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Maximizing Premium Assistance Tax Credits For Self-Employed Health Insurance Costs

August 19, 2020 07:02 am 7 Comments CATEGORY: Taxes

In 2014, the Affordable Care Act (also known as “Obamacare”) established state health insurance programs with the intent to make health insurance accessible to all individuals and families – including the self-employed – without needing to obtain coverage through a (larger) group employer. For those with lower income who may not be able to afford coverage from the state marketplaces, the Affordable Care Act also established the Premium Tax Credit (PTC; also known as the Premium Assistance Tax Credit, or PATC), a fully refundable Federal income tax credit meant to subsidize the cost of insurance premiums for individuals who purchase insurance through the Health Insurance Marketplaces. The PTC provides support by effectively capping health insurance premiums (for the second-lowest-cost Silver health plan available in their state) to a certain percentage of the individual’s household income, calculated on a sliding scale for those earning up to 400% of the Federal Poverty Level (which amounts to $104,800 for a family of 4). Though because of the unique control that self-employed individuals have over the income and expenses of their businesses, they have a unique opportunity to make business decisions that can also help maximize their ability to receive Premium Tax Credits.

In this guest post, Vinicius Hiratuka, founder of Elevated Retirement Financial Services, examines planning strategies that self-employed individuals can use to manage their reportable income levels in order to qualify for the Premium Tax Credit, and maximize the amount of the PTC they receive.

Maintaining income levels within the allowed threshold to qualify for the PTC in the first place - between 100% and 400% of the Federal Poverty Limit (FPL) - is crucial because as little as a single dollar of income over the 400% FPL will result in the complete loss of the PTC.

Maximizing the PTC (once meeting the FPL-qualifying threshold) is largely influenced by managing above-the-line tax deductions (that affect the calculation of an individual’s AGI used to determine the PTC in the first place). As such, self-employed individuals often have greater flexibility to employ tax-savings strategies through business expense and retirement contribution planning, such as accelerating business expenses (e.g., at the end of the year) to reduce income and contributing to Health Savings Accounts (HSAs) and/or tax-deferred retirement accounts, which can be used to increase above-the-line deductions, and thus reduce their income for purposes of calculating the PTC itself, thereby increasing the amount of the PTC benefit being received.

However, financial advisors should assess if and how their planning strategy will affect both their self-employed clients’ PTC benefit and also their Qualified Business Income (QBI) deduction. For example, while a Solo 401(k) contribution may decrease income (which both improves the PTC and reduces the Federal tax liability), the reduced income may also make the QBI deduction lower. As a result, making contributions to a Traditional IRA account instead of a Solo 401(k) could be even more beneficial, as the result would still reduce MAGI to increase the PTC, but would not reduce the QBI deduction for the self-employed individual (as IRA contributions are considered personal and, technically, not business-related contributions).

Ultimately, financial advisors can help clients by simply clarifying what health insurance options and potential Premium Tax Credit assistance is available to them. This can help the client understand how the PTC benefits their tax situation, and at the same time alleviate the fears that many clients who are considering self-employment have about the high cost of health insurance for self-employed business owners. Advisors can also add value for their clients by walking them through detailed tax projections that illustrate how the PTC (and other deductions and credits) play into their overall tax liability. Not only does this provide potential opportunities to strengthen the relationship with clients’ tax professionals, but at the end of the day, the collaborative efforts will ensure that the client has a more holistically prepared financial plan, and health insurance they can afford to keep!

#FASuccess Ep 190: Scaling An Advisory Firm By Finding New Talent Outside The Financial Services Industry, with Stacey McKinnon

August 18, 2020 07:12 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 190th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Stacey McKinnon. Stacey is the chief operating officer for Morton Capital, an independent RIA based in the suburbs of Los Angeles that oversees nearly $2 billion of assets under management for almost 1,000 client households. What's unique about Stacey, though, is the firm's non-traditional approach to hiring talent from outside the financial services industry to grow and scale, a path that Stacey herself has followed having previously been a wedding coordinator and operated a Pilates studio before career changing into the financial services industry and successfully climbing the ladder to become Morton Capital's chief operating officer.

In this episode, we talk in-depth about how Stacey has developed hiring practices to spot talent from outside the industry. Why she's pursued everyone from teachers, who have a demonstrated ability to educate and give of themselves, to someone who's previously worked in a rehab center, with a demonstrated ability to show empathy for people in difficult situations, to the manager of a coffee house who had shown through his own work experience that he really knew how to care for his team. The in-depth interview process that Stacey's firm uses to evaluate both prospective job skills and culture fit over a series of five to six meetings, and the career track that Morton has created to give everyone in the firm upward mobility to grow their careers over time.

