Can You Afford to Spend More and Give More? You Might Be Surprised by the Answer!

Can You Afford to Spend More and Give More? You Might Be Surprised by the Answer!

by | Mar 21, 2023 | Advisors, Ask Merriman, Charitable Giving, Family Talk, Geoff Curran, Goal Planning, Retirement Savings, Tech Focus, Wealth Enhancement

 

When I started my career in financial planning over 12 years ago, I discovered a deep passion for helping others navigate important life decisions such as retirement. What I didn’t realize at the time was just how difficult it can be for clients to feel comfortable spending money and giving away their wealth to family or charities they feel good about (and the regret that can come later in life by these decisions). I’ve come to term this as “financial immortality,” which is quite common among clients and was the inspiration for writing a new eBook, Merriman’s Guide to Living Fully in Retirement: How to Feel Comfortable Spending and Giving More.

 

No matter where you are on your financial journey, this new book covers topics and strategies suggested by our advisors to help you Live Fully in retirement. Whether you are currently retired, soon to be retired, or just looking ahead to the future, you can learn about options and make smart decisions that may enable you to spend more and give more. Perhaps you can make that vacation home purchase you have always dreamed of. Maybe starting a home-based business to dabble in during retirement is within reach. Or perhaps you’d like to spread your wealth across the family. Maybe there is a cause you’d like to support in a meaningful way. The giving part can be the act of gifting resources to loved ones or to charitable organizations. The point is, with the right plan of action, you can likely do more with your money!

 

A client of mine passed away in her late 90s with enough resources to survive two to three additional lifetimes relative to her spending needs. While her heirs were grateful for their inheritance, they kept sharing versions of the same story: “Aunt Susan always lived so frugally and was never comfortable with spending money. I wish she had traveled more.” From my conversations with her, I know she wished she had too.

 

Another client of mine reached financial independence in his mid-40s with three children. The problem was that each year he kept moving his own personal goalpost, pushing him to continue to work in a high-pressure role that he didn’t enjoy anymore. It took several planning sessions to build his comfort around the plan, and he was able to step away to spend more time with his family and work on something that he was actually passionate about.

 

If you recognize traits like these in yourself or someone you care about and want to explore ways to positively change attitudes about saving, spending, and giving, we can help! We are happy to share our new eBook, Merriman’s Guide to Living Fully in Retirement: How to Feel Comfortable Spending and Giving More.

 

Learn more about:

  • defining financial immortality and the importance of having a financial plan to help determine if you can afford to spend more and give more
  • spending and giving as it relates to different withdrawal rates and methods and from which account to withdraw
  • actionable strategies to help you save on taxes, donate to charity, and how best to transfer wealth to your family
  • common roadblocks or distractions that clients encounter

 

This book offers great perspective as a collaborative effort from our team of Merriman advisors. To help explain these strategies, each section is filled with real-life examples from over 200 years of our collective experience, including stories from the following advisors: Jeff Barnett, Tyler Bartlett, Aimee Butler, Paige Lee, and Paresh Kamdar. CLICK HERE to get your copy!

 

Do you need help figuring out if you can afford to spend more and give more? Schedule a time with a Merriman advisor to build your own personalized plan and assessment because we truly enjoy helping others LIVE FULLY in retirement.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

How to Report a Cash and Stock Merger on Your Tax Return

How to Report a Cash and Stock Merger on Your Tax Return

by | Mar 1, 2022 | Advisors, Geoff Curran, News, Wealth Preservation

 

First: Congratulations on the successful merger of Kansas City Southern (KSU) and Canadian Pacific Railway (CP). Second: It’s no fun to receive a surprise tax bill related to the December 2021 merger, so we’ll try to outline the specifics.

Here are the rules around gain recognition when cash/property is received as part of an otherwise non-taxable merger/transaction: Your original cost basis is first applied or transferred to the shares of the acquiring company’s stock. If your cost basis is greater than the value of the acquiring company’s stock received, then the remaining cost basis is applied to the cash portion of the transaction. If your cost basis is less than or equal to the acquiring company’s stock received, any cash or property received in addition to the stock is taxed as a gain.

