Category Archives: Investing

Year-end Tax Planning, Tax Credits, and all Continued

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There are two parts to this e-mail – year-end moves for 2009 and planning for long-term capital gains rate changes over the next three years…..

First is a repetition of some year-end ideas to make sure you have addressed all that you should to save taxes, between 2009 and 2010 combined.

One idea to check out is the sales tax deduction for purchase of a large item like a new car, especially with all the sales on cars at year end. These and other ideas are reprinted from Kiplinger’s below, along with links to other articles.

Also, be careful about withholdings – some people had reductions early in 2009 and will end up owing taxes if they do not change the withholding rate now or pay an estimate

Remember to use the 2009 $13,000 gift exclusion before it expires.

Finally, you can adjust your withholdings the other way if you will have the benefit of the first-time home buyer credit or expanded tuition credit.

Second is a strategy on capital gains. As we said, this is a year for planning 2009, 2010 and 2011 taxes. The long-term capital gains rate will remain at 15% in 2010, but then the rate jumps back up to 20%. This argues for selling in 2009 or 2010 to increase the basis, buying back and then having less taxed in 2011 or later at the higher rates.

Reprinted below is a table from Wikipedia along with their description of the US Capital Gains Tax.

There are many issues raised in this Newsletter, so let me know if you have questions or comments.

Thanks,

Steven

Review Your Year-End Tax Plans

Making the right moves now can save you plenty.
By Mary Beth Franklin, Senior Editor, Kiplinger’s Personal Finance
November 17, 2009

The end of the year is fast approaching, but you can still take steps to lower your 2009 tax bill. Don’t focus just on this year, though. Look ahead to next year as well. That may help you decide whether you should take advantage of certain tax breaks due to expire at the end of this year, such as a sales-tax deduction when you buy a new car, or delay action so you can reap a tax break still available in 2010, such as claiming a tax credit of up to $1,500 for installing energy-efficient home improvements.

In general, it makes sense to accelerate as many deductible expenses into this year as possible to reduce the income that’s taxed on your 2009 return. But that’s not always the case. If you expect to be in a higher tax bracket next year, for example, you may be better off postponing some deductible expenses until 2010, when they will be worth more.

Those who itemize have plenty of leeway when it comes to shifting deductions. Start with state and local income taxes. Mail your January estimated payment in December and you can claim a deduction for the payment this year, not in 2010. (Warning: this doesn’t work if you’re subject to the alternative minimum tax. State taxes aren’t deducted under the AMT, so there’s no benefit in accelerating the payment.) Or, make your January 2010 home-mortgage payment before the end of this year and you can deduct the interest portion in 2009.

Accelerating charitable contributions planned for next year into this year will boost your itemized deductions. Just make sure your mail the check or charge the donation to your credit card by December 31 so the gift counts for 2009. And if you’re close to exceeding the threshold of 7.5% of adjusted gross income for medical expenses, consider getting and paying for elective procedures in 2009.

Sometimes you have to spend money to cash in on certain tax breaks, such as buying a first home or purchasing a new car. But pay close attention to income eligibility limits to make sure you’re able to capture these and other tax breaks. Some incentives, such as the home-energy tax credit, are not tied to your income.

In the coming weeks, we’ll be rolling out a new tax tip every weekday. You can sign up for outo have the best and latest tax information delivered right to your in-box.

Let us know if you have questions or comments. Thanks,

Steven

Tax Planning – take the IRA distribution or defer?

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Here is another year-end tax planning issue for people taking the required minimum IRA distributions:

Do you defer as the 2009 law allows or do you take it now because tax rates will be going up?

Input from Kiplingers is reprinted below.

For me the issue is alternate sources of cash flow. If you can defer, even against rising rates, that usually pays off because of the compounding of sheltered growth

However, this depends on how you have invested as well as your cash flow needs so everyone has to review

Thanks,

Steven Contact

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To Tap or Not to Tap Your IRA

You can skip your distribution this year and save on taxes.
By Mary Beth Franklin, Senior Editor, Kiplinger’s Personal Finance
November 25, 2009

If you are at least 70½ years old, you normally must take a taxable distribution from your traditional IRA or employer-provided retirement plan by the end of the year — whether you need the money or not — or face a stiff penalty equal to half of the amount you failed to withdraw. But this year is different. Uncle Sam says you can skip your required minimum distribution for 2009. (Employees who continue working past age 70½ are not subject to mandatory distributions from their company plans until they retire, but they still must take distributions from their IRAs.)

IRA owners who turned 70½ between July 1 and December 31 would normally have to take their first distribution by April 1, 2010. But thanks to the waiver, they can skip that, too, delaying their first mandatory-distribution deadline until December 31, 2010.