We also talk about the growth and evolution of Morton itself as a multibillion-dollar RIA. The way the firm restructured its compensation away from traditional revenue-based approach to better align everyone on the team, the way Stacey helped the firm reduce the tendency to micromanage as the business grew by helping everyone across the firm build stronger relationships and what they dubbed a year-long culture of trust initiative, and how the Morton team now structures its weekly firm-wide education sessions every Thursday morning.

And be certain to listen to the end, where Stacey shares the challenge she faced in her own career journey when she had to decide whether to pursue an advisory or operations path, why the word "because" is so crucial in leadership conversations, and why Stacey believes the key to future success for advisors isn't simply about finding a niche or specialization, but immersing yourself into a community of people that you can serve and with whom you have shared beliefs.

Unequal Pay For Unequal Work Preferences? Examining The Gender Pay Gap For Financial Advisors

August 17, 2020 07:07 am 6 Comments CATEGORY: Planning Profession

Industry media has often noted that gender pay gaps among financial advisors are shockingly large – with gaps observed as high as 40% or more. However, these headline-grabbing numbers don’t tell the full story. In particular, just looking at ‘raw’ pay gaps (i.e., gaps that don’t adjust for other relevant pay-related differences between men and women) can be misleading, because it doesn’t tell us whether the gap results from men and women being paid unequally for doing equal work, from men and women being paid relatively equally but working in different capacities, or from some combination of these factors. In fact, the Bureau of Labor Statistics—the entity that publishes the data most advisor gender pay gap statistics are based on—explicitly cautions that their data does not include the relevant information needed to fully assess a pay gap.

At the same time, many misunderstandings exist with respect to how to interpret and understand pay gap analyses themselves. For instance, just because a gap does not remain after controlling for relevant differences does not suggest that gender discrimination is not an issue within an industry. A proper pay gap analysis will control for relevant differences in worker characteristics (e.g., job role, hours worked, productivity, etc.), but if differences in these characteristics are themselves the result of discrimination (e.g., a ‘glass ceiling’ effect in which equally qualified women are passed up for promotions for discriminatory reasons), then this effect will not be picked up in a pay gap analysis. Such effects are not picked up because a gender pay gap analysis is only examining the very narrow question of whether men and women receive equal pay for equal work, and not the broader question of whether other discriminatory factors may influence the roles that individuals end up in. On the other hand, another common way to misinterpret a pay gap analysis is to conclude that any unexplained gap is evidence of discrimination. Discrimination is one possible explanation, but there are alternative explanations, such as researchers not having access to other relevant variables that should have been controlled for.

In the context of the financial advisory industry—an industry that has long been male-dominated and has struggled to recruit more women into the field—understanding the extent to which we do see evidence of potential discrimination is important, as the common message that women are not paid equally in our field could itself be a factor discouraging women from pursuing a career in financial planning. Accordingly, using data from our 2018 Kitces Research Study, we conducted what was, to our knowledge, the first gender pay gap analysis among financial advisors that examined more than just the ‘raw’ gap between men and women.

Based on highly detailed information provided by over 700 financial advisors, we observed a ‘raw’ gender pay gap of 19% among financial advisors before controlling for a number of factors such as experience, credentials, advisory role, team structure, hours worked, revenue produced, marital status, and psychological motivators around compensation. The gap we observed is likely lower than the ~40% commonly reported in the media because we excluded administrative workers, many of whom would be included in the BLS statistics. However, the factors controlled for in our study (including both revenue and time spent, and the preference for variable vs stable salary income) explained 91% of the gender pay gap observed, leaving an unexplained gap of just 1.8 percentage points. Discrimination is one potential factor that could explain this remaining gap of 1.8 percentage points, although other factors, such as relevant variables that were not included in our study, could also explain the remaining gap. Notably, the biggest driver of the pay gap that we observed was the tendency for men, on average, to be more motivated by income potential (and ostensibly choosing more variable-compensation revenue-sharing roles), while women were, on average, more motivated by stable pay (and thus may tend to choose salaried roles with less long-term upside).

Of course, as noted previously, our findings do not suggest that gender discrimination is not an issue within financial planning. In fact, previous research has found that factors such as ‘performance support bias’ (e.g., the assignment of better accounts to men relative to women when a broker leaves a firm) do contribute to the advisor gender pay gap in a manner that would be missed by our study. Furthermore, a follow-up Kitces Research Study in 2019 that sought to examine relationships between family characteristics and advisor earnings (since the "motherhood penalty"—i.e., systematic biases that working mothers face in the labor market—contributes significantly to the gender pay gap in many fields) and did find gender differences in relationships between income and family-related characteristics among advisors. For example, we found evidence of a ‘marriage premium’ and a ‘stay-at-home spouse premium’ among men but not women, providing support to the notion that factors outside of the workplace may also be influencing earnings differences amongst advisors, and emphasizing that work to further close the gender pay gap should be cognizant of addressing these complicated factors.

