I’ve Been Laid Off — What Now?

I’ve Been Laid Off — What Now?

by | Feb 13, 2023 | 401k, Advisors, Ask Merriman, Chris Waclawik, Emergency Savings, Frank McLaughlin, Lowell Parker, Risk & Reward, Sarah Kordon, Sierra Butler, Tech Focus, Wealth Protection

 

News headlines everywhere are talking about widespread layoffs, particularly in the technology industry. Thousands of people have lost their jobs with still many more losses predicted in Q1 of 2023. With so many heavy hitters right here in the Pacific Northwest—Microsoft, Google, and Amazon, just to name a few—it’s likely these tech world layoffs affect you or someone you know.  Many of our own clients have expressed concern over their own job security, understandably anxious and full of questions.

 

Of course, the primary concern when facing a layoff is finding a new job, but that can take time. Here are a few things to think about as you adjust to your new normal. Perhaps most importantly, DON’T PANIC!

 

Here are the things that should be first on your list:

  • Give us a call! Your Wealth Advisor is here to help put your financial picture into perspective and to assist with planning to protect your investments. We can help you wade through the pros and cons of everything in this article—decisions regarding your 401(k), insurance, benefits, cash flow, taxes, retirement concerns, and more.
  • Start networking! Reach out to alumni groups, job boards, professional organizations, former colleagues, recruiters, etc.
  • Understand your rights under state law.
  • Review company documents and your severance agreement. There may be some terms of the layoff you can negotiate, like extending healthcare or retaining some company perks.
  • Apply for unemployment benefits.
  • Once you know the details of your severance agreement and unemployment benefits, plan out how to fill the income gap. See below for the pros and cons with some of the different options available.
  • Look at your options for any vested and unvested stock options or RSUs.
  • Review healthcare options. Should you sign up for Cobra, get coverage via a Marketplace plan, or join your spouse’s coverage? A layoff is a triggering event, so these options are all available to you, but there are pros and cons to each that depend on your situation.
  • Review your expenses and cut back if needed.
  • Consider your 401(k) options.

 

 

What are your options for filling the income gap?

 

Spending down your assets – Sarah Kordon, CFP®, CRPS®, Wealth Advisor

Ideally, you have an emergency savings account specifically appointed for a situation like this. If so, this should be the first asset you begin to use to supplement your income. Keep in mind that you will want to rebuild your emergency savings account after you are settled in a new job, so don’t spend frivolously. Revisit your monthly budget and look for ways to cut costs so you can stretch these savings for a longer period and rebuild them quickly when your new income stream picks up.

Spending down assets may also affect your larger financial goals, so before you dip into your savings and investments too heavily, be sure to consider the ramifications. Hopefully shorter-term goals, such as buying a new home or taking a grand vacation, can simply be postponed. Longer-term goals, such as retirement at a certain age, can also be adjusted if needed, but hopefully your emergency cushion is large enough to keep that from being necessary.

If you need to take distributions from investments, we can help you evaluate the tax consequences and understand the impact of such actions on your goals, which may make some tough decisions a little easier and provide you peace of mind.

 

Taking a 401(k) loan or withdrawal – Sierra Butler, CFP®, CSRIC™

When you’ve stopped getting a paycheck, using some of your 401(k) assets through a loan or withdrawal might seem like an attractive choice, but here are some reasons why it should be your last resort.

Most 401(k) plans do not allow new loans after an employee has left the company. If you already have a 401(k) loan, the plan may demand an immediate repayment or a shorter repayment plan. The loan must be repaid before rolling over the balance into a new 401(k) or IRA, which would prevent you from consolidating your accounts and potentially taking advantage of superior investments in a different account.

If you instead take a withdrawal from your 401(k), or if the loan is not repaid, it will be treated as a taxable withdrawal and is subject to ordinary income tax. Additionally, you will incur an early withdrawal penalty of 10% if you are younger than age 55.

One of the biggest risks of a 401(k) loan or withdrawal is missing out on market gains should the investments do well after you take the withdrawal. I caution folks from viewing their retirement accounts as piggy banks for current spending as it can be a quick way to deplete their retirement nest egg.

 

Should I take on gig or contract work? – Frank McLaughlin, CFP®, CSRIC™

This question depends entirely on your financial situation and tradeoff preferences. Assess these by asking yourself questions like:

  • Have I saved up enough cash to weather this period between jobs?
  • Am I able to cut back on certain expenses to allow me to search for a new job without taking on a gig? Is cutting back on expenses worth it, or do I prioritize maintaining a certain lifestyle?

