Two facts that cannot be denied are: (1) we need to be better stewards of our planet, and (2) all peoples deserve to be treated and represented equally. A niche market was developed in response to these critical needs – ESG investments.

“ESG” stands for Environment, Social, and Corporate Governance. ESG investing is the practice of considering ESG factors in financial analysis and investing in responsible companies. This is
similar to biblically responsible investing, which considers which companies align with one’s faith. ESG investing has seen substantial growth in recent years. These products come in the form of mutual funds, exchange-traded funds (ETFs), annuities, and individual stocks and bonds. It sounds like an easy way to do your part to make the world a better place, but before you treat your portfolio to an ESG allocation, let’s walk through some considerations to make sure you’re not getting tricked.

First and foremost, the financial services industry is just that – an industry. As with any industry, salespeople have incentives for promoting specific products. If your advisor is pitching ESG or biblically based investment products, the first question you should ask is, what do they stand to gain? Many ESG investments are also proprietary products, meaning the company that employs your advisor may be the same company that can earn commissions and fees from the sale of the product. It’s always important to ask about the existence of any conflicts of interest, commissions and fees, and to be skeptical of solutions offered by someone who doesn’t know your exact needs or goals.

Second, greenwashing exists in the financial industry. Just like food producers sell non-GMO orange juice at a premium (GMO oranges don’t even exist), investment product managers have been caught falsely promoting that their products are more socially responsible than others. Consider an ESG fund that invests only in companies which limit carbon emissions. It sounds socially responsible, so you invest. Unbeknownst to you, those “green” companies are selling their government-granted allotments of carbon dioxide output to other companies for a profit. Now, the commissions and fees attached to the fund have eaten away at your annual returns, the world is no greener for your sacrifices, and your good stewardship has been exploited. Regulatory agencies have prioritized this issue and are working to regulate ESG marketing to protect investors. However, the term “socially responsible” is subjective and means different things to different people. It’s been acknowledged that regulation might never come. So, what can you do?

Rest assured that honest, low-cost ESG products do exist if you know what you’re looking for and your advisor isn’t incentivized to promote specific products. As a CFP® Professional required to put my clients’ best interest ahead of my own, I would first recommend you identify your financial goals and have a solid financial plan developed. Then, I would select a nonbiased range of ESG investments if that was your desire, simulating varying exposures of each product in question to determine what your portfolio can tolerate without sacrificing long-term returns beyond your risk capacity. Only then would I advise you to treat your portfolio to an ESG allocation. If your advisor is skipping these key steps – you’re likely getting tricked.

Published in the Victoria Advocate

Hannah K. Gohmert is a CERTIFIED FINANCIAL PLANNER™ Professional and the Chief Compliance Officer for KMH Wealth Management, LLC.

Has your favorite hobby turned into a cash cow? Are you an independent contractor looking for the most tax advantageous entity for your income and expenses? Maybe you have put in the time with your employer and are ready to venture out on your own? No matter your reason, make sure you have the proper foundation for making your new business venture successful from the start. A popular analogy used in our industry is that of the “three-legged stool.” Without all three legs, your business, or stool, will not be sturdy enough to stand, so what are these legs?

The first leg; make sure you consult your Certified Public Accountant (or CPA) concerning the proper entity to accomplish your goals and limit your tax liability. Depending on expected income, the simple choice of entity could determine whether you are paying anywhere from 0% to over 50% in taxes. There are three main business structures to consider. A Single-Member LLC (Limited Liability Company), not electing corporation treatment, will be subject to both ordinary income and self-employment tax. While income reported on a K-1 to a shareholder of an S Corporation is not subject to self-employment tax, officers are required to take a “reasonable wage” for their services and report as ordinary income subject to FICA withholding. In a C Corporation, the profit is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends, creating a double tax. Depending on your entity, profession and income, there may also be a 20% Qualified Business Income Deduction available as well. These are all things to be considered by your CPA professional.

The second leg; make sure you hire a business attorney to establish and file all of the proper paperwork for your new business entity. Most entities will need to choose a name (and make sure it is not already used), file various paperwork at the state and federal levels to be properly registered, file for an Employer ID Number (EIN), and have proper entity agreements and formation documents. Depending on the entity, it may be necessary to have all contributions, ownership interest, shares owned, officer information, and general partners recorded before the ribbon cutting.