Related Links

* The New Roth Rollover Rules

And if you tapped your IRA earlier in the year and now regret it, the usual 60-day rollover period, which allows you to redeposit the money tax- and penalty-free, has been extended to November 30. But there’s a catch: You are allowed to put one IRA withdrawal back into the account within 365 days. So if you received regular distributions every month, for example, then you can put only one of the withdrawals back in. If you received the money in a lump sum, however, then you can put it all back (including any taxes withheld from the distribution; otherwise it will be considered a distribution and will be taxed as ordinary income).

The one-year moratorium on mandatory distributions also applies to owners of inherited IRAs and other retirement accounts. For example, if you inherited your mother’s IRA and planned to take annual distributions based on your own life expectancy, you can forgo this year’s withdrawal. Or if you follow another set of distribution rules that require you to empty an inherited IRA by the end of the fifth year after the owner’s death, you now have an additional year to do so.

Although there are no required minimum distributions for Roth IRA owners — regardless of age — nonspouse beneficiaries who inherit a Roth are subject to the mandatory distributions. They can skip this year’s withdrawal, too.

Of course, you can tap your traditional IRA this year if you wish and pay taxes at your ordinary rate on the entire amount you withdraw. But if you don’t need the money, there are several advantages to skipping a distribution for 2009. Keeping your money invested in a tax-deferred IRA will give your account even more to time to recover from the worst market collapse since the Great Depression. Plus, not taking an IRA distribution this year could reduce the tax bill on your other income. You might be able to trim the amount of your Social Security benefits that are taxed, and with a lower income, you may be eligible for other tax breaks that you normally can’t use, such as deducting medical expenses in excess of 7.5% of your adjusted gross income.

You can still opt to send up to $100,000 of your IRA distribution directly to a charity. While you can’t double-dip and deduct the donation as a charitable contribution, the amount will not be added to your taxable income.

Another option: Because you aren’t required to withdraw the money this year, you may want to roll some of it into a Roth IRA. (See more on Roth IRA choices here.) You’ll have to pay taxes when you make the switch, but you can take tax-free withdrawals after five years, you never have to take required minimum distributions, and you can create a tax-free inheritance for your heirs. You don’t need earned income to convert a traditional IRA to a Roth, but to qualify, your income — not counting converted amounts — can’t top $100,000 in 2009.

Tags: Roth IRAs and Roth 401(k)s Making Your Money Last, Saving for Retirement, Tax Breaks, Tax Planning

Let us know if you have questions or comments. Thanks,

Steven

More Tax Strategies – Three Year Planning for this year-end

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Because some tax laws will lapse by their own terms and because new laws will certainly be enacted, the year-end tax planning for 2009 differs from most years: you need to also consider the changes that will occur in 2010 and even 2011.

First, when the Bush tax cuts expire in 2010, the two top tax rates will move up from 33 percent and 35 percent to 36 percent to 39.6 percent. For a couple making $500,000, the added tax will be about $6,000 per year, for a couple making $1 million about $30,000.

Second, the 15% capital gains rate will end. So, do you sell stocks now, perhaps using capital losses from prior years to shelter the gain, in order to increase your basis so that when you later sell, less will be taxed at the higher rate?

Third, IRA distributions may be taxed at higher rates in the future. So, do you take the current law deferral and not distribute in 2009 or instead distribute anyway so that less comes out in future years at higher rates?

Fourth, do you delay major deductions such as planned charitable gifts? The deduction could be worth more in 2011 or you could be in the AMT.

There are some changes the did get enacted for 2009 that help:

The first time home buyer credit of $8,000 is extended for contracts signed by April 30, 2010 and closing by June 30, 2010 (however, there is a phase out of this credit for high income filers).

Also, small business can carry back 2008 or 2009 losses five instead of two years.

All of these issues can lead you wondering what to do. The starting point, whether you do the work or hire someone to do it for you, is to create good working tax projections for 2009, 2010 and 2011. From these, you can see if you are in the AMT or not, if you will have more income taxed at higher rates in the future, etc.

Let us know if you have questions and what help we can supply …..

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven

In divorce, do you keep the house or the 401(k)?

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Real Estate: Bubble or not? How does it effect our Divorcing clients

By Howard I. Goldstein and Steven A. Branson

This article was wrtiten a few years back and appears at the following link on line at DivorceHQ.com, http://www.divorcehq.com/articles/realestatebubble.html and on Howard Goldstein’s site. However, the financial calculations are still relevant.

Copyright 2005. Steven A. Branson and Howard I. Goldstein

Boosting social security

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A client forwarded the Kiplinger’s article reprinted below about how paying back money to Social Security can result in a recalculation that creates a higher benefit.

It is a strategy that works, so long as you live long enough.