 

Case Study #1

You originally bought stock for $10,000 that was later acquired by another company for a total merger consideration of $20,000 ($15,000 for the acquiring company’s stock and $5,000 cash). In this case, your new cost basis in the acquiring company’s stock is $10,000 (where you now have an unrealized $5,000 gain as it’s worth $15,000) and $5,000 realized capital gain (since your cost basis was less than or equal to the stock received of the acquiring company).

 

Case Study #2

KSU and CP merger details: KSU shareholders received 2.884 shares of CP stock and $90 cash for each share of KSU stock in December 2021.

Now how would this transaction be reported on your 2021 tax return if you owned 1,000 shares of KSU at the time of the merger?
  • Original KSU cost basis: $65,000.00 or $65.00 per share purchased > 1 year ago.
  • Merger consideration: $298,657.40 total value received between CP stock and cash:
    • CP stock: 2,884 shares of CP stock worth $208,657.40 (1,000 shares of KSU * 2.884 shares of CP shares at $72.35 on the date of the transaction)
    • Cash: $90,000 (1,000 shares of KSU * $90 cash received per share)
    • Cash in lieu of fractional shares: Since the stock conversion part of the transaction led to a whole number (i.e., 2,884.00 shares versus 2,884.50 shares), no extra cash was distributed for fractional CP shares.
  • New CP cost basis: $65,000 or $22.54 per share ($65,000 KSU cost basis / 2,884 new shares of CP). The cost basis remained unchanged (explained below).

Capital gain: Long-term capital gain of $90,000 realized and reported in tax year 2021. Per the example above, the cash received is treated as a capital gain in the year of receipt since this individual’s cost basis was less than the stock received of the acquiring company (CP in this case). This also left the new cost basis in CP to be unchanged from KSU.

 

Case Study #3:

Now what if the conversion of KSU shares to CP shares led to fractional CP shares? How would that impact the tax calculation? What if you owned 1,150 shares of KSU instead of 1,000 shares?
  • Original KSU cost basis: $65,000.00 or $56.52 per share purchased > 1 year ago.
  • Merger consideration: $343,456.01 total value received between CP stock and cash:
    • CP stock: 3,316 shares of CP stock worth $239,912.60 (1,150 shares of KSU * 2.884 shares of CP shares at $72.35 on the date of the transaction—see below for how the 0.6 of 3,316.60 shares is treated)
    • Cash: $103,500 (1,150 shares of KSU * $90 cash received per share)
    • Cash in lieu of fractional shares (result of 3,316.60 CP shares conversion to 3,316.00 CP shares): $43.41 (CP shares at $72.35 * 0.60) of which $31.65 will be treated as a capital gain in 2021.
      • Capital gain calculation: $31.65 [$43.41 cash received for a fractional share of CP stock – ($19.60 new CP cost basis per share * 0.60 shares)]. The new CP cost basis is calculated by dividing the original KSU total cost basis by the new CP shares received including fractional shares (i.e., $65,000 KSU cost basis / 3,616.60 CP shares).
    • New CP cost basis: $64,988.24 or $19.60 per share. The new CP cost basis is the KSU cost basis less the $11.76 cost basis used up when calculating the capital gain in the cash received in lieu of fractional shares.

Capital gain: Long-term capital gain of $103,531.65 realized and reported in tax year 2021 ($103,500 cash + $31.65 cash in lieu of fractional shares). Per the example above, the cash received is treated as a capital gain in the year of receipt since this individual’s cost basis was less than the stock received of the acquiring company (CP in this case).

