Do Luxury Cars Need an Active Warranty?

Do Luxury Cars Need an Active Warranty?

 

If you own a luxury car, do you need to have an active warranty on it? That’s a question that has been on many minds lately, particularly those who own or are looking to purchase a high-end vehicle. Here we’ll take a look at what an active warranty is, the pros and cons of having one for your luxury car, and who might benefit from purchasing one. So whether you’re in the market for an exotic sports car or are simply curious about this topic, read on.

 

The Benefits of an Active Warranty

When you invest in a Rolls-Royce Phantom, you’re not just buying a car—you’re making a statement. This is a vehicle that exudes luxury, and its price tag reflects that. But what many people don’t realize is that a Rolls-Royce is also a complex machine, with hundreds of moving parts. That’s why it’s so important to have an active warranty.

An aftermarket warranty can help cover the cost of repairs and services, and it gives you peace of mind knowing that you’re covered in case of any unforeseen problems. So if you’re thinking about buying a luxury car, make sure you factor in the cost of an active warranty. It could end up being the best investment you ever make. Take a look at the different warranty providers; for example, see how CarShield warranty costs differ from other providers.

1. Luxury cars are often expensive and have high maintenance costs

Anyone who has ever owned a luxury car knows that they come with a high price tag. Not only are the initial costs higher than for a standard car, but luxury cars also have much higher maintenance costs. Warranty coverage is generally much more expensive for luxury cars, and repairs can also be quite costly.

In addition, luxury cars often require premium gasoline and may need to be serviced more frequently than standard cars, adding yet more to the overall cost. However, for many people, the high cost is worth it for the prestige and status that comes with owning a luxury car.

2. Warranties can help you protect your investment

Warranties are a great way to protect your wealth. When you purchase a vehicle, you want to be sure it will last for years to come. A warranty can help you do just that. By ensuring that your vehicle is protected against defects and damage, you can rest assured that it will continue to run smoothly for years to come. What’s more, a warranty can also help you avoid costly repairs. In the event that something does go wrong with your vehicle, a warranty can help to cover the cost of the repairs. As such, warranties are an excellent way to protect your wealth and ensure that your vehicle remains in good condition for years to come.

3. There are a variety of warranties to choose from

As you approach retirement, it’s important to start thinking about how you’ll protect your assets. One way to do this is to purchase an aftermarket car warranty for your vehicle. There are a variety of options available, so you can find a plan that fits your needs and budget. It’s important to compare plans and prices before you make a decision, but an aftermarket warranty can be a great way to protect your investment and provide peace of mind.

4. They can help you save money over the life of your car

If you’re like most people, you probably don’t give much thought to car warranties. However, if you’re the owner of a Porsche Panamera, an aftermarket car warranty can be a lifesaver. Porsche is known for its luxury cars, and the Panamera is no exception. With a starting price of $85,000, it’s one of the most expensive cars on the market. And because it’s a Porsche, you can expect to pay more for repairs and maintenance than you would for a less luxurious car.

An aftermarket warranty can help to offset some of these costs. In addition, it can give you confidence knowing that your car is covered in the event of an unexpected breakdown. Whether you’re looking to save money or to protect your investment, an aftermarket car warranty is worth considering.

 

When You Don’t Need an Active Warranty

Anyone who’s ever driven a luxury car knows that they’re a different breed altogether. They’re smoother, sleeker, and generally just better all around. But one of the best things about them is that despite their higher price tag, they don’t require an active warranty. That’s right—you can buy a luxury car and not have to worry about forking over extra money every month for a warranty. And why is that? Because luxury cars are built to last. They’re made with higher quality materials and designed to withstand whatever life throws their way. So go ahead and treat yourself to a luxurious ride. You deserve it!

1. You can afford to pay for repairs yourself

If you don’t mind spending the money and can afford to pay for repairs yourself, you don’t need an aftermarket warranty. For example, if you have an Audi A8, the cost of repairs and maintenance will be much higher than the average car. However, if you have the money for it, you won’t have to worry about paying for repairs down the road. Aftermarket warranties often have a lot of fine print that can exclude certain types of repairs. So, if you can afford to pay for repairs yourself, it’s probably the best option.