Note: Don’t forget to consider new potential expenses, such as healthcare costs.

  • Do I have another source of income, such as a working spouse who could temporarily pick up the additional burden for a while? Would my significant other be okay with that arrangement?

If you find yourself answering no to more than one of the assessment questions above, taking on a side gig or contract work may be a great option to explore.

 

 

Could there be a silver lining?

 

Consider retiring early, staying home with the kids, or taking a sabbatical – Lowell Parker, CFP®

After a layoff, the most common course of action is to work toward finding a new job. But that isn’t the only path available to you. Burnout is real! Maybe this is your sign to take a break if you can afford to. Can you take this opportunity to retire early or stay home with the kids for a few years? Or perhaps take advantage of the temporary break from work and go on that long trip you’ve been dreaming about, or use the time off to work on a home remodel?

The obvious and large warning for any of these options is that your financial plan must support it. Do you know what these choices would mean for your future lifestyle? This is a major decision to make, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough if you won’t continue to have an income stream from a job? It’s important to revisit your financial plan and make sure you have saved enough to make work optional, whether temporarily or permanently, throughout a variety of potential future market scenarios. If this is something you’re considering, reach out to your Wealth Advisor to see if you can make it happen.

 

Make it work to your advantage at tax time – Chris Waclawik, AFC®, CFP®

After you’ve reviewed your income sources following a layoff and you have an estimate of the tax impact of using these sources for income, you may be able to create a plan to take advantage of the situation.

The “good” news is that a layoff, especially one that happens early in the year, can potentially place you in a lower tax bracket for the year, which opens up some planning opportunities. Here are a few to consider:

First, your health insurance choice may come with tax perks. When being laid off, many employees have the choice of COBRA, to extend current health insurance, or health insurance through the Marketplace. Purchasing coverage through the Marketplace can have subsidies (provided through your tax return) that can reduce the cost of coverage by over $1,000 per month depending on age, income, and the number of family members to cover.

Second, it may be possible to realize long-term capital gains at a 0% rate. This is a great opportunity to diversify out of a concentrated position without incurring a huge tax burden.

Third, finding yourself temporarily in a lower tax bracket can be a good opportunity for Roth conversions. By intentionally moving some investments from an IRA to a Roth account, you may be able to reduce taxes over your lifetime.

While I think everyone agrees layoffs aren’t fun to experience, at least we may be able to take advantage of them to reduce our tax burden for that year and potentially well into the future.

 

If you are experiencing a layoff yourself, remember: Your first step should be to contact your Wealth Advisor. If you’re not already working with one, schedule a meeting today. We can take some of the stress of these decisions off your plate and help you find the silver lining.

 

 

 

 

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.

Take Advantage of New Tax Adjustments in Planning for 2023!

Take Advantage of New Tax Adjustments in Planning for 2023!

by | Jan 12, 2023 | 401k, Advisors, Chris Waclawik, Investing 101, News, Retirement Savings, Tech Focus, Wealth Preservation

 

 

Tax adjustments happen every year, but this provides an excellent opportunity to review and plan for a better personal tax situation for 2023. Let’s take a look at the changes! Legislation has given even more planning opportunities for employees and retirees than usual. The planning opportunities for 2023 fall into three broad categories: tips for current workers, tips for retirees, and ongoing strategies.

 

Updates for Current Workers

Here are some items that people who are currently working will want to review for the new year:

  • New Tax Brackets and Standard Deduction: Tax brackets and the standard deduction are all indexed to inflation. The large numbers in 2022 created bigger changes than usual in 2023, making it worth reviewing tax withholding.
  • Higher 401k (and 403b and 457) Employer Plan Contribution Limits: 2023 will see an increase from $20,500 ($27,000 if age 50+) to $22,500 ($30,000 if age 50+) that can be added to your employer retirement plan.
  • Higher IRA and Roth IRA Contribution Limits and Phase Outs: The contribution limits to IRA and Roth IRA accounts will also increase, potentially in addition to employer plan contributions. There will also be an increase to the income limits regarding when your ability to take advantage of these plans starts to phase out.
  • Health Savings Account Increases: For employees with a health savings account (HSA), the amount that can be contributed to the plan will also increase in 2023.
  • NEW Employer Matching 401k Contributions as Roth: Starting in 2023, employers may start allowing employees to take matching contributions as Roth contributions rather than pre-tax contributions. This is brand new and opens up significant planning opportunities.