With the risk of dying before you equal the payback, you may want to have life insurance equal to the amount you have to repay, to last until the benefits received equal that amount

You have to factor that cost into your calculation (as you would if you picked an employee benefit over the joint and survivor benefit from a pension).

Let me know if you want our input on the calculation for you or someone that you know

Thanks,

Steven

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Secret Ways to Boost Your Social Security

Four legal strategies for adding as much as $12,000 a year to your retirement income.
By Mary Beth Franklin, Senior Editor
From Kiplinger’s Personal Finance magazine, July 2008

Some retirement decisions are irreversible. But many retirees will be happy to learn that choosing when to start collecting Social Security benefits is not one of them.

When John Rothenhoefer, 70, found out that he could increase his Social Security benefits by about $1,000 a month by taking advantage of a do-over strategy, he thought he’d struck gold. As it turns out, he might as well have won a mega lottery. Out of the 32 million retirees who collect Social Security benefits, Rothenhoefer was one of just 71 people this fiscal year to take advantage of an obscure option that lets you halt your current benefits, pay back all you have collected interest-free, and restart your benefits at a new, higher rate based on your current age.

It’s perfectly legal, says Mark Lassiter, a spokesman for the Social Security Administration. But don’t expect the claims representatives at your local Social Security office or the employees who answer the agency’s toll-free number (800-772-1213) to be familiar with the details. “Our service representatives can go an entire career and never encounter this situation,” says Lassiter. He recommends that you download Form 521 (“Request for Withdrawal of Application”) from the agency’s Web site (www.ssa.gov) and visit your local office in person.

This strategy is just one of four little-publicized ways we uncovered to help you maximize your Social Security benefits. Each tactic applies to a specific situation; if one of them is yours, you could be in the money.

A “sweet deal”

For someone like Rothenhoefer, who had been collecting monthly checks for eight years, the price of repaying Social Security benefits can be steep — $100,000 or more in some cases. But he thinks it’s well worth it. Not only will his monthly check be about 75% larger than his previous benefit, but it will also increase with inflation each year for the rest of his life. And if John dies first, his wife, Charlotte, 67, will collect the same monthly amount as a survivor benefit for as long as she lives.

Here’s how it works: Let’s say you qualify for full benefits of $1,600 a month at your normal retirement age of 66, but you decide to begin collecting your benefits at 62. Your retirement benefits will be reduced by 25% for the rest of your life — to $1,200 a month, in this example — because you’ll be collecting a smaller benefit for a longer period of time.

On the other hand, if you delay collecting benefits, you will receive an 8% credit for every year beyond your normal retirement age until you reach 70, when your maximum benefit will be 132% of what you would have received at age 66. In this example, you would receive about $2,100 a month at 70 — a $900 difference.

Maybe you decided to collect benefits early out of fear that you wouldn’t live long enough to collect the larger delayed benefit. But now that you’ve made it to 70, you may regret your decision and wish you were receiving a larger check.
In order to get one, you must first file Form 521 at your local Social Security office to request a withdrawal of your application for benefits. Your retirement benefits will stop almost immediately — and if your husband or wife receives spousal benefits based on your work record, his or her benefits will stop, too. Then the Social Security Administration will send you a letter telling you how much you need to repay (including any spousal benefits). That process may take several weeks. Once you repay the benefits, you can reapply for new, higher payments based on your current age.

If, for example, you received $1,200 a month starting at age 62, plus annual cost-of-living adjustments through age 70, you would have to repay about $130,000. That’s a lot of money, but for some people it’s worth the price to get an additional $900 a month in retirement. By comparison, it would cost a 70-year-old man about $190,000 to buy an immediate annuity that would provide $900 a month initially, plus annual inflation adjustments and a 100% survivor benefit. That’s 46% more expensive than “buying” a lifetime annuity from Social Security.

Rothenhoefer thinks it’s a “sweet deal.” He concedes the strategy could backfire if both he and his wife were to die before they recoup their investment, which will take about ten and a half years. Still, he says, “it’s worth the gamble,” particularly because his wife stands a good chance of living into her nineties, as her mother and grandmother did.

There’s another financial downside: You may have to go without Social Security benefits for a few months while the agency sorts out how much you have to repay and you reapply for benefits. When your benefits stop, so do the automatic deductions that cover your Medicare premium. You’ll have to pay the Part B premium yourself — currently $96.40 a month for most retirees — until your Social Security benefits resume.

Crunch the numbers

Boston University economics professor Laurence Kotlikoff says repaying and reapplying for Social Security benefits is a “fantastic option” for some people. But it can involve a lot of number-crunching to determine whether it’s the right decision for you. Kotlikoff offers case studies on his Web site, www.esplanner.com. For $149, you can access his sophisticated financial-planning software, which lets you create your own comprehensive retirement plan, including an analysis of the pros and cons of a decision to pay back your Social Security.