The third leg makes a wobbly stool sturdy. A CERTIFIED FINANCIAL PLANNER® (or CFP®) professional will be well versed in helping a new business owner decide on the proper financial considerations to further set the business up for success. This would include suggesting necessary insurance policies and plans, retirement benefits, the proper financial vehicles to save money for the business and working with the CPA to properly budget for the future.

You can see why it is important to choose the right entity when setting up a business, making sure everything is legally legitimate, and making sure the proper financial plan is in place. There are various ways to make income on your own and even more reasons to decide to do so. No matter your reason, make sure your stool has all three legs to keep you from falling on your face.

Published in the Victoria Advocate

Adam H. Baucom CPA/CFP® is a Senior Tax Manager for Keller & Associates CPAs, PLLC and is an Associate Advisor for KMH Wealth Management, LLC. He has over 10 years of experience in tax planning, tax return preparation and accounting.

As the year flies by I have noticed more and more questions of uncertainty revolving around one particular subject, Required Minimum Distributions or RMDs. More specifically the question is, “Are RMDs required for 2021?” I believe the reason this has become a topic of uncertainty is due to the fact that for 2020 RMDs were not required. This relief was one of the many items included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed into law in March 2020.

Before I answer the question of topic, let us refresh our memory on the basics of RMDs. RMDs were established by the U.S. Tax Law as a means to collect taxes on tax-deferred retirement accounts. Like most of the tax code there are various exceptions and specific circumstances that convolute the RMD rules. For the sake of simplicity, RMDs establish a set dollar amount that a person 72 or older is required to withdraw annually from their tax-deferred retirement account. This amount is determined by taking the prior year-end balance of the tax-deferred retirement account and dividing it by a Life Expectancy Factor that can be found using the IRS Uniform Lifetime Table located in IRS Publication 590.

Without RMDs in the tax law, these funds could, in theory, remain in tax-deferred accounts growing annually and delaying taxation for generations. As a means to make sure this did not happen and allow the IRS to collect taxes in a timely fashion on these funds, RMDs were established.

Now, back to the question at hand and to settle any uncertainty on 2021 RMDs. For the 2021 tax year, there has been no relief issued and RMDs ARE REQUIRED to be distributed by 12/31/2021.

There are a few points to be made regarding RMDs that I would like to note. First, RMDs must be taken directly by the account owner and be included in the account owner’s 2021 Adjusted Gross Income. Alternatively, if certain criteria is met, the RMD of up to $100,000 may be paid directly to a qualified charity of your choosing. If paid directly to a charity, this is considered a Qualified Charitable Distribution (QCD). With QCDs the amount distributed directly to the charity will not be includable in your Adjusted Gross Income and will still satisfy the annual RMD requirement.

Hopefully, the requirement of RMDs for 2021 is of no surprise to you but if it is, there is still time to act. Begin discussions with your CERTIFIED FINANCIAL PLANNER™ professional and Certified Public Accountant to properly plan for both the timing of the distribution and an appropriate strategy for payment of any associated tax that may be generated

Published in the Victoria Advocate

Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.

As a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™ professional, I deal with uncertainty on a daily basis. Clients progressing through different life stages, volatile financial markets, and keeping up to date with ever-changing tax laws are a few examples of this daily uncertainty. Our Keller/KMH staff field a steady stream of pertinent questions and concerns from our clients on a daily basis. I’d like to share with you some of the more relevant and relatable questions below.

Perhaps the most prevalent question pertains to the status of tax laws. My colleague, Lane Keller, wrote about this very topic almost a month ago in an article titled “More Tax Talk 2021” where he advised you to be prepared for coming change on the tax law front. I would expand on that by recommending you visit soon with your tax professional to have them prepare a 2021 tax projection for you. Did you receive the full $1,400 payment from the third stimulus package? What strategy did you choose for Advance Child Tax Credit payments? Should you consider Roth conversions to utilize historically low tax rates? Gaining clarity on your 2021 tax situation will help build certainty moving into the back half of 2021.

