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Social Security Explained 09.07.2021

Imagine you are offered a job, and you are counting on it to provide income for you and your family for many, many years. But you didn’t ask about 1.) starting date, 2.) salary, nor 3.) benefits.

Now, change “job” to “Social Security” and you get a sense of the general lack of knowledge many Americans have about this bedrock retirement income stream.

Are you, or will you be, eligible for Social Security benefits? Do you have concerns about the solvency of the Social Security system? Are you confused about when to start taking your social security benefit—about whether to take it early or wait? Are there things you don’t understand about spousal benefits? You aren’t alone.

Towerpoint Wealth is a boutique wealth management firm in downtown Sacramento. In this post, Towerpoint’s CEO, Joseph Eschleman, will help you answer these important questions about your social security benefits.

Social Security is an essential retirement income stream for many Americans, and it is also a confusing, complicated, and evolving system, one that is next to impossible to properly navigate without a complete and thorough understanding of the rules. Importantly, knowing when to take Social Security —claiming your Social Security benefits at the RIGHT TIME—means SIGNIFICANTLY more money in your pocket.

With this post, we seek to accomplish three things: 1.) social security explained 2.) review a number of important yet oftentimes misunderstood filing strategies, and 3.) discuss what lies in store for the future of the $2.9 TRILLION Social Security trust fund.

Social Security Benefits 101

Back in 1935, President Theodore Roosevelt signed the Social Security Act, creating a social insurance program designed to give older Americans an additional income stream in retirement. Current American workers pay Social Security taxes to provide benefits to those who are eligible to receive Social Security right now.

Typically, the amount you receive from Social Security will increase or decrease based on when you elect to claim your benefit, relative to what is known as your FRA, or full retirement age. When you were born will determine what your FRA is. If you were born between 1943-1954, your FRA is 66. If you were born after 1954 but before 1960, the FRA gradually climbs from 66 towards 67, based on the year you were born, increasing two months every year. For example, if you were born in 1956, your FRA would be 66 + four months. Lastly, and much more simply, if you were born in 1960 and beyond, your FRA is 67.

To be eligible for Social Security benefits, you must earn a minimum of 40 “credits” throughout your working career. You can earn up to four credits a year, so it takes a minimum of 10 full years of work to qualify for Social Security.

Your specific Social Security benefit is computed based on the 35 calendar years in which you earned the MOST money. You can increase your Social Security benefit at any time by replacing a low, or zero, income year with a year in which you earned a higher income. Importantly, Social Security benefits do have a maximum, depending on the age you retire. For someone at full retirement age (or FRA), the maximum monthly benefit is $3,113 in 2021. If you wait until age 70 to file, the maximum monthly Social Security benefit amount is $3,895.

Social Security protects you against inflation through what are known as cost of living adjustments, or COLAs, which help beneficiaries keep up with ever-increasing living expenses. This inflation protection is extremely valuable, especially in today’s inflationary environment. While the Social Security COLA for 2021 was “only” 1.3%, many estimate that the COLA in 2022 could be higher than 6%!

When to Take Social Security – Social Security Explained

Now that you better understand how Social Security works, let’s discuss optimizing when and how to take it. Many people have multiple sources of income in retirement, which can impact the decision about when to claim Social Security. This is an extremely important decision, and here at Towerpoint Wealth, it is one that we work closely with our clients to get right, as there are a myriad of variables, rules, and assumptions that must be accounted for when developing a customized strategy for yourself.

You are allowed to begin collecting Social Security as early as age 62, but taking your benefit early will result in a major haircut, reducing your benefit by as much as 25 or 30% as compared to waiting until you reach your FRA. Obviously waiting until your full retirement age will result in receiving 100% of your earned benefits, but importantly, you can also choose to delay claiming your Social Security benefit, all the way to age 70 if you would like.

Should I wait to take Social Security?