John Greaney, who started the Retire Early Web site (www.retireearlyhomepage.com), says that members of his online community were aware of the repayment strategy but treated it as an urban legend. When Greaney took the time to research it last summer, he realized that it was an even better deal than he had first thought. That’s because when you repay your Social Security benefits, you can claim either an itemized deduction or a tax credit (whichever results in bigger savings to you) for the taxes you paid on your benefits in previous years. The calculations are complicated, but you can get all the details in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, at www.irs.gov.

The idea of boosting your Social Security benefits may be enticing, but you still have to figure out how to pay for it. Kotlikoff’s case studies weigh the pros and cons of using other assets to repay the benefits. Greaney created a spreadsheet that assumes you collect benefits early, invest all the money, then repay the benefits with earnings to spare. The spreadsheet also factors in the tax refund.

But Rothenhoefer had another idea. With his mortgage paid off, he decided to take out a home-equity loan and use the extra income from the bigger monthly Social Security benefit to repay the loan. “I didn’t have to touch my savings, and I’ll get a tax deduction on the interest,” says Rothenhoefer, who lives in Ellicott City, Md.

One word of caution: Although this strategy can work well if you are already collecting benefits and like the idea of starting over at a higher monthly rate, it’s riskier to plan to collect reduced benefits now with the intention of repaying them later. For one thing, you might not live long enough to take advantage of the repayment strategy. In that case, your spouse would be left with a reduced survivor benefit. Plus, there’s no guarantee that Congress won’t tinker with the provision when it eventually turns its attention to

Social Security reform.

Tactics for couples

Two other income-boosting strategies give couples a way to maximize their Social Security benefits. A recent paper by the Center for Retirement Research recommends that the spouse who is eligible for lower benefits collect them early, while the higher-earning spouse delays taking benefits until they are worth more. Then, when the primary breadwinner dies, the spouse with the lower benefit will “step up” to a much higher survivor benefit as the smaller retirement payment drops off.
In the past, it wasn’t always possible to implement such a strategy. For example, a wife with little or no work history would have to wait until her husband actually started collecting Social Security to apply for spousal benefits based on his work record, equal to half of his monthly check.

That’s not the case anymore. The Senior Citizens’ Freedom to Work Act of 2000 allows a worker to “file and suspend” Social Security benefits once he or she has reached full retirement age. Under this law, the higher-earning spouse (usually the husband) could file for benefits, allowing his wife to collect her share, and then suspend his own benefits while continuing to work and building a bigger payment for the future. This kind of planning works best for couples in which one spouse has substantially higher lifetime earnings than the other.

There’s also a way for married couples with similar incomes to enhance their benefits. In that situation, once you reach your normal retirement age, you can apply just for spousal Social Security benefits and delay the start of your own, higher benefits.

Let’s say, for instance, that a man and his wife are both 66 years old and each is entitled to retirement benefits of $1,500 a month. She decides to retire, but he wants to continue working. He can apply for spousal benefits based on her work record — worth $750 a month in this case — and delay claiming benefits based on his own work history until he reaches age 70. At that point, his check would be worth about $2,000 a month.

Take care of the kids

Older men who are widowers or divorced often get remarried to younger women, and it’s not uncommon for them to start second families. So when these do-over dads start collecting Social Security benefits, they may still have minor children at home. More than 500,000 children currently receive monthly payments based on a parent’s Social Security retirement benefits.

If you’re in this situation, you can put aside the money for your kids — you might even be able to get Uncle Sam to foot the bill for their college education. That’s what one 67-year-old man in Austin, Tex., plans to do. Although he didn’t want us to use his name, “Bill” was happy to share his story.

After the death of his first wife several years ago, Bill married a younger woman, and they’re expecting their first child this year. When the baby is born, he or she will receive monthly Social Security checks worth up to half of Bill’s benefit until the child reaches age 18.

Bill plans to stretch those benefits even further by depositing them in a state-sponsored 529 college-savings plan. By contributing to a 529, he’ll be able to use the earnings and distributions tax-free to pay for tuition, books, fees and other qualified expenses. If the child received $500 a month, for example, and the account earned an average 5% annual return, the college fund would be worth about $175,000 in 18 years. Depending on where you live, you may also qualify for a state income-tax deduction on your 529 contribution.

Despite the Social Security system’s long-term financial problems, you don’t need to feel guilty about trying to maximize your benefits, says Mary Jane Yarrington, a policy analyst with the National Committee to Preserve Social Security and Medicare. “These new strategies bring public attention to the fact that Social Security is truly valuable and that there are ways to make it even more worthwhile,” Yarrington says.