Tips for dealing with taxes, charitable giving, and whether to refinance your mortgage

With changing tax laws, a surging, but still scary stock market, nonexistent interest on savings, and general financial upheaval, getting proper financial planning advice may be more important than ever. George Padula has spent more than 15 years as a financial planner, including his current position at Modera Wealth Management in Boston, where he serves as a principal and wealth manager.

Padula, who works with both private clients and nonprofit institutions, said that he came to Modera because he enjoys working with private clients on their comprehensive investment strategies.

“I have a research background, and financial planning is really an extension of that. I help people answer their key questions: When can I retire? How much money will I need to live on? And, will I have enough to meet my goals and do the things I want to do when I want to do them? Those are the issues people care about,” he explained. “I enjoy working with numbers, but, most importantly I enjoy working with people.”

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Padula, who has a long history in Boston, holds a master of business administration from Boston College’s Carroll Graduate School of Management and a bachelor of arts degree from Colby College. He is also a graduate of Boston College High School. He recently spoke with to offer some financial planning tips. How did you advise your clients during the fiscal cliff debate?

George Padula: There were a lot of questions from clients. A big question from clients was around charitable gifting. Should I make a big gift this year or wait until next year?

We wanted clients to look at the big picture and not let a short-term issue dictate the long-term financial picture. In other words, don’t let the tax tail wag the dog. We wanted people to look at their strategies as a whole.

Answers on the fiscal cliff did not get finalized until Jan. 2, and some aspects we have seen before, so we knew how to advise our clients. For example, anyone over 70½ can make a charitable gift of up to $100,000 from his or her IRA directly to a charity. This does not get counted as a taxable distribution and it helps the charity at the same time. Are you seeing changes in your clients’ willingness to make charitable contributions?

Padula: We’re seeing that our clients are also becoming more involved in the charities that they support and thinking about strategic philanthropy. Some clients are focusing their gifting on charities and nonprofits that are smaller and in which a modest gift can have a more meaningful impact. We have also seen clients volunteering their time and expertise in addition to or instead of a monetary contribution.

We explore the benefits of using appreciated securities to make charitable contributions. With a gift of an appreciated stock, you can gift the shares, the charity gets the full value of the gift, the donor gets the full deduction of the shares and avoids capital gains taxes at the same time. It is a win-win all around. You may actually be better off gifting a security than selling it and gifting the cash proceeds because when you make the sale it could increase your income and it could increase your tax bracket. You’re getting a real benefit there.

You have to incorporate a philanthropic strategy with your overall investing strategy. Ultimately, with cutbacks on human services, people overall are stepping up and increasing charitable gifting of both time and funds. It does not need to be a big commitment.

I practice this myself as, in addition to my work here, as a member of the Financial Planning Association of Massachusetts, I volunteer my financial planning services on a pro-bono basis to Dana Farber Cancer Institute as part of a financial coaching program. We assist patients with various financial planning issues. These are patients who cannot afford the services of a financial planner on their own. It is very fulfilling to be able to help in even a small way those who need assistance as they get themselves healed. Are your clients concerned about existing and potential changes to tax laws?

Padula: Clients are definitely asking questions. There are different scenarios for clients based on their circumstances. For clients still working, they are seeing some of their paycheck go down because of the Social Security and payroll tax increases. Retired clients have different concerns. They are worried about the cost of health care and whether their taxes will increase in 2013 because of higher rates on investment income and capital gains. These may not impact them now, but it will by April 2014 and we are analyzing scenarios for them now. Are older clients worried about potential changes to Medicare?

Padula: For the most part we haven’t had clients ask us about changes to Medicare. Many of our clients are in their 50s to 60s and so Medicare is a generalized concern. It can be confusing and we try to help clients sort out their options. The way people work today is different that it was in the past.

Many don’t work for one company until age 65 in just one field the way people used to. People go into different careers, making the retirement age question not as top of mind as, say, take home pay. People are active and working beyond the traditional retirement age. Of course, Medicare and paying for health care is a big topic across all our clients. Are there any investment concerns specific to Massachusetts residents?

Padula: If Massachusetts state taxes go up then municipal bonds for Mass. residents may be more appealing. The tax free income from a municipal bonds may be better than the after tax income received from other investments, say corporate bonds, especially if that income is subject to federal taxes as well. For example, earning 3 percent tax free on a Mass. municipal is equivalent to earning 4.5 percent on a taxable bond for someone in the 28 percent federal tax bracket and subject to the 5.3 percent Mass. income tax rate (a couple earning more than $250,000). If you can earn 3 percent on a municipal bond, it’s the same tax equivalent yield because Mass. municipal bonds are free from state and federal taxes. Should homeowners refinance their mortgages?

Padula: That’s the one question we keep getting as rates are at historic lows. For clients that refinanced last year or the year before when rates were low then, rates are even lower now, so, in many cases it makes sense to refinance.

For example, a $350,000 mortgage at a 4.5 percent interest rate will result in a monthly principal and interest payment of $1,771. If you refinanced at 3½ percent you’d be paying $1,571 per month. Adjustable rate mortgages could be even lower, but, you have to figure out how long you are going to stay. There is a risk that rates could increase.

Saving $200 a month is real money and a positive boost for many people. You have to be aware of closing costs too, but some banks are even waiving those. So, for many people, it still makes sense to explore refinancing. What should people be thinking about overall for their 2013 investment decisions?

Padula: Be realistic, keep it simple, have a long-term approach, keep expenses down, don’t try to time the market or think that you have to beat the market. Have a diversified portfolio and don’t think that there is only one “right time to invest.” If you can’t do it yourself, ask for assistance from an adviser. Importantly, make sure you have a rainy day fund, or get one started. In baseball terms, hit for singles and doubles, not home runs. It will make all the difference.