There is a big economic incentive to waiting, as your monthly Social Security benefit will grow an additional 8% (!) a year until age 70. Add in any cost of living adjustments, which also are included if you wait, and the financial incentive to delay claiming Social Security becomes even greater. With certain Towerpoint Wealth clients, we will set up a supplemental, or “bridge income” plan, and have you temporarily withdraw more money from your nest egg for just a few years to allow your Social Security benefit time to grow larger. Additionally, waiting to claim your Social Security income can benefit your heirs, as a higher earning spouse can ensure their lower-earning spouse will receive a higher survivor benefit in the event the higher-earning spouse dies first. Not always fun to talk or think about, but life throws us lots of twists and turns that need to be considered.

Some individuals implement what is known as a “split strategy” in which the higher wage earner waits to take their benefit, but the lower wage earner claims their Social Security early, getting cash flowing into the household sooner, and yet ensuring that whoever outlives the other will receives the highest possible survivor benefit.

Children, family, and divorcee benefits

Additionally, unmarried children can receive Social Security benefits if they are younger than age 18, or between 18 and 19 and a full time student, or 18 or older with a disability that began before age 22. To get benefits, a child must have a parent who is disabled or retired and entitled to Social Security benefits; or a parent who died after having worked long enough in a job where they paid Social Security taxes. Benefits stop when your child reaches age 18 unless your child is a student or disabled.

Within a family, a child can receive up to half of the parent’s full retirement or disability benefit. If a child receives Survivors benefits, he or she can get up to 75 percent of the deceased parent’s basic Social Security benefit.

Widows and widowers are also eligible for Social Security benefits, as are divorcees. Just like a regular spousal benefit, you can get up to 50% of your ex-spouse’s benefit, or less if you claim early, before full retirement age.

Is your head spinning yet??

You can reverse your Social Security claim

Complicating things further, you can always “take a mulligan” and undo a Social Security claiming decision, and while Social Security benefits were tax free prior to 1984, they aren’t anymore, and you will have to pay federal taxes on your Social Security benefit. For those who are upper middle income or upper income, 85% of a security benefit is taxable, and 15% is tax free. Additionally, 13 states also assess state income taxes on benefits.

Social Security Solutions

Now, it is no secret that the Social Security system is stressed and is facing challenges. With the COVID-19 pandemic causing record-high unemployment, coupled with many people retiring or changing careers, there are fewer people paying into the system now than ever, and estimates that Social Security will run out of funds even faster than projected even two years ago have created large concerns.

However, it is very important to realize that changes to the system have occurred regularly since its birth in 1935, and politicians, while reticent to make difficult decisions until they absolutely have to, have consistently drafted legislation to address these Social Security financial problems and economic shortfalls. And here at Towerpoint Wealth, we feel that our elected leaders have quite a few options at their disposal: 1.) Increasing the Social Security, or FICA, payroll tax. Currently, each worker pays 6.2% and the employer also pays 6.2%, for a 12.4% total payroll tax. Increasing this tax, while not popular, is always an option to shore up the system. 2.) Increasing the FRA, or full retirement age, for younger workers, has historical precedent and could be politically attractive to provide economic support to the Social Security system. 3.) Instead of tying Social Security COLA benefit increases to the consumer price index, or CPA, the government could make a shift to what is known as the “Chained CPI,” which reduces the amount a benefit will go up over time, and 4.) our politicians could always increase the earnings CAP on Social Security taxes.

Currently, the limit on the amount of earnings subject to Social Security taxes is $142,800. If the cap were fully removed, the Social Security system would be fully solvent. President Biden’s tax plan proposes a donut hole for Social Security taxes, where the first $142,800 is taxed, as well as any income over $400,000. Needless to say, it remains to be seen what solutions will be implemented, but fortunately the government has a number of arrows in its quiver to address these shortfalls. Bottom line – if you want to take Social Security early, we strongly encourage you to consider two things: 1. “The system is going bankrupt” is a poor reason for doing so, and 2. The pay raise that you earn by waiting is compelling.

Reach out to Discuss a Sound Social Security Strategy

Ensuring that you have a sound and well thought out Social Security claiming strategy can literally mean hundreds of thousands of additional dollars in benefits in your pocket. Please share this article with your friends who are thinking about Social Security. And please, email us at info@towerpointwealth.com to begin a conversation about developing an optimized strategy for you, to determine the best year and month for you and/or your spouse to begin claiming your Social Security benefit.

