart Business Northeast Ohio Family Business Conference - PFS will again participate as a sponsor of the Family Business Conference and Family Business Achievement Awards interactive workshop in September 2018. The conference features leading industry experts providing the type of actionable insight necessary to plan for a smooth transition of family businesses. Join us to hear from a dynamic line up of panelists as they share real life examples of what separates success stories from failures. This annual networking breakfast and interactive workshop will offer perspectives from both industry experts and actual family business owners to address this and other issues facing family-owned businesses every day. Watch for more information from PFS regarding the date, time and location of the 2018 event in the months ahead.

Market & Economic Update

***U.S. stocks and bonds were hit by inflation concerns recently, but what is the economic data telling us? A barrage of U.S. economic data was released in recent weeks, including major reports such as fourth quarter gross domestic product (GDP), personal consumption expenditure (PCE) inflation, and the January employment situation report.  We will discuss the impact of each individual report in more detail later, but overall the data deluge has signaled that the U.S. economy remains on stable footing. Signs of rising inflation were present in all three reports, which is one of the factors behind both stock and bond weakness. However, we would remind investors that, for now at least, inflation readings remain below the Federal Reserve’s (Fed) 2.0% target, and we would need to see continued acceleration before we would expect a more aggressive path of Fed rate hikes.

GDP Misses, but Underlying Data Shows Strong Demand

The advance release of fourth quarter GDP showed a year-over-year increase of 2.6% on an inflation-adjusted (real) basis. This was below the market’s expectation of 3.0% and also below the 3.2% reading from the prior quarter. However, the underlying data was better than the headline portrayed.

An inventory drag, possibly hurricane related following rebuilding efforts late in the third quarter, was the major reason for the shortfall versus expectations. Trade also hurt, as import growth strongly outpaced export growth and widened the trade deficit. However, the report also featured strong demand, with consumer spending (+3.8%), business equipment investment (+11.4%), and residential construction (+11.6%) all seeing strong results. Government spending, which hasn’t been a major driver of GDP in recent years, also grew by 3.0% during the quarter, which is the best since 2015. Removing the impact of inventories and trade (a measure referred to as final sales, based on annualized data), growth would have come in at a solid 4.3%.

For the full year of 2017, GDP rose 2.3%, roughly in line with the expansion average, and we expect the impact of the new tax law may help push the pace up closer to 3.0% in 2018.

PCE inflation Stable at 1.7%

Rising inflation expectations are one factor behind the recent rise in interest rates. Below-target inflation has been a persistent headache for the Fed in recent years, but market-based inflation expectations, such as 10-year breakeven inflation (based on the difference between the 10-year Treasury yield and 10-year Treasury Inflation-Protected Security [TIPS] yield) have started to increase in recent months. However, higher expectations have yet to translate into higher actual inflation.

This fact was again highlighted recently with the release of PCE data. Headline PCE met expectations at 1.7% year over year but decelerated from its November reading of 1.8%. Core PCE (which excludes volatile food and energy prices, and is the Fed’s preferred measure of inflation), accelerated slightly from the previous month, but at 1.5% year over year remains well below the Fed’s 2.0% target. The report was broadly seen as a step in the right direction for the Fed, but a sustained upward move in inflation may be needed before the Fed can become significantly more aggressive.

Employment Report Showed Continued Strength

The final major data released, and arguably the most impactful, was the January Employment Situation Report. This monthly report indicates how many jobs were created over the prior month and also gives details on other important measures of labor market strength including the unemployment rate, the labor force participation rate, and wage growth. Wage growth is a particularly important indicator to watch in the current environment, as it is often viewed as a leading indicator of inflation. A tightening labor market typically means that there are fewer workers available, and companies have to pay more when hiring. Given that wages make up a large portion of employer expenses, a strong rise in wages can also mean an increase in overall inflation as companies raise prices in order to maintain profit margins. This chain of events has yet to unfold in the current economic expansion, though the recent employment report did finally show some signs of wage pressure.

The U.S. economy created 200,000 jobs in January, better than the180,000 consensus expectation and above the upwardly revised 160,000 number in December (which was previously reported at 148,000), although a downgrade to November’s job growth made the total revision negative. The unemployment rate remained unchanged at a multi-decade low of 4.1%, but wage pressures did finally start to show, as average hourly earnings hit an expansion high of 2.9%, well above the consensus expectation of 2.6%. The higher than expected wage growth number helped push bond yields higher and also led to some weakness in stocks as markets theorized that a sustained growth in wages could give the Fed more ammunition for a faster path of rate hikes. While this number definitely represents acceleration in wages, history suggests that wage growth may need to move considerably higher, toward the 4.0% range, before triggering a significantly more aggressive Fed. In addition, faster wage growth may have been impacted by an increase in the minimum wage in several states and tax-law related bonus increases, which don’t necessarily reflect wage pressure from tighter labor markets. We continue to believe that the Fed may raise rates three times in 2018, though this will be an area to watch in the coming months.