At the same time, we do believe there are potential reasons to be optimistic about our findings. While we could not examine all potential types of gender bias, at least on this narrow form of potential discrimination (unequal pay for equal work), we did not find evidence of significant gender discrimination. We see this as a positive message for women who otherwise fear that they may not be paid fairly if they pursue a career as a financial advisor. Furthermore, women were represented among all levels of advisor success, including the highest earners bringing in over $1 million in annual personal income. And while it did appear that, on average, women prioritized some career choices over income to a greater extent than men, average income among women was still very high relative to income levels of most Americans ($165,000 for women in 2018 and $197,000 in 2019). So, to the extent that advisors (regardless of gender) may select different pathways within the industry based on personal preferences (e.g., selecting a stable-pay job because of a desire/choice to use that as a foundation to start a family and have more work-life flexibility), it still appears that excellent career opportunities are available regardless of preferences.

Ultimately, the bottom line is that despite widespread reports of large gender pay gaps within the financial advisory industry, we did not find evidence of unequal pay for equal work. And while our studies do identify some differences in income between men and women in the advisory industry, other relevant differences, particularly with respect to work and income preferences, explained most of the gender differences in income that were observed. While our findings should not be interpreted as suggesting that gender discrimination is not an issue within the industry (as there are many forms of potential discrimination that would not show up in a pay gap analysis and other limitations to consider), our findings do suggest that perhaps, at least on the narrow dimension of unequal pay for equal work, the news is not as bad as commonly reported.

Weekend Reading for Financial Planners (August 15-16)

August 14, 2020 02:55 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the latest updates from the SEC on Regulation Best Interest, acknowledging a growing confusion for hybrid broker-dealers (and the consumers that work with their representatives) in trying to delineate when it's permissible to advertise as a financial advisor (or not), when a representative's fiduciary duty applies (or not), and when and what disclosures must be made when an advisor takes off their advisor hat and puts on their broker hat instead.

Also in the news this week are a number of big announcements on industry diversity efforts, including a series of 25 new scholarships from the American College for Historically Black Colleges and Universities (HBCUs), a new $500,000 donation to the AAAA (Association of African American Financial Advisors) Foundation to support next-generation Black CFP professionals coming through CFP Board-registered programs at HBCUs, a look at how sustaining improved diversity in the industry is about not just improving the pipeline of diversity but also the entry-level job opportunities (to go beyond sales-based jobs that have a disproportionately high failure rate), and a powerful reminder that being 'blind' to the color of an advisor's skin can still hinder diversity because doing so implicit ignores the positive value of the differences in thinking and perspectives that come from a diverse team.

From there, we have a number of marketing-related articles as well, from a look at the difference between "blanket" (broad-based) and "target" (focused) marketing, how to choose a prospective target market when you're already a generalist with a broader client base, how to refine your marketing once you've selected a more focused target market, and why it's so important to think about the audience you really want to reach when marketing (and recognizing that in the end, you can go deeper with them or broader to reach more of them, but it's very difficult to do both at the same time and periodically it may be best to switch from one to the other!).

We wrap up with three interesting articles, all around the theme of pricing and the value of an advisor's services: the first explores how to handle prospective clients who try to negotiate and haggle down the advisor's fee; the second explores how pricing your time by the hour can change your own thinking, in ways that may be good for growing your business or career but risk over-focusing on income growth at the cost of sacrificing the happiness that in theory more income was supposed to bring; and the last explores the concept of Value-Based Pricing and the power of pricing, not based on what your time is worth as an advisor, but what the time and value being delivered is worth to the client instead!

Enjoy the 'light' reading!

Kitces & Carl Ep 40: How To Turn Your Advisor Marketing Content Into A(n Entire) Book

August 13, 2020 07:07 am 6 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, digital marketing strategies have increasingly provided an alternative to the more traditional marketing tactics that advisors have relied on for so long. Blogs, podcasts, social media, lead magnets, email newsletters, and SEO (among a myriad of others) have for many advisors become far more effective than cold-calling and mass mailers, particularly for those establishing themselves as a trusted expert on helping to solve the specific problems of a particular type of niche clientele. And ultimately, there’s perhaps no better way to become recognized as a subject matter expert than by writing and publishing a book. Yet for many, if the thought of trying to find the time and inspiration to come up with enough “stuff” to write a blog or produce a podcast consistently is daunting, then the idea of writing a whole book is downright mystifying and overwhelming!

In our 40th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards share practical tips for actually writing a book, by building on the strategies they’ve shared around creating content for digital marketing, and how advisors can leverage the credibility that comes with being the person who (literally) “wrote the book” on a particular subject.