Joseph Eschleman, CIMA®, Certified Investment Management Analyst, CIMA®

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Restricted Stock Units | RSU 04.28.2021

Restricted Stock Units | A common program many publicly traded companies offer to their employees is an Employee Stock Purchase Plan. But ESPPs aren’t the only stock plan out there. Many companies have a different type of stock compensation program that allows them to grant you shares, called Restricted Stock Units, or RSUs for short. 

Restricted Stock Units are a way for an employer to compensate employees by granting them actual shares of company stock. The grant is “restricted” because it is subject to a vesting schedule. Therefore, the employee typically only receives the shares after the vesting date. Once the shares are delivered, the grant is considered compensation income and your taxable income is the market value of the shares.  

When you later sell the shares, you will also recognize income on any appreciation over and above the market price of the shares back on the vesting date. Your holding period will determine whether the gain is subject to short-term ordinary income rates, or lower long-term capital gains rates. 

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn the taxation rules associated with RSUs, and the importance of planning to limit your overall tax liability.

Sacramento Certified Public Account, Matt Regan
Sacramento Wealth Advisor | Sacramento Financial Advisor

Restricted Stock Units, RSUs | Last week, I spoke about a common program many publicly traded companies offer to their employees, an Employee Stock Purchase Plan, or ESPP for short. If you recall, these plans afford you an opportunity to buy shares of the company you work for at a discounted price. But ESPPs aren’t the only stock plan out there. Many companies have a different type of stock compensation program that allows them to grant you shares, called Restricted Stock Units, or RSUs for short. 

Hi Everyone, Matt Regan here from Towerpoint Wealth, and today I am going to discuss the basics of RSUs.

As I just mentioned, RSUs are a way for an employer to compensate employees by granting them actual shares of company stock. The grant is “restricted” because it is subject to a vesting schedule. As you would expect, the employee typically only receives the shares after the vesting date. 

Vesting schedules are often time-based, requiring you to work at the company for a certain period before your RSUs begin to vest. A common schedule is a “graded” vesting schedule, which means the vesting of the grant occurs in serial portions. Vesting schedules can also have “cliff” vesting, which means 100% of the RSU grant vests after you have completed a specific stated service period of say three or four years. And finally, the vesting schedule can also be performance-based, meaning tied to company-specific or stock-market targets.

With RSUs, you are only taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares upon vesting. The grant is considered compensation income, and is subject to mandatory federal, state, and local income and employment tax withholding. The most common practice of paying these taxes is by surrendering the necessary amount of newly delivered shares back to the company. This holds or “tenders” shares to cover your tax obligation. When you later sell the shares, you will also recognize income on any appreciation over and above the market price of the shares back on the vesting date. Your holding period will obviously determine whether the gain is subject to short-term ordinary income rates, or lower long-term capital gains rates. 

So, there you have it. While RSU’s may not be as complicated as ESPP plans, the tax planning for them is just as important. Understanding when your shares will vest gives you the opportunity to plan in advance to ensure you can limit your overall tax liability. Feel free to contact me on LinkedIn, Facebook, or Instagram to discuss the taxation of RSU’s in greater detail. Thanks, and have a great day.

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Employee Stock Purchase Plan 04.21.2021

Employee Stock Purchase Plan | If you are an employee of a publicly traded company, it most likely offers an #employeestockpurchaseplan, or #ESPP for short. These are excellent plans to take advantage of as they allow employees to purchase company stock at a #discount. However, what most people do not fully understand are the #tax consequences of selling the stock.

With an ESPP, you are not taxed at the time the shares are purchased, but instead only when you sell. As you may expect, the tax consequences of the sale will be different, depending specifically on how long you have held the shares. This holding period will determine if the sale is a #qualifyingdisposition or #disqualifyingdisposition.

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn the taxation rules associated with ESPP plans, and the importance of having a “disposition strategy” that will produce the best economic result for you.