Sticking with the theme of uncertain tax laws, our office is also fielding multiple inquiries about the President’s proposals to dramatically change the estate tax landscape. Most of the discussion and consideration focuses on whether or not to utilize the high lifetime gift exemptions (currently $11.7 million per person). We have many clients who have recently utilized or are in the process of creating partnerships, trusts or other entities to facilitate these gifting transactions. The important takeaway is to meet with your estate planning team sooner rather than later to evaluate your plan. This will set you up to be able to proactively manage any tax law changes that may develop.

Another popular question relates to the stock market and what its future may hold. Undoubtedly, the stock market has experienced excellent returns in the past few years. It is also just as certain the market will experience another correction at some point in time. Our philosophy is that portfolio management should be driven by your financial plan. Each client’s situation, station of life and goals are unique to them and their portfolio should be constructed and managed to accommodate those factors. This allows your portfolio to inherently be built with a long-term perspective in mind. The value we add to our clients is to maintain rigorous discipline in both good and bad markets to keep them on track to achieve their goals. My advice would be to focus on a long term asset allocation that works for you and in unison with your overall financial plan, then drown out the day-to-day noise about the markets.

While there is no solution to totally eliminate these uncertainties, I hope these answers will reassure you that you are not alone with your questions. Begin working with a CPA and/or CERTIFIED FINANCIAL PLANNER™ professional to gain some certainty on your financial situation.

Published in the Victoria Advocate

Kyle W. Noack CPA/CFP® is Chief Financial Officer for Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC.

My last article was released to the Advocate on February 14th of this year. Here we are, over four months later with very little real clarity on what income and estate taxes will look like for 2021 or 2022. What we do have is the President’s “American Families Plan” presented to Congress and released on April 28^th for spending and the proposed tax changes to pay for it. The “Plan” includes tax cuts and extended credits for lower-income taxpayers and increased rates and IRS enforcement for taxpayers earning over $400,000.

The President’s Plan expects to raise $700 billion over ten years through “revitalized enforcement” of existing tax laws “to make the wealthy pay what they owe.” It would require financial institutions to report information on account flows, increase investment in the IRS and ensure that the additional IRS resources go toward auditing those with the highest incomes. How long will it take to revitalize the IRS and financial institutions to update reporting?

The highest income tax rate will increase to 39.6%, rescinding the 2017 tax cut. For households making over $1 million, all income will be taxed at 39.6% equalizing the rates paid on capital gains and dividends.

In addition, the Plan will eliminate step-up in basis upon death over $1 million ($2 million per couple). Transfers at death or by gift will result in a deemed sale for capital gains purposes.

Other pending plans include Bernie Sanders’ “For the 99.5% Act.” The Act reduces annual exclusion gifts to a total of $20,000 per year (that’s total, not per recipient), reduces the estate and gift tax exemption to $3.5 million and will raise the top gift and estate tax rates up to 65% for the top bracket. Bernie’s plan also attacks Grantor Trusts, Generations Skipping Trusts, and valuation discounts.

Elizabeth Warren’s “Ultra-Millionaire Tax of 2021” includes a 2% annual tax on the net worth of households and trusts valued over $50 million and another 1% over $1 billion. Now I know what an “Ultra-Millionaire” is! Thanks Elizabeth. No one knows how this would be accomplished every year.

It certainly seems that Biden’s Plan took some of the original platform proposals to Congress and left the rest of the original proposals to Senators Bernie and Warren.

It is likely to take several months for tax legislation to work its way through Congress. Most of my reading indicates that effective dates for legislation will likely be between date of enactment and January 1, 2022. While it is possible the enacted reforms could be made retroactive, it would be uncommon.

As I said in my first article, no one really knows where this will all shake out and this article is not all inclusive and only hits the highlights. I suspect a lot of negotiating has already taken place and there are a few Democrats in Congress that will not go along with the Draconian effect this will have on agriculture and family owned businesses.

Change is coming and it is very important that you spend some quality time with your CPA, attorney and financial advisor. At the very least, you need to have a good handle on where you stand today and consider what planning options are available.

Published in the Victoria Advocate

Lane Keller CPA/CFP® is a managing member of Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC with over 30 years of experience in tax preparation and planning.