 

Case Study #4:

What if you didn’t have as large of a gain on the position when the transaction happened? What if your cost basis was $280,000 instead of $65,000 for 1,150 shares?
  • Original KSU cost basis: $280,000.00 or $243.48 per share purchased > 1 year ago.
  • Merger consideration: $343,456.01 total value received between CP stock and cash:
    • CP stock: 3,316 shares of CP stock worth $239,912.60 (1,150 shares of KSU * 2.884 shares of CP shares at $72.35 on the date of the transaction—see below for how the 0.6 of 3,316.60 shares is treated)
    • Cash: $103,500 (1,150 shares of KSU * $90 cash received per share)
    • Cash in lieu of fractional shares (result of 3,316.60 CP conversion to 3,316.00 CP): $43.41 of which $0.00 will be treated as a capital gain in 2021.
      • Capital gain calculation: $0.00 [$43.41 cash received for a fractional share of CP stock – ($72.35 cost basis per share * 0.60 shares)]
    • New CP cost basis: $239,912.60 or $72.35 per share. The new CP cost basis equals the price of CP shares on the date of the transaction because the KSU cost basis was greater than the amount of CP stock received in the merger.

Capital gain: Long-term capital gain of $63,456.01 realized and reported in tax year 2021 [$103,500 cash – ($280,000 original KSU cost basis – $239,956.01 CP stock received, based on CP share value at $72.35 applied to 3,316.60 shares)]. Per the example above, only part of the cash received is treated as a capital gain since the $280,000 original KSU cost basis is greater than the amount of CP stock received. As such, the remaining cost basis is applied to the cash received until used up; then the remainder is treated as a capital gain.

 

Case Study #5:

What if you bought the KSU stock less than 1 year prior to the stock and cash merger transaction with CP? The only difference is that any gain realized would be treated as a short-term capital gain that is taxed at ordinary income tax rates for Federal income taxes. Per Case Study #4, the $63,456.01 gain would be treated as a short-term capital gain instead of a long-term capital gain.

Estimated taxes: Please be aware that you may need to make an estimated tax payment(s) for Federal and State (depending on what state you live in) income taxes to account for the realized capital gain portion of these transactions to avoid any penalties.

If you have any questions about the KSU and CP cash and stock merger or about any other financial planning topics, please contact the Merriman team.

 

Useful resources:

 

 

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable. However, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Merriman is not an accounting firm- clients and prospective clients should consult with their tax professional regarding their specific tax situation.  Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.

Fall Items to Check Off Your List

Fall Items to Check Off Your List

by | Sep 7, 2021 | Geoff Curran, Tech Focus, Wealth Enhancement

 

With fall fast approaching, it’s time to take care of a few things before year end that can also set you up for the start of next year.

    • Retirement contributions and withdrawals – Just as it’s important to make the necessary contributions to your retirement plan based on your financial plan, you must also take your required minimum distribution (RMD) by December 31 to avoid any penalties if above age 72 or own an inherited IRA. The Merriman Client Services team is hard at work making sure these are all completed for clients. Contributions: The deadline for 2021 Roth IRA and Traditional IRA contributions is April 15, 2022.

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New Payroll Tax in Washington State

New Payroll Tax in Washington State

by | Apr 23, 2021 | Geoff Curran, Life & Disability Insurance, News, Wealth Preservation

 

Do you work at Amazon, Microsoft, Facebook, F5 Networks, or any of the other large tech employers in Washington State? Do you earn over $300,000 a year? If so, read this!

Washington State passed a new tax on employees to fund the first public-operated, long-term care (LTC) insurance program. Effective January 1, 2022, Washingtonians who are W-2 employees will be subject to a 0.58% payroll tax on all compensation. Said differently: You will pay $580 of additional tax per every $100,000 of compensation with no income cap.

Good news: You can opt-out and become exempt from this tax and program by having your own individual long-term care insurance policy in place before the deadline. Apart from the annual savings, the benefits of an individual policy are far superior to those offered through the state’s LTC insurance program.

 

Q&A on Washington’s Long-Term Care Trust Act:

 

What is long-term care? What is long-term care insurance?

Long-term care includes services designed to meet a person’s health or personal needs as they age and need additional help completing their daily activities. This care is provided through three stages: independent living, assisted living, and skilled nursing.

Long-term care insurance provides the means to cover part or all of the costs for such services. This insurance coverage is essential for couples and individuals who do not have the personal financial resources to cover these costs.

 

Why is Washington state adding this program now?