Closing Remarks

The large amount of economic data released over the past few weeks shows that the U.S. economy continues to expand at a steady pace. Inflation expectations have been rising over the past few months, and the economic data, including January’s employment report, are finally showing some signs that inflation may be starting to move in the right direction (for the Fed). However, actual inflation, as measured by the PCE price deflator, remains below the Fed’s 2% target, and we believe that we will need to see a sustained path toward that number, or alternatively at least a stronger move in wage growth, before we are likely to see a significantly more aggressive path of Fed rate hikes.

We remain committed to providing you with the education, advice, and insight to help you retain a long-term perspective and focus on your individual goals throughout this new year. Your Return on Life® is always our top priority. As such, we continue to watch the financial markets, economy, and geopolitical factors closely and adjust our portfolios in response to market activity to ensure our clients’ investment strategies are aligned with their stated investment objectives.

If you need additional help or if someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Real People. Real Answers.

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder

To review our privacy policy, ADV Part A and ADV Part B, please visit our website at

*Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criteria because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchange for placement on a ranking.

**The Weatherhead 100 Award (awarded to Planned Financial Services in 2007, 2008, 2009, 2011, 2016) was established to celebrate Northeast Ohio’s spirit of entrepreneurship and to reward companies that serve as a beacon to all the region’s businesses. Based on sales growth, employment of 15 or fewer employees, and/or had less than $1 million in net sales. Planned Financial Services and Weatherhead School of Management, Case Western Reserve University are separate entities.

***Research source: LPL Financial, Weekly Economic Commentary, February 5, 2018.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor and separate entity from LPL Financial.

Securities offered through LPL Financial, Member FINRA/SIPC.

Planned Financial Services and SME Cleveland are separate entities.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

Personal consumption expenditures (PCE) is a measure of price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, nondurables, and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals.

Treasury Inflation-Protected Securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI), while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of are that the CPI might not accurately match the general inflation rate; therefore, the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPS do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.






3 Questions Can Help You Tune Up Your Investment Portfolio

Written by: Cynthia Yang

Your financial portfolio is always a work in progress. No matter how carefully you match your investments to your goals, changing market conditions and life’s evolving priorities have a cumulative effect — until one day you realize that your portfolio is no longer aligned with your objectives. To remain financially healthy, periodically re-evaluate your investments by asking these three questions.

1.  Has my portfolio changed?

Over time, you’re likely to find that your asset mix has drifted from your original target. For example, the percentages devoted to stocks, bonds and alternative investments, or between categories of an individual asset class, such as small- vs. large-cap stocks, generally shift over time.

If one asset type has performed particularly well (or poorly), your carefully thought-out allocation might look very different today than it did when you first set it up. Specifically, market movements may have left one or more of your asset classes over- or underrepresented relative to your target. If this happens, you may decide to rebalance your portfolio — selling a portion of one type of security that has outperformed and adding to a type that has underperformed.

Be aware that rebalancing your portfolio may have tax implications. Ask your advisor how often you should do so, given your individual situation.

2. Have my investments changed?

In addition to your portfolio’s allocations, your individual investments can also change over time. Stocks and mutual funds are rarely “set it and forget it” investments, as business conditions are constantly shifting and the prices at which the securities are trading are always in flux.

If you own individual securities or mutual funds, you’ll want to work with your advisor to make sure these investments continue to serve their intended purpose in your portfolio. For individual stocks, for example, reassess the business fundamentals of the underlying companies. With mutual funds, make sure their underlying strategy and management haven’t changed. You’ll also want to compare long-term results to those of a relevant benchmark to ensure your funds are still meeting your expectations.

3. Has my personal situation changed?

Your financial situation and your goals change over time, and a portfolio that suited you in the past may no longer be appropriate. For example, as you near retirement, your capacity to handle investment risk may change as the number of income-earning years ahead of you decreases. In such a situation, you might want to pivot toward income-oriented securities and reduce your exposure to the kind of volatile assets you owned earlier in your investing years.

Other personal factors come into play as well. Marriage, the birth of a child, a career change or increased responsibilities for aging parents could all result in revised financial objectives. When your objectives change, your portfolio will likely need to change with them. 

Get to work

A portfolio that’s in sync with evolving market conditions and your financial situation involves regular portfolio checkups with your advisor. Together, you can determine the optimal schedule for rebalancing your investment mix and review your goals to make sure you’re appropriately invested for the future you envision.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

© 2017

Cradle to College - How to Give Your Children a Solid Financial Education

Written by: Dan Goldfarb

Parents need to teach their children a lot in their early years, including how to walk and talk, and you may think that money management is something that can be put off for later. But if you want your children to become financially responsible adults, their fiscal education should start early.