Sacramento Certified Public Account, Matt Regan | Sacramento Wealth Advisor | Sacramento Financial Advisor

If you are an employee of a publicly traded company, it most likely offers an employee stock purchase plan, or ESPP for short. These usually are excellent plans to take advantage of, oftentimes allowing employees to use after-tax payroll deductions to purchase company stock at a discount, which can be as high as 15% off the actual market price of the stock! However, what most people do not fully understand are the tax consequences of selling the stock acquired through these plans. 

Hi Everyone, Matt Regan here from Towerpoint Wealth and today I am going to discuss the taxation rules associated with ESPP plans, understanding the importance of having a “disposition strategy” that will produce the best economic result for you.

With an ESPP, also known as a qualified Section 423 plan, you are not taxed at the time the shares are purchased, but instead only when you sell. Employees can generally sell shares at any time, which is great if you have immediate cash needs, or want to reinvest the money into other assets. However, the tax consequences of the sale will be different, depending specifically on how long you have held the shares. This holding period will determine if the sale is a “qualifying disposition” or “disqualifying disposition,” which governs how much of the gain will be taxed at capital gains rates, or at less favorable ordinary income rates. 

A qualifying disposition occurs when you sell your shares after holding them for at least one year from the purchase date, *and* at least two years from the offering date. The rules say that you will pay ordinary income tax on the lesser of either 1) The discount offered based on the offering date price, or 2) the gain between the actual purchase price and the final sale price. The remainder of the gain, if there is one, will be taxed at the more favorable long-term capital gains rate. 

If you don’t meet the holding period requirements for a qualifying disposition, then by default you end up with a disqualifying disposition. You will pay “regular” ordinary income tax on the difference between the actual purchase price and the purchase date market price, and you’ll pay capital gain tax rates on the difference between the purchase date price and the final sales price.

A little complicated, I know. As you can see, it is incredibly important you understand the ESPP tax rules and how they can impact the amount of money you end up keeping in your pocket, if and when you decide to sell any shares you own in your plan. Feel free to contact me on LinkedIn, Facebook, or Instagram to discuss a disposition strategy that is best for you given your circumstances and financial goals. Thanks, and have a great day.

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Trading vs. Investing 04.15.2021

Trading vs. Investing | These two terms Trading vs. Investing are often used interchangeably by many, understanding the goal of both is to generate profit in the stock market. However, they represent two very different philosophies in how you approach the market. 

Oftentimes when we watch movies and TV shows about the stock market, we see a Gordon Gekko-type of character, quickly buying and selling stocks, making the big bucks, and living an opulent life. They make trading look seductive. But, as you would expect, it can be a very risky enterprise.

Investing, on the other hand, involves strategically buying an asset you expect to rise in value over time, independent of any shorter-term movements in its price. Investors usually have a longer-term time horizon, and look to build wealth through *discipline*, gradual appreciation, and compound interest.

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn the pros and cons of both investment philosophies and how you can incorporate both approaches into your own portfolio.  

Sacramento Certified Public Account, Matt Regan | mregan@towerpointwealth.com
Sacramento Wealth Advisor | Sacramento Financial Advisor | Trading vs. Investing

Trading vs investing | Two terms that are often used interchangeably by many, understanding the goal of both is to generate profit in the stock market. However, they represent two very different philosophies in how you approach the market. Depending on your level of market expertise, time availability, risk tolerance, emotional discipline, and goals, one of these approaches may be better for you than the other.

Hi Everyone, Matt Regan here from Towerpoint Wealth, and today I am going to discuss the differences between Trading vs investing, and why you would want to incorporate either of these philosophies into your investment strategy.

Oftentimes when we watch movies and TV shows about the stock market, we see a Gordon Gekko-type of character, quickly buying and selling stocks, making the big bucks, and living an opulent life. They make trading look seductive. Trading focuses on timing market moves and buying and selling individual stocks within a short period of time to generate quick profits. As you would expect, it can be a very risky enterprise. If a trade doesn’t go your way, you can lose a lot of money in a very short period of time. The costs of short-term trading are also greater. The more trades you execute, the more fees or commissions you might have to pay. Also, any quick gains that are made will be subject to higher ordinary income tax rates, and not the lower long-term capital gains tax rate. These two costs can be a huge drag on overall portfolio growth.