 

Updates for Retirees

Retired individuals will also see several changes in 2023 to plan around:

  • NEW RMD Age Increased from 72 to 73: The biggest change for retirees in 2023 is the delay of the first required minimum distribution (RMD) from age 72 to 73. Individuals turning 72 in 2023 now have an additional year of flexibility for things like Roth conversions or other strategies to minimize taxes over their lifetimes.
  • Social Security Benefits and Medicare Premiums: Social Security will get an 8.7% increase in 2023. The base monthly premium for Medicare will decrease from $170 to $165.For higher earning retirees, the thresholds for Medicare’s IRMAA surcharge will be increasing.

 

Ongoing Planning Opportunities

There are several ongoing planning opportunities as individuals start looking ahead at 2023:

  • Qualified Charitable Contributions (QCD): For individuals who are at least 70½ years old, qualified charitable distributions (QCDs) from an IRA may be one of the most tax-effective ways to give to charity.
  • Roth Conversions and “Backdoor” Roth IRA Contributions: Depending on your current income and current retirement accounts, Roth conversions or “backdoor” Roth IRA contributions may allow more savings into accounts that will grow tax-free in the future.
  • Tax Loss Harvesting: With the decline in both stock and bond markets in 2022, there may be more opportunities than usual to sell investments at a loss and offset taxable income realized in other areas.

 

The Bottom Line

The new tax changes have created significant planning opportunities to review. It’s worth exploring how your personal tax situation may benefit from making adjustments in 2023. At Merriman, we live and breathe this stuff so you don’t have to. We are happy to answer your questions and partner with you to develop and/or refine the best approach for your taxes for 2023. Schedule some time with us today!

 

 

 

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. 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 and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

 

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

by | Oct 4, 2022 | After you retire, Chris Waclawik, Goal Planning, Preparing for Retirement, Retirement Savings, Tech Focus, Wealth Enhancement, Wealth Protection

 

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Moving into retirement is an exciting opportunity to live fully. It can be a time to travel, explore new hobbies, or spend time with grandchildren.

For many, this period at the start of retirement can also be an opportunity to provide additional financial security—and minimize lifetime taxes—by making partial Roth conversions.

 

The Retirement “Tax Valley”

Many retirees will be in a lower tax bracket early in retirement than they were just before retirement while they’re still working—or than they will be in later in retirement. To understand why, consider Jim and Susan (both age 61) who recently retired.

While working, Jim and Susan had a combined household income of $250,000. This put them right in the middle of the 24% tax bracket for a married couple. At retirement, Jim and Susan have the following assets:

  • $1 million (Jim’s IRA)
  • $1 million (Susan’s IRA)
  • $100,000 (Jim’s Roth IRA)
  • $500,000 (Taxable account – with a $300,000 cost basis)
  • $300,000 (Cash savings in bank accounts and CDs)
  • $800,000 (House – No Mortgage)

Jim and Susan will also have the following income in retirement:

  • $50,000 (Jim’s annual pension – starting at age 65)
  • $30,000 (Susan’s annual pension – starting at age 65)
  • $40,000 (Jim’s annual Social Security – Starting at age 70)
  • $35,000 (Susan’s annual Social Security – Starting at age 70)

 

In addition to that income, Jim and Susan will each have to start taking required minimum distributions (RMDs) out of their IRAs starting at age 72. Assuming they don’t make withdrawals from the IRA between now and age 72, and that the accounts grow at 7% annually over the next 11 years, they would each be worth about $2.1 million by age 72. They would each have an RMD of about $76,650 the year they turn 72 ($2,100,000 / 27.4).

This would potentially give them a taxable income at age 72 of about $308,300 from pensions, Social Security, and their RMDs. This puts them back at the top of the 24% tax bracket, and they could easily move up to the 32% tax bracket or higher.

However, in their first years of retirement, they could basically have no taxable income if they are using cash savings and the taxable investment account to fund their goals if they choose to do so. Is it a smart idea to minimize taxes this much during these early retirement years?

 

Strategic Roth Conversions Early in Retirement

Let’s say that Jim and Susan would have $0 taxable income in early retirement. Their modest interest, dividend, and realized capital gain income is offset by their $25,900 standard deduction.