Washington, like most states, has an aging population. Each year, more and more people over the age of 65 will need some sort of support service. By putting this program in place now, Washington hopes to mitigate part of this problem.

 

What benefits does this program provide?

Individuals can receive up to $100 per day to cover long-term care costs, with a maximum lifetime benefit of $36,500. This equates to a year’s worth of coverage for long-term care expenses at $100 per day.

Other considerations:

  • Benefits are not available outside of Washington State.
  • Benefits only cover the employee who is contributing through payroll, not their spouse or dependents.

 

Who is subject to this new tax?

Starting January 1, 2022, all W-2 employees will be subject to this new payroll tax (unless you opt-out in time). This tax will be paid by employees through mandatory employer paycheck withholdings.

Self-employed individuals, such as independent contractors, sole proprietors, partners, and joint venturers, are not subject to this tax. They can, however, choose to opt-in to the program (similar to Washington’s paid family and medical leave program).

 

What do you mean by all employee compensation is subject to this tax?

This includes your salary, bonuses, and company stock (such as restricted stock units [RSUs]) with no income cap.

For example: An Amazon employee with an annual compensation of $450,000 ($160,000 salary plus $290,000 vesting RSUs) would pay an additional $2,610 in payroll taxes.

 

How can I opt-out and be exempt from this new payroll tax?

You can opt-out permanently if you have your own long-term care insurance policy in place before November 1 that provides equal or better benefits. You must then submit an attestation that you purchased this policy to Washington State’s Employment Security Department between October 1, 2021, and December 31, 2022.

Note: Individuals can also be exempt from this program if they have a qualified life insurance policy or annuity that includes supplemental coverage for long-term care expenses.

 

What are the differences in benefits if I get my own LTC insurance policy?

The benefits provided by an individual policy can be substantially greater and more comprehensive than those offered by the state’s program. One common difference is that individual LTC insurance policies provide coverage for two or more years. You can also purchase a shared policy with your spouse where you get a joint benefit and receive discounts on the premium.

 

Should I get my own LTC insurance policy?

We recommend exploring alternatives for any of the following reasons:

  • High income earners: This means anyone who earns $300,000 or more in annual employee compensation. Most will be able to find a much better LTC insurance alternative for far less than $1,740 a year ($300,000 * 0.58% payroll tax). This is especially the case for households with two high incomes (i.e., $400,000 or more in joint employee compensation) that can purchase a shared policy to receive discounts on their insurance premiums. 
  • Plan to move outside of Washington State in retirement: You can only collect these benefits if you receive care in Washington State. Those who plan to move away will not receive any benefits and would receive far greater value by buying their own policy that can be used for LTC expenses in any state they choose to live in retirement.
  • Plan to retire in the next few years: To be eligible, you must have paid into the system either (1) for 3 years within the past 6 years, or (2) for a total of 10 years, with at least 5 of those years paid without interruption. As such, you will not receive any benefits if you do not meet these requirements before leaving employment.

 

Please contact us if you have questions about how Washington’s Long-Term Care Trust Act might impact your financial situation.

 

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

City of Tacoma Employees: Buy-Up Long-Term Disability Insurance Benefit

City of Tacoma Employees: Buy-Up Long-Term Disability Insurance Benefit

by | Jan 13, 2021 | Caring for Dependents, Geoff Curran, Life & Disability Insurance, Wealth Protection, Your Professional Team

 

Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. While this benefit may not sound too exciting, it represents essential insurance coverage that can protect your income in the unfortunate event that you become disabled.

City of Tacoma employees should sign-up and take advantage of this benefit.

Who am I? My name is Geoff, and I am a financial planner with Puget Sound-based Merriman Wealth Management, LLC. I got excited after seeing the special benefits notice my wife received as a City of Tacoma employee. I do not work for the City or the vendor, and I do not receive any personal benefit from you enrolling in this extra disability coverage. I am just passionate about helping families make the best financial decisions possible and wanted to provide additional information on a topic that can seem overly complicated or may often be overlooked.

The FAQ below illustrates just how important this additional long-term disability coverage is, whether or not you have dependents:

 

What is disability insurance?