Investing, on the other hand, involves strategically buying an asset you expect to rise in value over time, independent of any shorter-term movements in its price. Investors usually have a longer-term time horizon, and look to build wealth through discipline, gradual appreciation, and compound interest. Investors typically own a well-diversified portfolio of investments, and only sparingly make major adjustments. Since investors are not constantly buying and selling, the overall costs and drag on the portfolio oftentimes is lower as well. So, while investing may not be fast paced, nor exciting, at Towerpoint Wealth, we feel it is the best way to gain the highest return at the lowest risk.

So, there you have it. Both ways of approaching the stock market have their pros and cons. If you’re comfortable with the risks, trading can be an exciting way to earn quick profits. If reducing risk and taking a more methodical approach to building your net worth are your main goals, then you’ll want to stick with a longer-term investment philosophy. Regardless, these philosophies don’t need to be mutually exclusive, and if you are interested in learning how you can incorporate both approaches into your own portfolio, feel free to contact me on LinkedIn, Facebook, or Instagram for some expert guidance and to have a no-strings-attached conversation. Thanks, and have a great day.

Matt Regan No Comments

Coinbase | Largest cryptocurrency exchange 04.15.2021

Today, Coinbase Global Inc., the largest cryptocurrency exchange platform in the U.S., went public on the Nasdaq exchange via a direct listing under the ticker symbol COIN. Coinbase is the world’s third largest digital asset exchange, and by far the most well-known cryptocurrency exchange platform in the US. COIN provides a service that helps its users easily secure direct ownership of cryptocurrencies.

For years, cryptocurrency has faced skepticism and resistance, but the floodgates appear to continue to be opening as banks and businesses have begun accepting Bitcoin for transactions or investing heavily into it with corporate cash. Many people see Coinbase’s arrival on the stock market as further validation for cryptocurrencies, and a great PR opportunity for the entire crypto industry.

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn more about Coinbase, what it means for the cryptocurrency world, and what it means for individual investors like you and me.

Sacramento Certified Public Account, Matt Regan
Sacramento Wealth Advisor | Sacramento Financial Advisor

Over the past year, Bitcoin has been on a tear. On April 13, 2020, a single coin was valued at $6,879. At the close of yesterday, a single coin was valued at $63,291, an 820% increase in value in just one year, just remarkable. This is clear evidence of just how much cryptocurrencies have continued to be viewed as a legitimate asset. And cryptos received another boost today, as Coinbase, the largest cryptocurrency exchange platform in the U.S., went public on the Nasdaq exchange via a direct listing, under the ticker symbol COIN.

Hi Everyone, Matt Regan here from Towerpoint Wealth, and today I am going discuss what Coinbase is, what it means for the cryptocurrency world, and what it means for individual investors like you and me.

Coinbase is the world’s third largest digital asset exchange, and by far the most well-known cryptocurrency exchange platform in the US. “COIN” provides a service that helps its users easily secure direct ownership of cryptocurrencies. About 90% of Coinbase’s revenue is currently derived directly from retail trading, with most if that here in the U.S., and centered primarily on the two largest cryptocurrencies: 1. Bitcoin and 2. Ethereum. The benefits to owning shares of Coinbase? Revenue and profit increase as interest and demand in cryptocurrencies continues to increase. The risks? ONE: The possibility for stricter governmental regulations, and TWO: Business and financial conditions for Coinbase could be negatively affected if demand for Bitcoin and Ethereum declines and is not replaced by new demand for other crypto assets.

For years, cryptocurrency has faced skepticism and resistance. Just this past February, Warren Buffett said “Cryptocurrencies basically have no value, and they don’t produce anything. I don’t have any cryptocurrency and I never will.” But at least for now, Warren appears to be wrong, as the floodgates appear to continue to be opening. Banks, credit card companies, professional sports franchises, and even automakers have begun to make moves into the space, either by accepting Bitcoin for transactions, or by investing heavily into it with corporate cash. Many people see Coinbase’s arrival on the stock market as further validation for cryptocurrencies, and a great PR opportunity for the entire crypto industry.

