Asset Planning, Inc Blog

The flowchart below covers important decision-making factors a client must consider when paying off their mortgage, such as:

• Thoroughly weighing the pros and cons involved in this big decision, and how they specifically relate to their financial situation.

• Recognizing what degree of flexibility they may or may not have after paying off the mortgage.

• Considering any tax implications that may result from paying off the mortgage.

• Identifying sound reasons for paying off the mortgage, and determining the best course of action if applicable.

Should-I-Pay-Off-My-Mortgage-2022.pdf

This year, large capital gains on mutual funds are expected. Usually when the market performs very well, higher capital gain distributions can be predicted. Capital gains are created through buy and sell activity during the year within the mutual fund's holdings. That activity creates capital gains which must be paid out to the mutual fund holders. Capital gain distributions are generally paid once a calendar year, usually in December.

For example, if you own mutual fund XYZ, and the fund holds Amazon stock at a gain and the fund manager needs to trim some of the Amazon holding, this will produce a capital gain. Your portion of the gain will be distributed to you as cash or shares reinvested. Often, fund managers start selling and buying in the portfolio to rebalance the fund.

Overall, these gains are good as they are either paid in cash or reinvested and you get more shares. However, if it is held in a taxable account, there will be taxes owed on the gain unless there are losses that can be netted. If the funds are in a qualified, tax deferred account such as an IRA or 401(k), your capital gains distributions will have no taxable impact.

You will notice many daily fluctuations. When the gain is paid, the fund will drop in value by the same percentage as the gain paid. The next day, the value of the fund will rebound.

Asset Planning advisors will be monitoring the gains and using tax loss harvesting to offset the tax liability as much as possible, if any.

If the shares were held over one year: you owe taxes at the lower, more favorable capital gains rate (0%, 15%, or 20% depending on your income tax bracket).

If the shares were held for less than one year: you owe the short-term capital gains rate which is the same as your marginal tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your income tax bracket).

Please refer to the table for the average capital gain expected for the different Morningstar fund categories.

If you or a family member have an inherited property in California or expect one in the future, you would benefit from the information found in California’s newly passed Proposition 19, “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act”.

Previous laws such as Proposition 13 allowed homeowners who were disabled or over the age of 55 to transfer their property tax basis one time to a new home under the condition of their replacement residence being valued equal or less than the original home. Furthermore, children could inherit their parents and grandparents properties and keep the same tax basis. However, with Proposition 19 the child must use the home as a primary residence to keep the same property tax basis. The added benefit of the new law is seniors, disabled, and those affected by wildfire and other natural disasters can transfer property tax basis to a home even if it is more expensive than their current residence. As well, property tax transfer may be done up to three times. It is important to note that if you buy a more expensive property, the transfer is prorated, meaning there will be a calculation to adjust the basis .

These rules will not affect transfers of property occurring before February 15, 2021. If you or someone you know is planning on passing a property, it is recommended you consult your tax professional soon. Note that when you pass the property, you also pass the unrealized gain in the property since it is considered a gift as opposed to inherited properties where the realized gain is removed since the cost basis is updated at death. The lifetime gift limit is above $11 million, so it may not be as large of an issue for most.

Erin Nelsen, a CFP with Asset Planning contributed to an article written on the NerdWallet website about the increase in people doing home improvements during the lockdown period. The article discusses the benefits and limitations for different forms of payment for home renovations/improvements. 

To read the NerdWallet article, "How to Finance for a Home Remodel without Tapping Your Equity", please click here. 

Our office will be closed on Monday, September 8th in observance of Labor Day.

We will resume our normal hours on Tuesday, September 9th.

We hope you enjoy your Labor Day!

In observance of 4th of July, our office will be closed Friday, July 3rd.

We will resume normal business hours on Monday, July 6th.

Wishing all of our clients a happy and safe 4th of July weekend!

The CARES Act suspended interest and payments for most student loans until September 30, 2020. This means that you will not be charged any interest or have to make your payments during that time. If you are fortunate enough to be able to continue to be able to make your student loan payments, you may want to do so. Any payments that you make now will be applied directly to the principal. If you had your student loan payments set up on autopay, these have all been suspended and no payments will be processed until September 30, 2020. You will need to pay your student loan payments directly each month.

The recently passed HEROES Act extends the suspension of interest and payments until September 30, 2021. It also expands the break to all federal student loans. In addition, the HEROES Act will cancel out $10,000 of student loan debt for federal and private loans. Though the HEROES Act has passed it still needs to go through the senate for negotiations. Expect the final legislation sometime in the fall.

Mortgage rates hit historic lows today. I am in the process of refinancing my own home mortgage and thought I'd share how I go about shopping for rates. http://www.mortgagenewsdaily.com/ is the website I check to get an idea of what the lowest zero cost rates are in the marketplace. Mortgage News Daily publishes a daily mortgage rate survey collected from various loan orginators.  Today's survey shows 3.04% for 30 year, 2.67% for 15 year, 2.75% for FHA 30 year, and 4.18% for Jumbo 30 year. Then I look at various websites online to see who is advertising rates at or below what Mortgage News Daily survey shows. I find Bank Rate, Zillow, Nerd Wallet, & Mortgage News Daily are the best website to comparision shop. I'll submit about 3 requests online to get quotes. I usually pick the loan orginator that is the cheapest and most responsive. Please feel free to reach out to me if you want the contact information of the loan agent I'm using.  

After your taxes are complete it is always a good idea to go through your records and organize what you should keep and what you can get rid of.

How long to keep records is a combination of judgment and state and federal statutes of limitations. Since federal tax returns can generally be audited for up to three years after filing and up to six years if the IRS suspects underreported income, it’s wise to keep tax records at least seven years after a return is filed. Requirements for records kept electronically are the same as for paper records. Many records can easily be kept on-line now and downloaded and to your computer, external drive or cloud account.

Records Retention Guideline # 1: Some items should never be thrown out

This is because these items would be hard to replace and you may be asked to provide them later in life. I suggest storing these “permanent records” in an expanding file or wallet – preferably in a fire safe box:

• Income tax returns: if the return is uncomplicated then you only need to keep it for 7 years.
• Important correspondence.
• Legal documents.
• Vital records (birth/death/marriage/divorce/adoption etc.).
• Retirement and pension records.
• Year-end investment statements.
  • If the investments are transferred to another account make sure the cost basis has transferred over correctly.
  • IRA non-deductible contributions (Form 8606).
• Will and Trust documents.
• Records of paid mortgages and other loans.

Records Retention Guideline # 2: Everything Else

You should retain these records according to the following guidelines:

• Home purchase documents – Ownership period + 7 years.
  • Property records/builder contracts/home improvement receipts (keep until property is sold – needed for taxes)
• Car purchase and sale records (keep until car is sold + 3 years).
• Insurance policies (keep for life of policy).
  • If policy is changed to another company make sure that you keep the files together.
• Sales receipts (keep for life of warranty or life of the item on large purchases).
• Warranties and instructions (keep for life of product).
• Medical bills – keep for 3 years or longer if there are any reimbursement questions.
• No need to keep monthly statements for credit cards, bank statements, utilities, etc. if you receive a year end recap or are able to go online and view up to 3 years of statements.