News | Merriman

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

by Chris Waclawik | 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.

When Can I Expect My Tax Forms?

by Merriman | Feb 1, 2022 | Investing 101, News, Tech Focus

We know there’s a lot to keep track of at tax time and we often get asked, “When will I get my tax forms?” Here’s a quick guide of roughly when you can expect to have your tax forms available from your custodian. We encourage you to sign up for electronic tax form delivery for notifications about their availability, ease of access, and security.

Schwab

To ensure timely tax reporting while limiting corrections, Schwab produces its Form 1099 Composite in two separate production runs, depending on the types of investments held and when trades were last placed in the account. If you are a Merriman client, your account(s) will likely be included in the second production run.

First Production run | Posted online and begin mailing forms: February 2

Second Production run | Posted online and begin mailing forms: February 16

Both production runs | Tax software download/export: Available February 18

Source: Schwab

You can sign up for electronic tax form delivery by logging into www.schwaballiance.com and selecting the Paperless option in the Service tab.

Tax Form Corrections

If Schwab receives updated information from issuers of securities after the initial tax form has been mailed, Schwab is required to send a corrected Form 1099 Composite, with the revisions clearly highlighted, within 30 days of being made aware.

TD Ameritrade

TD Ameritrade has already posted some 2021 1099 tax forms. If you received at least $10 in dividends or interest, or had a closing transaction or certain reportable corporate actions, an IRS Form 1099 will be issued.

The 1099 forms currently available are for clients who:

Had reportable activity as a result of trading and/or dividend or interest income from equity stocks, and
Did not hold investments deemed highly likely to reclassify income distributions, requiring a corrected 1099 tax form.

TD Ameritrade will alert clients who have a valid email address on file once their 2021 Consolidated Form 1099(s) and corrected form 1099(s) (if issued) are available for them to view online.

You can sign up for electronic tax form delivery by logging into www.advisorclient.com. then selecting My Profile > Communication Preferences.

Clients Who Will Be Excluded from This First Mailing

Clients who had a high probability of income reclassification or cost basis reporting related to fixed-income products were not included in the initial 1099 batch. Their 1099 tax forms will be available in the coming weeks, allowing more time to capture such changes in the original form and reducing the likelihood these clients will receive a corrected form (which could potentially require the refiling of their tax returns).

Fidelity

Similar to Schwab and TD Ameritrade, Fidelity does multiple 1099 production runs to minimize corrections needed. Depending on the client’s holdings and when transactions occurred in the account, these are the three possible timelines:

You can sign up for electronic tax form delivery by logging in at www.fidelity.com and selecting Your Profile (tab) > Preferences > Communication Options. In the electronic/paper mail delivery section, click Update.

Flourish

1099-INTs have been posted for all applicable accounts. You can log in to www.flourish.com and click on the Documents tab to access your 1099(s), which are dated December 31st, 2021.

Please note: Flourish does not issue 1099-INTs for clients if their combined account(s) do not generate $10 or more of interest in any given year. This does not imply that clients are not required to report interest if under $10. Clients should consult with a tax professional if they have any questions.

Merriman Wealth Management, LLC, Opens New Office in Bellevue, Moves Seattle Location

by Merriman | Jan 18, 2022 | News, Tech Focus, Why Merriman, Your Professional Team

FOR IMMEDIATE RELEASE, January 18, 2022

Media Contact: Jay Scott, jscott@gavinadv.com, 484-695-3774

SEATTLE, Washington — Wealth management firm Merriman is opening a new office in Bellevue as part of its strategic growth plan.

The 6,461-square-foot Bellevue office at 10900 NE 8th St., Suite 780, will have 16 employees using it as their primary office starting January 19, with additional hires planned.

According to Jeremy Burger, Merriman CEO, there were several reasons for opening the new office. One top driver was talent acquisition and retention. The Merriman team grew by 15 percent in 2021 and is poised for additional growth this year to support the complex financial needs of its clients in the Pacific Northwest and nationwide.