2. It’s not worth the extra money

Aftermarket warranties are often not worth the extra money for a number of reasons. First, they tend to be much more expensive than the manufacturer’s warranty. Second, they often have a lot of exclusions and restrictions that make it difficult to actually use the coverage. Finally, many people find that they never actually need to use the coverage. For these reasons, aftermarket warranties are not always worth the extra money.

Financial freedom is important, and there are better ways to spend your money than on an aftermarket warranty. Financial freedom gives you the ability to live your life the way you want to live it, and it is something that everyone should strive for. There are numerous things you can do to achieve financial freedom, and buying an overpriced warranty is not one of them.

3. Luxury cars are built to last

Luxury cars are built with the highest quality materials and components so they can withstand the rigors of daily driving for many years. That’s why luxury car owners don’t need to buy an extended car warranty. The factory warranty will cover any repairs that are needed during the first few years of ownership. After that, the car will continue to run reliably for many more years, with only routine maintenance required to keep it in top condition. So if you’re thinking of buying a luxury car, rest assured that it will provide years of trouble-free driving enjoyment.

4. The claims process is complicated

The extended car warranty claims process is complicated. If you bought a car with an extended warranty, you’re likely to find that the process for filing a claim is much more complicated than you anticipated. In order to get your claim processed, you’ll need to provide a lot of documentation, including proof of purchase and a detailed description of the problem. You’ll also need to be prepared to negotiate with the warranty company, as they will likely try to lowball you on the repairs. However, if you’re persistent, you can get the full value of your extended warranty. Just be prepared for a long and complicated process.

When it comes to luxury cars, there are many things to consider. You need to think about the cost of repairs and maintenance, whether you can afford them, and whether an aftermarket warranty is worth the money. Ultimately, it’s up to you to decide if you need an extended warranty for your Genesis G90. If you’re comfortable with the costs and don’t mind dealing with the complicated claims process, then go ahead and buy a warranty. But if you’re not sure that an aftermarket warranty is right for you, don’t feel pressured into buying one. There are plenty of other ways to protect your investment in a luxury car.

 

 

Written exclusively for Merriman.com by: Georgia Henry. 
Georgia Henry is originally from South Orange, New Jersey. After studying marketing in college and minoring in finance, she discovered her true passion: writing. Georgia loves to ski and has been on many amazing vacations, but her favorite was when she visited the petrified forests. She also enjoys painting and watching Olympic wrestling. In her spare time, she likes to hang out with her cat named Tom Petty.

 

 

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 Improve Your Credit Score

How to Improve Your Credit Score

 

 

 

Bad credit can haunt you for years. It can make it difficult to get a loan, rent an apartment, or even get a job. If you’re struggling with bad credit, it’s not the end—there is hope. Here are some useful pointers on how to give your credit score a much needed boost. Follow these steps to see a noticeable improvement in no time.

 

What Is a Credit Score?

A credit score is a critical indicator of one’s financial health and stability. This numeric value is determined based on several factors, including payment history, credit utilization, length of credit history, types of credit used, and recent inquiries on the report.

 

Because this single number encapsulates so much information about one’s financial behavior and habits, it is essential to monitor a credit score closely. You must take all necessary steps to maintain or improve it. A good credit score can be your ticket to financing significant purchases, such as a home or car. In contrast, a poor score can leave you in the hands of bad credit auto finance companies or other high-interest lenders.

 

Credit scores go from a low of 300 to a high of 850. Generally, a score above 650 is considered good, while anything below that is fair or poor. Therefore, it is of utmost importance to understand what goes into a credit score so that you can work to improve yours over time. Fortunately, consumers can take steps to improve their credit scores, regardless of where they fall on the credit spectrum.

 

Pointers to Help Boost Your Credit Score

Looking at your credit score right now may leave you feeling down in the dumps, but don’t despair. You can do plenty of things to improve your credit score over time. The following pointers will help get you on the right track:

 

1) Pay Your Bills on Time, Every Time

A good credit score is crucial for many reasons. That’s why it’s important to make sure you pay your bills on time, every time.

 

Unfortunately, things have a way of turning up to scuttle any timely payment plan. If that happens to you, don’t panic. There are steps you can take to minimize the damage to your score.