If they each convert $65,000 annually from their IRA to their Roth accounts ($130,000 total), they will initially pay tax on that conversion primarily at the 10% and 12% rates, with just a little being taxed in the 22% bracket each year.

If they do this each year until age 72 when their RMD begins, they would have about $1,079,000 in each IRA, assuming 7% annual returns. This would reduce their initial RMD at age 72 by about half. Their taxable income at age 72 would be reduced by about $74,500 and their tax liability by about $17,880 since they were in the 24% tax bracket.

Much of the earlier conversions each year would have been taxed at 10% or 12% rates, resulting in less overall tax being paid during their lifetimes.

 

Protection Against Rising Tax Rates

The example above shows the benefits of Jim’s and Susan’s Roth conversions, assuming tax rates stay the same. If 10 years from now, tax rates on higher earners increase, they will have less income being taxed at those higher levels due to the smaller IRA balances and smaller RMDs.

They would also have about $1,000,000 in each Roth IRA by age 72, assuming a 7% rate of growth. This can be withdrawn tax-free if additional money is needed. This is always a benefit but especially so in a world where overall tax rates are higher.

 

Roth Conversions to Take Advantage of a Market Decline

In addition to the benefit of taking Roth conversions when in lower tax brackets, Jim and Susan can take advantage of market declines to make strategic Roth conversions.

Say a market decline in the first six months of the year produces the following negative returns:

-2% (Bonds)

-10% (Large US stocks)

-15% (Large international stocks)

-20% (Small US stocks, small international stocks, emerging market stocks)

This becomes a great opportunity for Jim and Susan to strategically move some of the small US, small international, and emerging market stocks from the IRA to the Roth accounts. Assuming the investments recover as expected, Jim and Susan can pay tax on the conversion when the prices are down and enjoy a significant tax-free recovery after the investments are in the Roth account.

 

Additional Factors to Consider

There are several other factors for Jim and Susan to consider when making Roth conversions early in retirement.

When purchasing individual health insurance in retirement before Medicare begins, retirees may qualify for subsidies to reduce the cost of their premiums based on their taxable income. In Jim and Susan’s case, they have retiree healthcare from their employer that doesn’t qualify for tax subsidies, so this is not a factor.

Once Medicare Part B benefits start at age 65, there is an additional IRMAA premium cost when taxable income increases beyond a certain level. In 2022, this additional premium begins when income is above $182,000 for a married couple.

For retirees who expect to have money at the end to leave to an heir, Roth conversions can be an important part of an estate plan, as leaving Roth assets to heirs are significantly more valuable than leaving traditional IRA money to heirs.

 

Conclusion

While they won’t be a perfect solution for everyone, for the right families, Roth conversions early in retirement can be a powerful tool to minimize taxes over your lifetime and maximize overall expected wealth.

This can be one more tool to ensure the ability to make the most of retirement and really live fully!

 

 

 

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. 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 and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

Boeing Pension and Lump Sum Comparison – Should I Retire Early?

Boeing Pension and Lump Sum Comparison – Should I Retire Early?

by | Aug 19, 2022 | 401k, Advisors, After you retire, Chris Waclawik, Goal Planning, Preparing for Retirement, Retirement Savings, Tech Focus, Wealth Enhancement

 

Boeing Employee – Should I Retire Early?

Boeing employees nearing retirement age are facing a financial decision that will need to be made by November 30—one that could have a significant impact on their lifestyle in retirement.

 

Higher Interest Rates and the Lump Sum Pension Benefit

Boeing offers many employees the option at retirement to either receive a pension, providing monthly income for life, or to have a single lump sum deposited into a retirement account that can be invested and withdrawn as desired.

The amount of the pension benefit is based on several factors, including years of service with Boeing and average salary while employed.

When determining the lump sum benefit, the underlying interest rates are an additional factor to take into consideration. Higher interest rates will create a lower lump sum benefit, and lower interest rates will create a higher lump sum benefit. Boeing resets the interest rate used in the calculation once per year in November.

With the significantly higher interest rates we’ve seen in 2022, an engineer who may currently qualify to choose either a $5,000 monthly pension or a $1 million lump sum benefit may be looking at only $800,000 in lump sum benefit if they retire after November 30, 2022. The exact numbers will vary for each employee.

That $200,000 reduced benefit can be a significant incentive for employees who are planning to retire in the next few years to adjust their plans and retire early.

 

To Whom Does This Apply?