“Having a presence on both sides of the lake will dramatically increase the number of highly qualified employees who may choose to work with Merriman,” Burger said.

The new office offers proximity to a larger number of current and prospective clients in the growing Bellevue/Eastside market. But it is also a practical move – most of the 16 employees who will be based out of the new office live on the Eastside.

Along with the new Bellevue space, Merriman has relocated its Seattle office to 920 5th Ave., Suite 2720. The 5,929-square-foot downtown space is home to 23 employees.

“Hybrid work allows us to have wonderful client meeting spaces now in Bellevue and Seattle while also providing high quality remote options for clients, prospects and our growing team,” Burger said.

Merriman also has offices in Spokane and Eugene, Oregon.

About Merriman

Merriman is an independent, fee-only investment advisory firm which manages approximately $3.67 billion for clients across the country. Founded in 1983, Merriman has a strong focus on creating deep relationships built on empathy and understanding and combining that with expertise to give our clients agency and confidence to use their money to achieve true wealth. To help our clients be truly successful in achieving their goals, we offer a comprehensive approach to wealth management that includes not only investment planning, but also encompasses taxes, estate planning, insurance, risk management, charitable giving and more.

Printable version available here.

New Payroll Tax in Washington State

by Geoffrey Curran | 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.

Stimulus 2.0: What Is (and Isn’t) Included in Consolidated Appropriations Act (CAA) of 2021

by Merriman | Feb 9, 2021 | News, Phuc Dang, Tech Focus, Wealth Enhancement

On December 21, 2020, Congress passed the second round of major stimulus as a follow-up to the CARES Act passed earlier in March 2020. President Trump initially balked at signing the new legislation, citing that he wished to see a higher Recovery Rebate payment for families, but ultimately he signed the legislation as presented on December 27, 2020. While the CAA expanded on some of the relief provided in the earlier CARES Act, it was also notable for a few specific provisions it didn’t include.

Here are some highlights included in the bill:

Recovery Rebate: Qualified families are eligible for an additional advanced rebate of $600 per taxpayer and $600 for each qualified child (compared to $1,200 per taxpayer and $500 per child under the CARES Act). The income thresholds remain the same as under the CARES Act, with phaseouts beginning at $75,000 for Single or $150,000 for Married Filing Joint.

Extended Federal Unemployment Benefits: The earlier CARES Act authorized additional federal unemployment benefits to be paid on top of state unemployment benefits to help individuals affected by the pandemic. However, those federal benefits were set to expire in December 2020, but the CAA extended the benefit for another 11 weeks at a reduced rate of $300 per week (down from the original $600 per week). Employees as well as self-employed individuals remain eligible for the extended federal unemployment benefits.

Enhancements to Paycheck Protection Program (PPP) Loans: The CAA provides significant relief to businesses impacted by the pandemic. In addition to expanding the list of qualified expenses eligible for loan use, the CAA opened the doors for businesses to obtain a second PPP loan. These loans may be forgiven if used to pay for qualified expenses such as wages, rents, utilities, and now certain operational expenditures, property damage due to vandalism, and worker protection expenditures. Also of note, the act specifically allows businesses to deduct expenses paid with PPP loan proceeds, even if the loan is later forgiven.

Equally notable are the provisions NOT addressed in this bill:

No Extension of the 2020 RMD Waiver: Taxpayers will need to resume their Required Minimum Distributions in 2021.

No Extension of Coronavirus-Related Distributions (CRD) into 2021: Last year, individuals affected by the coronavirus could access retirement accounts (IRAs, 401(k)s, etc.) for up to $100,000 without being subject to the 10% early distribution penalty if they were under age 59 ½. Furthermore, these distributions could be paid back within 3 years to “undo” the income. Unfortunately, the CAA did not extend this withdrawal provision into 2021, so be careful when accessing retirement accounts before age 59 ½.

No Further Student Loan Relief: Federally backed student loan payments had been suspended under the CARES Act and through executive order through January 31^st, 2021, but the CAA did not further extend this relief.