The key is that for advisors that have already been creating various pieces of content for a while (whether by writing down answers to frequently asked questions, or by recording thoughts and observations on topics that are relevant to prospective and existing clients), after a not-unsubstantial-but-not-overwhelming period of time, there will be a sufficient number of those pieces of content to sort into “piles”. Those piles can then be organized into one of two structures, either a manifesto (i.e., “These are the things I believe” gathered into a coherent flow) or an outright book that provides the expert information to solve a problem for a specific niche. And if the building blocks are there, then it just takes a little bit of work to pick the best bits and hand them off to a freelance editor… who can then help to assemble them into a polished final product.

In other words, financial advisor authors don’t have to try to write books by sitting down and writing a book. They can do it by proactively identifying key ideas and points to communicate to a specific audience, getting into the habit of creating ‘snackable’ pieces of content, and then outsourcing the rest to freelancers who edit and pull together books for a living. All of which can be done today without a big publishing house – which in the end is solely concerned with overall sales volume, while for financial advisors, a book has nothing to do with book sales and everything to do with prospects and clients anyway. In fact, a financial advisor book is arguably just a 200-page business card… but one that will go immeasurably further in establishing real credibility (not to mention generating a few more leads and improving the conversion rate on those leads) than any steak dinner and glossy pamphlet (with stock photos of lighthouses and winding roads) ever will!

Preserving Capital Losses At Death By Gifting Embedded Loss Assets To Avoid A Step-Down In Basis

August 12, 2020 07:04 am 6 Comments CATEGORY: Taxes

Over the past couple of decades, Congress has passed several laws impacting the Federal estate tax exemption, resulting in a significant increase from $675,000 in 2001 to $11.58 million today. As a result, under the current rules, most taxpayers will not be subject to a Federal estate tax liability, and thus, the current focus of tax planning for one’s estate should generally focus on reducing Federal income tax liability. Basis management is a critical part of this process and includes strategies to both maximize the step-up in basis, as well as to minimize the loss of any unrealized and/or carryforward capital losses.

For spouses, two questions are important in determining adjustments to the basis of inherited (non-IRD) assets: 1) who owns the asset, and 2) whether the state of residence is a community property or separate property state. In separate property states, property ownership is generally determined by common law, which generally dictates that property is owned as it is actually titled. Thus, if an asset is in an account that belongs solely to the deceased spouse, then 100% of the asset is subject to a step-up (or step-down) basis adjustment; however, for assets held jointly (typically either as joint tenants with rights of survivorship or tenants by the entirety), the surviving spouse will typically receive a step-up/step-down basis adjustment on only one-half of the assets (the half of assets considered to have been owned by the deceased spouse).

By contrast, in states that follow the “community property” rules (AZ, CA, ID, LA, NV, NM, TX, WA, and WI; with AK also allowing couples to opt-in to community property treatment), most assets acquired during marriage, as well as those assets which are mutually agreed upon to be jointly owned or that can’t clearly be identified as either spouse’s separate property, are essentially treated as being simultaneously owned 100% by each spouse. Accordingly, these assets will automatically receive a full step-up/step-down adjustment on the entire value of the property upon the death of either spouse.

This basis adjustment of inherited assets at death can potentially result in losing out on the opportunity to benefit from realized capital losses, which can be used to offset capital gains and up to $3,000 ordinary income each year. However, by gifting assets prior to death, the original owner’s basis can be retained, and unrealized capital losses preserved!

For non-spouse beneficiaries, the benefits of gifting assets with potential capital losses are not quite as favorable as those for spouse beneficiaries but remain valuable, nonetheless. More specifically, when a non-spouse receives an asset with unrealized capital losses, the so-called ‘double basis’ rules apply. These rules use the value of a gifted asset on the date of the gift to calculate the amount of any capital loss. On the other hand, the donor’s basis at the time of the gift is used to calculate the amount of any capital gain.

Application of the ‘double basis’ rules results in three potential consequences for non-spouses who are gifted with assets that have unrealized capital losses: 1) If the sale price of the asset is less than the fair market value on the date of the gift, then the recipient of the gift can claim a loss equal to the difference between those two values; 2) If the sale price of the asset is more than the original owner’s basis on the gift date, then the recipient of the gift has a capital gain equal to the difference between those two values; and 3) If the sale price of the gifted asset is in between the fair market value on the gift date and the original owner’s basis, the recipient has neither a capital gain nor a capital loss.

Ultimately, the key point is that gifting assets is a simple yet effective strategy to preserve the economic value of unrealized capital losses that can be used to reduce future capital gains (and up to $3,000 of ordinary income, annually). As while the basis of inherited assets will generally receive a step-up (or step-down, depending on the FMV) adjustment at death, unrealized capital losses from inherited assets are essentially useless after the original owner’s death since they will no longer be available for use to offset any gains in tax years after death.