Not all Boeing employees have a pension as part of their benefits. Also, some employees are covered by unions that only offer the monthly pension and do not have a lump sum option.

Boeing engineers who are members of the SPEEA (Society of Professional Engineering Employees in Aerospace) union usually have a generous lump sum benefit compared with the monthly pension and may benefit significantly from comparing their options.

 

Financial Planning to Compare Options

The decision to take either the lump sum in retirement or the monthly pension is a significant one, and both contain risks.

With the lump sum, the employee is accepting the risk of the market and managing the money.

With the monthly pension, the guaranteed income provided to the employee will not increase with inflation. This year has been a good reminder that inflation can significantly reduce the purchasing power of that income.

Also, does it make sense for an employee who originally planned to retire in two years to give up on the years of additional earnings and savings? Can the employee afford to do so?

We help employees compare how a monthly pension or lump sum benefit will interact with other resources (Social Security, retirement accounts, real estate) to determine the ability to meet goals in retirement. We can also compare retiring in 2022 with delaying retirement and possibly receiving a reduced benefit in the future.

 

Deadline and Next Steps

Boeing employees wanting to claim the lump sum before rising interest rates potentially reduce benefits will have to retire and submit the request for a lump sum benefit by November 30, 2022.

If you’re feeling overwhelmed by assessing the pros and cons of this decision, reach out to us for your complementary personalized analysis. We can help you determine whether retiring now would provide you with a sustainable retirement that meets your lifestyle needs.

 

 

 

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. 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 and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

 

 

Aimee Butler & Chris Waclawik Promoted to Principals

Aimee Butler & Chris Waclawik Promoted to Principals

by | Jul 8, 2022 | Aimee Butler, Chris Waclawik, Life at Merriman, News, Your Professional Team

 

Merriman Wealth Management, LLC, an independent wealth management firm with over $3.5 billion in assets under management, is pleased to announce the promotion of two new principals – Wealth Advisors Aimee Butler, CFP®, and Chris Waclawik, AFC®, CFP®.  

“Aimee and Chris’s contribution and dedication to Merriman and our clients has been invaluable as we seek to be the destination for clients and employees who are looking to Live Fully,” said CEO Jeremy Burger, CFA®, CFP®. “Aimee and Chris continue to demonstrate a strong commitment to improving the lives of our clients, lifting up their fellow teammates and giving back to their communities.”

Merriman is proud to offer a path to partnership for intellectually curious, motivated individuals who combine technical expertise and empathy. With the addition of Aimee and Chris, Merriman now has 15 principals. 

Aimee joined Merriman in February 2018 in its newly acquired Eugene, OR, office after holding senior leadership roles at Waddell & Reed and Ameriprise. Her leadership experience was indispensable as she helped integrate the newly merged teams and worked with clients to fulfill Merriman’s long-term vision of empowering people to Live Fully. Along with assisting many clients on Merriman’s behalf, Aimee serves on two leadership committees: the first designed to continually enhance the Merriman client experience and the second to attract and retain talented individuals to Merriman.

Chris joined Merriman in May 2014 as an Associate Advisor. Within two years, he was asked to lead and enhance the associate program into a development program for future advisors. While managing this growing team, he continued to be an advocate for clients and has helped the firm grow through new channels. In addition to his direct client work, Chris now focuses his leadership expertise on the Wealth Management Services and Client Experience Operations committees at Merriman. Always ready to contribute, Chris’s tax experience and attention to detail deliver great intellectual value, which consistently benefits our clients and team.  

 

 

 

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.

Washington Capital Gains Tax and Long-Term Care Payroll Tax – New Taxes and Planning Opportunities in 2022

Washington Capital Gains Tax and Long-Term Care Payroll Tax – New Taxes and Planning Opportunities in 2022

by | Feb 22, 2022 | Advisors, Chris Waclawik, Healthcare, News, Tech Focus, Wealth Preservation

 

The start of the new year is often a time when tax changes go into effect. At the Federal level, the Build Back Better Act, which had some significant tax changes, has not passed. For now, it is unclear if the legislation will pass in 2022. It is also unclear if any of the changes would apply in 2022 or would only apply to future years if it does pass.

In Washington State, 2022 brings the scheduled implementation of two new taxes that have the potential to impact many Merriman clients: the capital gains tax and the long-term care payroll tax.