As cryptos become more mainstream, we feel confident that it doesn’t mean volatility will decrease. Just like mainstream markets, news developments and speculation fuel price swings. Crypto markets are less liquid than traditional financial markets, so this heightened volatility and a lack of liquidity can create a dangerous combination, as oftentimes they both feed off of each other. As a result, it is very important investors have a long-term investment strategy and the ability to control their financial emotions during these expected wild fluctuations. If you are interested in discussing how cryptocurrencies can fit into your own financial plan, contact me, Matt Regan, on LinkedIn, Facebook, or Instagram. Thanks, and have a great day.

Matt Regan No Comments

Home Office Deduction 04.02.21

Like many workers during the pandemic, you went from a somewhat quiet office to your tiny home “office” where you couldn’t escape your noisy kids and barking dog. With Tax Day pushed back to May 17th, this has given taxpayers extra time to find ways to lower their tax bills. Like most, you may have thought to yourself, “Wait a minute, I worked out of my home office for 9 months last year. Can I claim the home office deduction?”

As you would expect, taxpayers must meet very specific requirements to claim home expenses as an income tax deduction. You must be a certain type of taxpayer, you must determine if the office is really your principal place of business, and only certain expenses qualify for the deduction.

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn whether or not you qualify for the home office deduction, and if you do, how to calculate the deduction. 

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401(k) Loans 03.31.01

401(k) Loans | You’ve recently made some money in the stock market and interest rates are still low, so you decide it is the perfect time to buy a home. But there is a dilemma – which assets should be used, and which accounts should be drawn from to fund the down payment? Should you liquidate investments held in your “regular” non-retirement account, or should you borrow from your 401(k)?

Many people don’t like the idea of funding a down payment by selling investments in a “regular” non-retirement account because of the possible income tax consequences. Instead, they sometimes choose to borrow from their 401(k), saying to themselves: I can save money NOW by borrowing from myself, AND I am paying myself interest on the loan! Sounds harmless, right? Not so fast!

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn why treating your 401(k) like a piggy bank could have a material impact to your retirement plan and longer-term economic health.

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Dollar-cost Averaging 03.05.2021

We hear people say it all the time. “I’m just waiting for the stock market to pull back, and then I’ll invest more” or “I’m going to build my cash for awhile and then invest it,” or “Things are too uncertain, or scary, or unpredictable right now – I am going to wait to invest for the time being.” Perhaps you have heard friends or colleagues say these things. Perhaps you have said them yourself?

When I hear people say things like this, I immediately think of the possible opportunities that person may miss out on by not taking more immediate and decisive action. This kind of investor behavior, while common among inexperienced or fearful investors, or among those who are not following a disciplined plan, can be problematic, but fortunately, easily improved upon by implementing a dollar-cost averaging strategy.

Watch this video, Dollar-cost Averaging, from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn how the use of dollar-cost averaging helps overcome emotional investing and is one of the best ways to grow and protect your portfolio over time.

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Student Debt: Tackle it Now!

Student Debt | You’ve graduated college, there is so much to look forward to and be excited about! Your first professional job, making money, traveling to new places, meeting new people, and no more studying! But for 44 million Americans, there is one part of college that unfortunately sticks with them for quite awhile: student loans.

Among the Class of 2019, 69% of college students took out student loans, graduating with an average debt of about $30,000. Most people believe that if they pay more than the minimum monthly amount, they won’t have extra cash for travel, nice things, and possibly even to invest. However, with the average student loan interest rate of 6%, it might sound crazy but it’s true: Even if you did invest that extra money, you might not break even!

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn how making sacrifices and staying motivated can help you pay off your student debt sooner, save you money, and achieve greater peace of mind and full financial freedom.

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Rental Passive Activity Losses

Do you invest in #rentalrealestate? Are you considering doing so? You have heard about the potential #taxdeductions and benefits, right? Not so fast!

Watch this quick video from our Wealth Advisor, Matt Regan, to learn more about the passive activity loss (PAL) rules associated with owning rental real estate, and message us with any questions that are on your mind.