 

First, try to arrange a payment plan with your creditor. This shows them that you’re willing to work with them to resolve the situation. Second, cover the minimum payment if you cannot make a full payment. This shows creditors that you’re still trying to meet your obligations even if you can’t pay everything you owe right away.

 

Finally, keep track of your payments and ensure you don’t miss another one. Even one late payment can significantly impact your credit score, so it’s critical to stay on top of things. By following these steps, you can help ensure that your score stays strong, regardless of life’s challenges.

 

2) Don’t Apply for Too Many Accounts at Once

It can be tempting to open up many credit cards when you’re first starting. After all, one of the first steps to building good credit is to have a robust credit file. But while it’s essential to have a few lines of credit, you want to be careful about applying for too many at once.

 

Whenever you submit a new credit application, your credit score takes a minor hit. And if you’re constantly applying for new lines of credit, that can add up to a significant drop in your score. Additionally, you increase your identity theft risk every time you open a new account. So while it’s important to build your credit file, you want to be thoughtful about which accounts you open and how often you submit applications.

 

3) Regularly Check Your Credit Report

You must always stay on top of your credit report. Whether you’re applying for a mortgage, a car loan, or a new credit card, your credit score will be one of the factors that lenders look at when considering your application. That’s why it’s so important to review your credit report regularly.

 

By doing so, you can catch any errors or discrepancies and address them before they have a chance to impact your credit score. You can also identify any negative information that may be dragging down your score and take steps to improve your credit standing. Reviewing your credit report is one of the best ways to keep track of your financial health, so do it regularly.

 

4) Pay Your Bills Every Two Weeks

There are many strategies for improving your credit score quickly and effectively. One helpful method is to pay your bills every two weeks instead of once a month. This pacing enables you to make smaller payments more frequently, which can help reduce the effect of interest over time.

 

In addition, making frequent and consistent payments helps demonstrate that you are a dependable borrower in the eyes of lenders. Because this can be a powerful tool for increasing your credit score, it is well worth considering if you have the financial means. If you can set aside just a small amount each paycheck or biweekly period, it could make all the difference for your future borrowing prospects.

 

5) Don’t Close Unused Credit Card Accounts

Some people say it’s good to close any unused credit card accounts. After all, why keep them open if you’re not using them? However, closing these accounts can do more harm than good. One of the factors that creditors look at when considering a loan is your credit history. The longer your history, the better.

 

So, by closing down those old credit card accounts, you’re shortening your history and making it look like you’re not as reliable. It’s better to keep those old accounts open and pay the annual fee if there is one. That way, you can maintain a strong credit history and improve your chances of getting approved for future loans.

 

 

The Bottom Line

Building good credit takes time and effort. But by following these simple tips, you can improve your credit score and make it easier to get the things you want out of life. So don’t wait—start working on your credit today.

 

 

 

Written Exclusively for Merriman.com by Amy Marshall.

Amy Marshall is an automotive expert who loves to write about anything car-related.

 

 

 

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. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Merriman. 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.

 

The Building Blocks of Portfolio Risk Management

The Building Blocks of Portfolio Risk Management

 

When markets are rising, risk management seems easy—invest, sit back, and watch your investments grow. Things get a bit trickier when the markets experience volatility and decline. These are the times when you need to understand the amount of risk your investments are subject to and how that risk relates to your financial plan.

 

The first and least tangible measure of risk is qualitative in nature: how much risk are you willing to take? How would you feel, for example, if the markets declined more than 20%? What if the markets fell by more than 40%? Generally, what is the level of decline that you are comfortable with that will encourage you to stay invested and allow for your plan to thrive? Take some time to think about it. While it is easy to come up with a threshold or a hypothetical number, it is different in real time (consider the financial crisis or the markets’ initial response to the COVID outbreak, for example).

 

Once we have a handle on your subjective feelings around risk, there are a variety of tools we use here at Merriman Wealth Management to help our clients manage the quantitative measures of risk.

 

First and most important is answering this question: what is the amount of risk my portfolio can take within the context of my financial plan? This is a super important question. Too often, folks will bifurcate their investment and financial plans. This does not typically lead to successful outcomes. We manage this for clients by calculating statistically valid risk and return measures for our clients’ portfolios—i.e., we expect an all-equity portfolio to return 9.52% net of fees per year with a standard deviation of 20.49. A more moderate 60% equity portfolio would return at 7.95% and 13.06, respectively. Understanding these figures within the context of your accumulation and distribution plans is what matters. The typical recipe is for folks in their early years to take on more risk, as they have time for the markets to recover from declines. In contrast, folks later in life have less time to recover, and a more moderate portfolio is conducive to their plan.