 

Washington State Capital Gains Tax

Starting in 2022, Washington will apply a 7% tax on realized capital gains above $250,000. The most common assets that will generate income subject to this tax include:

  • Sales of stocks and bonds (and mutual funds, ETFs, and other pooled investments)
  • The sale of a business above a certain size

 

Other assets are specifically exempt from the capital gains tax, including:

  • All real estate
  • Sale of small businesses below a certain size
  • Investments inside retirement accounts
  • Restricted stock units (RSUs) at the time they vest (though their later sale could result in taxable capital gain income)

 

How the tax is calculated

This 7% tax is applied only on capital gains above the $250,000 threshold. It is not impacted by other income. The same threshold applies to married and unmarried households.

Example 1: John sold $500,000 of Microsoft stock in his taxable investment account that was acquired for $240,000. He has no other income in 2022. This results in $260,000 of capital gains. Since $260,000 – $250,000 exemption = $10,000, John would owe ($10,000 x .07 = $700) in capital gains tax.

 

Example 2: Sally has $800,000 of income from her job. She sold $500,000 of Amazon stock that was acquired for $300,000. Because the $200,000 of realized capital gain is less than the $250,000 exemption, she does not owe the capital gains tax. Her other income is irrelevant to this calculation.

 

Example 3: Matt and Molly are married taxpayers filing a joint tax return. Matt sells stock in his individual taxable account that realizes $150,000 of capital gains. Molly sells stock in her individual account that realizes $120,000 of capital gains. Even though they are both individually below the limit, because they are married and are filing a joint tax return, their total gains are $20,000 above the $250,000 limit; they would potentially owe $1,400 in capital gains tax.

 

When are payments made?

According to the state Department of Revenue webpage, the tax will be calculated on a capital gains tax return in early 2023. The tax payment will be due at the same time the taxpayer’s federal income tax return is due.

There does not appear to be a requirement to make estimated tax payments before the end of the year the way some taxpayers are required to do for federal income tax.

 

Potential court challenge

Opponents have challenged the law saying this capital gains tax is unconstitutional under the state constitution. A hearing is scheduled for February 2022. Any ruling is expected to go to the state supreme court later this year.

At this time, we are encouraging families who may be impacted by this new tax to plan under the assumption that it will go into effect.

 

 

Long-Term Care Payroll Tax

We have previously shared about Washington’s new long-term care payroll tax. The tax is 0.58% on all wages (including RSUs at the time they vest) and is used to pay for long-term care benefits ($580 on $100,000 of income).

Taxpayers were given the opportunity to exempt themselves from the payroll tax by securing a private long-term care insurance policy before November 1, 2021, and requesting an exemption from the state.

 

Delay in implementing the payroll tax

In December 2021, Governor Inslee asked the state legislature to delay implementing the payroll tax. That has not happened yet, and employers are technically still required to withhold the payroll tax from employee paychecks.

The requested delay was to allow time to address some concerns, including:

  • The current program is limited to Washington residents. Residents could pay in for an entire working career, move out of state in retirement, and then not be eligible for benefits.
  • The current program has no mechanism for new workers in Washington State to opt out.
  • The current program requires workers to pay into the system who may never be eligible for benefits. Since you must pay in for 10 years to qualify for benefits, older workers who retire before reaching that point will pay in but not qualify for benefits. Military spouses and other out-of-state residents who work in Washington may be in a similar situation.
  • The current program has no mechanism to ensure that individuals who opted out of the payroll tax maintain their insurance.

It is expected that implementing the payroll tax will be delayed, but it will still likely go into effect in some similar fashion in 2023 or 2024.

 

 

Planning Opportunities

The biggest planning opportunity for the capital gains tax is remaining mindful of how much capital gains income is being realized each year. Several large area employers, like Amazon and Microsoft, along with many smaller employers have seen a significant increase in stock values.

At Merriman, we believe in the benefits of diversifying investments and not remaining too concentrated. For tax purposes, it is often beneficial to realize those capital gains over multiple years to spread out the tax impact.

Since the 7% state capital gains tax is in addition to the federal capital gains tax, it likely makes sense to limit those gains to $250,000 per year where possible.

For the payroll tax, there is a bit of a holding pattern. There was a rush of activity in 2021 to qualify for the exemption, and that deadline has passed. Now that implementation has been delayed, we will wait to see what adjustments, if any, happen and what clients should do to plan for it.

We will update with further adjustments for federal and state taxes. Your financial advisor can provide additional specific guidance.

 

 

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.