This type of insurance is used to protect your income and financial livelihood in the event of an untimely illness or injury.

There are two types of disability insurance: short-term and long-term. Long-term disability coverage is the most valuable because it replaces a portion of your income starting 90 days after your disability until recovery or age 65, whichever is sooner.

 

Don’t I already have long-term disability coverage through the City of Tacoma?

You do. However, for most employees this basic employer-paid benefit only protects 60% of the first $1,500 in monthly pre-disability earnings. This means that if you earn $6,250 a month or $75,000 a year, you will only receive $900 a month in benefits.  Will $900 a month cover your bills?

 

How much extra income protection will this additional benefit provide me?

Up to $4,100 of extra income per month of pre-disability earnings. Combined with the basic employer-provided benefit described above, you could receive up to $5,000 of income replacement (i.e., a total of 60% of $8,333 pre-disability earnings). The employee from question two above, earning $6,250 a month or $75,000 a year, would receive $3,750 a month in benefits, which would go much farther toward being able to cover bills.

Note: Employees earning $100,000 or more would receive the maximum benefit of $5,000 a month.

 

What is the difference between the 90-day and 180-day waiting period options?

This waiting period, otherwise called the elimination period, is how long you have to wait to start receiving long-term disability payments from the insurance carrier. Premiums are naturally higher for the 90-day waiting period option as you will start receiving benefits earlier. The difference in premium for choosing the 90-day waiting period over the 180-day waiting period is offset by starting to receive income 3 months earlier.

 

How much does this benefit cost and how is it paid?

The benefit costs 0.303% of pre-disability earnings up to the pre-disability earnings cap for the 90-day waiting period option. This means the employee earning $75,000 would pay an extra $18.94 per month or $227.28 a year (i.e., 0.303% X $6,250 pre-disability earnings). Employees earning $100,000 or more a year would pay an extra $25.25 per month or $303 a year. This extra benefit far outweighs the additional premium cost.

Note: This premium cost would be deducted via payroll as a post-tax cost.

 

What happens if I stop working at the City of Tacoma?

Generally, you cannot keep group disability benefits like this one offered through the City of Tacoma if you leave (i.e., not portable).

 

If I do become disabled, how does the benefit work? How long would the benefit last?

In the unfortunate event of an illness or injury that qualifies for disability insurance benefits, you would file a claim with the disability insurance carrier that includes medical evidence of your disability. If approved, you would start receiving the above-described benefits after the waiting period until recovering from the disability or age 65, whichever comes first.

 

Would the benefits received from this extra policy be taxable?

Because the premium is paid post-tax rather than pre-tax where you receive a tax deduction for the premium cost, the disability payment you would receive would be tax-free. SAID AGAIN: All of the income received from this extra long-term disability coverage would not be subject to taxation. The tax-free nature of the payments further helps replace your pre-disability income (as your pre-disability income is gross income or otherwise subject to taxes).

Note: Income received from the employer-paid basic long-term disability coverage (i.e., 60% of the first $1,500 in monthly pre-disability income) would be subject to taxation. This is because your employer pays the premiums for this benefit.

 

What if I earn more than $100,000 a year? Do I need additional income protection beyond this extra benefit offered by the City?

Maybe. Start by asking these questions:

  • Does my contribution to covering household expenses exceed $5,000 a month?
  • Do I expect these expenses above $5,000 a month to continue for at least another year?
  • Do I expect my income and expenses to increase in the future?

If you answered YES to these questions (and be conservative on this), then it makes sense to consider buying an additional individual disability policy outside of your City benefits. This is especially important for households with a single earner.

 

An advisor can get quotes through an insurance broker to help you make an informed decision. It is also important to evaluate this decision through the lens of your overall financial plan, taking into account all of your goals and resources.

If you have questions about how much disability insurance coverage you need to protect your income or any other financial planning topics, like whether you are on track to achieve your financial goals, feel free to contact me directly at geoff@merriman.com.

Other useful resources:

 

Disclosure: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; past performance is no guarantee of future performance. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman Wealth Management unless a client service agreement is in place.