President Biden has already indicated that a third round of stimulus will be needed, so we are likely to see more legislative changes this year. We will continue to stay on top of the changes impacting our clients, but please reach out to your advisor at any time if you would like to understand how these changes may impact you.

This article was written by retired Merriman Wealth Advisor, Phuc Dang.

How to Report Your 2020 RMD Rollover on Your Tax Return

by Chris Waclawik | Jan 26, 2021 | Chris Waclawik, News, Retirement Savings, Wealth Preservation, Your Professional Team

Following the stock market decline early in 2020, Congress passed the CARES Act on March 27, providing relief for individuals and businesses impacted by the pandemic. One of the provisions was a suspension of 2020 Required Minimum Distributions (RMDs). Individuals who hadn’t taken a distribution yet were no longer required to do so.

For individuals who took a distribution early in 2020, they were given the opportunity to “undo” part or all of that distribution by returning funds to their IRA by August 31, 2020.

Tax Forms for IRA Rollovers

Some taxpayers who took advantage of this rollover to undo that RMD may be surprised to get tax forms reporting the withdrawal.

Example 1: Kendra turned 75 in 2020 and had a $30,000 RMD at the start of the year. She took her distribution on February 1, 2020, with 10% tax withholding ($27,000 net distribution and $3,000 for taxes). She didn’t “need” the distribution as Social Security and other income covered her entire cost of living. Because she didn’t need the money, she returned the full $30,000 to her IRA on June 15, 2020.

In January 2021, Kendra was surprised to receive a Form 1099-R since she returned the entire amount and knew she shouldn’t owe taxes on it. The Form 1099-R reported a $30,000 distribution from her IRA in Box 1 and $3,000 in Box 4 for tax withholding. Box 7 reports code 7 for a “normal distribution.”

How to Report the 2020 Rollover

Since Kendra returned the entire $30,000 withdrawal listed on her tax return, it won’t be included in her taxable income. However, she will need to report both the withdrawal and the rollover on her tax return.

In her case, the full $30,000 will be reported on line 4a of Form 1040, with $0 reported on Line 4b. She will also write “Rollover” next to line 4b. In her case, the $3,000 that was withheld for taxes will still be reported with other tax withholding and will impact her ultimate refund or balance due.

How to Report a Partial Rollover

Example 2: Jane turned 76 in 2020. She also had a $30,000 distribution that she took on February 1, 2020, with 10% tax withholding ($27,000 net after $3,000 for taxes). On June 15, 2020, she returned $12,000 to her IRA instead of the full $30,000.

In January 2021, she received a 1099-R that also reported a $30,000 distribution from her IRA in Box 1 and $3,000 in Box 4 for tax withholding. Box 7 reports Code 7 for a “normal distribution.”

In Jane’s case, she will also report the full $30,000 on line 4a. She will report $18,000 on line 4b ($30,000 original distribution minus $12,000 returned to her IRA in 2020). She will also write “Rollover” next to line 4b. The $3,000 withheld for taxes will still be reported with other tax withholding as usual.

Form 5498

Taxpayers who returned some or all of their distribution in 2020 will receive Form 5498. They likely will not receive this form until May 2021—after the April 15 tax filing deadline. This form will be used to report the amount returned to the retirement account in 2020 and verify the rollover reported on the 2020 tax return. The taxpayer does not need to wait (and should not wait) for the Form 5498 before filing their taxes. This is simply an information form so the IRS can verify what was reported on the tax return.

Exception from the Usual Rule

It’s important to remember that all of these rollovers are a one-time exception in 2020 from the usual rule. Typically, this type of rollover can only be done once per rolling 365-day period and must be completed within 60 days of taking the withdrawal. Also, RMDs are generally specifically prohibited from this type of rollover.

Conclusion

Individuals who returned RMDs in 2020 to avoid having to include the withdrawal in their taxable income will still receive a tax form showing the distribution and will have to report it on their tax return. When reported correctly, the amount returned will be excluded from their income as intended.