 

The next risk management tool to understand centers around the sequence of returns. While one can craft statistically valid long-term expectations for portfolio risk and return, it is extremely difficult to predict returns in any given year. Consider 2020: who would have thought the markets would have rebounded so swiftly?

 

One thing to keep in mind with respect to sequence risk is what we call “bad timing.” What happens if you retire (switch from accumulating to decumulating) and the markets have two successive bad years? This is a good stress test for your portfolio. Pass this test, and your plan is likely in good shape.

 

The next measure to consider is the longer-term variability of returns. We measure this by running 1,000 different return trials for our clients (Monte Carlo analysis), effectively looking at everything from years of sustained above-average performance to years of sustained below-average performance and everything in between. The results are considered a success if greater than approximately 80% of the trials result in money remaining at the “end” of your plan. 

 

In conclusion, consider the list of questions below as you evaluate the risk metrics of your plan:

  • What are the risk dynamics of my current portfolio, and how do these relate to my financial plan?
  • What is the outcome of my financial plan if I retire and the markets have two successive bad years?
  • How am I accounting for the sequence of returns? What is my plan’s probability of success—will I have money left at the end of my plan?

 

Here at Merriman Wealth Management, we live by our tagline of “Invest Wisely. Live Fully.” If you are a Merriman client, we’ve got you covered. If you are not a Merriman client and would like a holistic review of your financial plan and corresponding risk metrics, let us know, and we would be happy to take you through our complimentary Discovery process.

 

 

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. Past performance is no guarantee of future results.  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.

Should I Buy Solar for My House?

Should I Buy Solar for My House?

Two of my core values are frugality and helping the planet. Adding solar to my house is one way I can help the planet by decreasing the amount of energy I consume from nonrenewable resources. But what is the cost of such a move, and when do I break even financially?

Where do I even begin to explore these questions and other blind spots I might have about solar energy?

The following resource can help you determine if your house is a good candidate for solar and what the approximate savings would be for such a change: solar savings estimator.

The process of getting a quote is simple. The two companies I reached out to asked me to send them a copy of my energy bill and some pictures of my Electrical Service (Electrical Panel and Meter). With this information, they obtained my address and were able to view my house and roof to determine its exposure to the sun as well as my annual electric usage. With the pictures, we were able to determine if my Service was To Code and generally figure out how easy a PV System can be interrogated into my existing Service or if additional work might be required. In my case, I wanted to get additional panels to account for the purchase of an EV in two years.

The breakeven period, according to the solar provider, is about 14 years. Over 30 years, we would save $104,962.*

*Assumes a 0.3% annual solar efficiency decrease and an 3.5% annual utility rate increase over 30 years.

In 2022, the Solar Investment Tax Credit (ITC) is 26%. In 2023, it will drop to 22%, and in 2024, it is set to expire. This tax credit—and the fact that it is set to expire in a couple years—is a great incentive to explore solar energy now.

When I first started looking into solar options, I had no idea that it could increase the value of my home for resale. According to the Renewable Energy Focus Journal 2017, 1 watt of solar energy adds $3 to the value of your home.

Financing is available as well, which would affect your breakeven period. As of January 12, 2022, the rates very between 3.24% and 9.84% for up to 240 months.

Other considerations to keep in mind as you look into solar options for your home:

  • The length of warranty: There are 25-year warranties available for both workmanship and performance.
  • Your roof age, pitch, direction, and type of roofing material (as some types of roofs are more expensive to install on compared to others): Your roof cannot be too old or it will need to be replaced after solar has been installed. To remove an existing PV System and re-install after a new roof is installed can cost $5,000 – $10,000. Also be aware of any obstructions (such as trees) that could block sunlight from your roof, as well as the direction your roof faces. Northward-facing roofs don’t receive enough “good” sunlight to normally pencil out as a good location for module placement. Southward-facing roofs are the best.

 

Written by: Michael Van Sant, CFP®. CSRIC™

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.

 

 

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

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

 

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.

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

 

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.