Tell tots about needs and wants

Although it might seem like jumping the gun, even 3- and 4-year-olds can begin grasping concepts such as needs and wants, as well as the idea that most people can’t buy everything they see. So it’s important to start explaining to these tots about the relationship between work and money.

A trip to the supermarket can be a great learning experience. Point out to your kids how different products cost different amounts, and explain when you feel it’s worth spending more and when a lower-cost version will suffice.

Give grade-schoolers an allowance

Grade school often is the time when parents provide allowances as a way to help their children live within a budget. Before handing over the cash, however, talk with your child about the purchases you expect the allowance to cover, such as video games. Otherwise, you may get ongoing “requests” to handle expenses your offspring believes shouldn’t come from his or her allowance.

Also introduce values to the discussion. Younger children are quite capable of grasping the concept of using their money and other resources to help those who don’t have as much. The value of delayed gratification — or saving for big-ticket items and longer-term goals — is another idea you might want to impart.

Moreover, it’s important to think through the relationship between your child’s allowance and the chores he or she is expected to handle. Some parents view an allowance as strictly a money management tool and that, as members of the family, the kids should have chores that they’re expected to handle without compensation. Of course, this isn’t to say that a child can’t receive extra payment for handling chores that go above and beyond day-to-day tasks.

Trust tweens to make bigger decisions

As your child gains experience handling small amounts of money, ask for his or her input on financial decisions. Before heading out to buy new school clothes, for example, discuss what items your child needs the most, and whether it makes sense to buy several less expensive items, or one pricier product. 

Given how tuned-in many “tweens” are, discuss with them how advertisements are designed to prompt consumers’ desire for a specific brand or product. As an example, point out that a popular brand of shoes costs significantly more than a store brand, and ask your child if the difference in cost is worth it.

Middle-school years are also a perfect time to open a bank account in your child’s name. Use this opportunity to explain how to record deposits and withdrawals, and provide a simple calculation to demonstrate the compounding effect of interest.

Help high-schoolers become independent

High-schoolers can be expected to take on greater responsibility for their own expenses — including clothes, entertainment, mobile phone use and transportation costs. When practical, bring your teenager into the discussion when you’re researching major purchases, such as a new car. He or she can read product reviews and descriptions, and compare features and prices. Just make it clear at the outset that you’ll have the final decision.

If you believe your teen is ready to handle a credit card, a safe way to start is with a secured card. As its name suggests, this line of credit is secured by cash deposited in the account. Once your child has proven to be capable of handling the line of credit, you may decide to allow him or her to open a regular credit card. But make sure you review the rules of responsible credit card use and the speed with which debt and interest expense can add up.

Consider college students adults

When your kids head to college, they’ll probably make most of their own day-to-day financial decisions and may also assume the long-term burden of student loan debt. These are adult responsibilities; make sure your children are ready for them.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

© 2017

Start the Year Right: Review Withholding and Estimate Tax Payments

Written by: Brian Klecan

Has this ever happened to you? Income tax time rolls around and you realize that over the course of the year you haven’t withheld enough or made estimated tax payments that you should have. You owe the IRS money — possibly a lot of money — even before factoring in underpayment penalties and interest.

Many taxpayers make this mistake only once. Thereafter, they regularly review their withholding and submit quarterly tax payments when necessary. Here’s why this is smart.

Adjust to fit

IRS withholding tables are designed to approximate a “typical” worker’s tax liability for the year. But not all workers are typical. Depending on your earnings, marital status and other tax circumstances, following the tables may result in underpayment or overpayment. A more reliable approach is to determine your actual expected tax liability regularly and, possibly, adjust your withholding amounts by completing a new Form W-4.

You should also revisit your withholding amounts after certain life changes that affect your tax liability. Examples include a new job, marriage or divorce, the birth or adoption of a child, or unemployment.

Generally, you’re required to make estimated tax payments if you have income that’s not subject to withholding (see “Take care with income not subject to withholding”) and you expect to owe $1,000 or more in federal taxes after taking into account withheld taxes and credits. To meet estimated tax obligations, figure out your expected tax liability for the year, subtract expected withholdings and credits, and pay the remainder in four equal installments on or before April 15, June 15, September 15 and January 15. (If the 15th falls on a weekend, the payment due date generally is the following business day, but check with the IRS.)

The problem with estimates

You’ll be subject to underpayment penalties if your total withholdings and timely estimated tax payments are less than 90% of your tax liability for the year (unless you owe less than $1,000 in taxes). Penalties may also apply if you skip or underpay an estimated tax installment, even if your remaining installments cover your entire tax liability. Suppose, for example, that your estimated tax liability for the year is $30,000. If you skip the April payment and pay $10,000 on the following three due dates, you’ll owe penalties for skipping the first installment, even if your remaining payments cover your entire tax liability.

The problem with estimated taxes is that they’re just that: estimated. Income can be unpredictable, and if you receive unexpected income — particularly late in the year — you can easily fall short of your tax obligations.

Two methods

Fortunately, there are strategies you can use to avoid penalties. If you receive income unevenly during the year, use the annualized income installment method to match your estimated tax payments to your actual income, deductions and other tax attributes during each period. This method is a bit complicated — essentially, it requires you to determine each estimated tax installment based on the amount that would be due if your tax liability through the most recent period were annualized. But it’s worth calculating because the method may enable you to reduce or eliminate underpayment penalties.

Alternatively, you can use a “safe harbor.” Under the safe harbor, you won’t owe penalties if you pay 100% of last year’s tax liability in four equal installments. The amount increases to 110% if your adjusted gross income last year was greater than $150,000 ($75,000 for married couples filing separately). Generally, the safe harbor is the simplest way to ensure that you won’t owe estimated tax penalties. But keep in mind that, if your income declines this year, you’ll end up overpaying. And if your income increases substantially this year, you won’t owe penalties but you’ll have to pay up by the April due date to cover additional tax.

What if you discover during the year that you haven’t paid enough in estimated taxes? Consider increasing withholding from your wages (or your spouse’s wages) to make up the difference. Although increasing your estimated tax payments late in the year won’t necessarily help you avoid penalties, withholdings are treated as though they were paid evenly throughout the year, regardless of their timing.

Getting help

Because estimating tax payments can be complicated, ask your tax advisor for help. Armed with informed estimates, you can confidently adjust your withholdings and quarterly tax payments.

Sidebar: Take care with income not subject to withholding

Employers are required to withhold income tax from cash and noncash wages, salaries, and commissions based on employees’ Forms W-4 and IRS withholding tables. However, you may earn other taxable income that isn’t subject to withholding, such as:

  • Self-employment,
  • Nonsalary from pass-through businesses, such as partnerships, S corporations and limited liability companies,
  • Investment — including interest, dividends and capital gains, and
  • Rental or royalty.

If such income is significant, you should make estimated tax payments.

Of course, there’s another type of income — nontaxable. In general, you don’t need to have  withholding or pay estimated tax on child support, gifts, inheritances, qualified scholarships or life insurance policy payouts (as long as you’re the beneficiary, not the policyholder).

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

© 2017

Don't Get Taxed Twice on Nondeductible IRA Contributions

Written by: Frank Fantozzi

Do you make nondeductible contributions to a traditional IRA? If so, you need to understand the tax treatment of distributions to ensure you’re not taxed twice on the same income.

Justify your strategy

There are several reasons why you might contribute nondeductible amounts to an IRA:

  1. You or your spouse has a retirement plan at work and your income exceeds the threshold, reducing or eliminating your IRA deductions.

  2. Your income is too high to qualify for a Roth IRA contribution.

  3. You still wish to make the maximum contribution (currently, $5,500 per year; $6,500 if you’re 50 or older) to take advantage of tax-free growth.

But for this strategy to make sense, you need to ensure that you’re not paying tax on IRA distributions of nondeductible (and, therefore, previously taxed) contributions. This will require you to calculate the portion of each distribution attributable to deductible and nondeductible contributions and file Form 8606 with your federal income tax return.

Do the math

To illustrate the procedure: Nick has $500,000 in his traditional IRA as of November 1, 2017. Of that balance, $125,000 is attributable to deductible contributions, $200,000 to nondeductible contributions and $175,000 to investment earnings within the IRA. Nick takes a $50,000 distribution from the IRA and reports the entire amount as taxable income on his 2017 return. By doing so, he pays tax a second time on the portion of the distribution attributable to nondeductible contributions, which were already taxed in the years he made those contributions.

To avoid double taxation, Nick must determine the portion of his distribution that’s attributable to nondeductible contributions. Suppose the IRA’s balance is $475,000 on December 31, 2017 — $500,000 less the $50,000 distribution plus additional earnings after November 1. To determine the nontaxable portion of the distribution, Nick adds the $50,000 distribution to his IRA’s year-end balance (for a total of $525,000) and divides nondeductible contributions ($200,000) by that amount. He multiplies the resulting percentage — 38% — by the $50,000 distribution to determine the nontaxable portion ($19,000). Because $19,000 of Nick’s distribution has come from nondeductible contributions, those are reduced by $19,000 (to $181,000) for purposes of future distributions.

Handle with care

A word of caution: You can’t avoid taxes altogether by making nondeductible contributions to a separate account and then taking distributions from that account. For tax purposes, the IRS treats all traditional IRAs as a single IRA. So your distributions will consist of a combination of taxable and nontaxable funds, regardless of which account they come from.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

© 2017

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