Tag Archives: Steven A. Branson

Estate Planning – will we have a new tax law in time?

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Many people have argued that Congress will freeze the federal estate tax exemption at $3.5 million and the estate tax rate at 45%

The House passed such a law and sent it to the Senate early this month.

However, as described in the article below, passage of this change to current law is not certain as there are political and procedural obstacles in the Senate. (Please see a more recent comment at What to watch out for in 2010)

If no action is taken, then there will be no estate tax in 2010 and only a $1 million exemption in 2011. In the second artilce below, Kiplinger’s Tax Letter projects a 1 year extension of the 2009 law.

We will continue to watch this to see if a law does pass…. and let me know if you have questions or comments. Contact Us

Estate Tax Reform Bill Passes House, Moves to Senate

Posted on December 8, 2009

On Dec. 3, the House passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154). With time running short, the bill now moves to the Senate, where straight passage of it is uncertain, and passage of any estate tax legislation is anything but assured.

Introduced by Rep. Earl Pomeroy (D-ND), the legislation permanently extends current estate tax law, which taxes the heirs of a deceased individual whose estate is valued above $3.5 million ($7 million for couples) at a 45 percent tax rate. The Pomeroy bill passed the House by a narrow margin – just 225 to 200 – and mainly along partisan lines, though 26 Democrats did join a united Republican caucus in opposition to the measure. The bill essentially mirrors what the president asked for in his FY 2010 budget request. Most importantly, the Pomeroy bill would extend current law and prevent the estate tax from expiring in 2010 and then coming back in 2011 under its pre-Bush tax cut levels.

According to an estimate released by the Congressional Joint Committee on Taxation, the Pomeroy bill would bring in $468 million in 2010, when the government would otherwise collect no estate taxes, but then cost the government $533 billion over the next nine years because of higher exemptions and lower tax rates than would have been in place if current law was left unchanged.

Passage of the Pomeroy bill in the Senate is unlikely because several important senators have misgivings about certain provisions. Sens. Max Baucus (D-MT) and Kent Conrad (D-ND), chairs of the Senate Finance and Budget Committees, respectively, argue that Congress should index the tax for inflation, something the Pomeroy bill does not do. Moreover, the Pomeroy bill includes the Statutory Pay-As-You-Go Act of 2009 (H.R. 2920) that would give PAYGO budget rules the force of law in Congress. The House passed the PAYGO bill in July, but the Senate has yet to take action on it because, according to a recent Congress Daily (sorry, subscription required to view), top Democratic senators are opposed to enacting the provisions.

Estate tax legislation is therefore likely to go down one of two paths in the Senate. One alternative is for the Senate to bring up legislation similar to the Pomeroy bill, debate it, and pass it. The other option is for the Democratic leadership to tack a one-year estate tax extension onto a likely omnibus appropriations bill that insiders say Congress will pass before the end of 2009. Depending on how congressional events play out, either option is possible.

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Without action by Congress before the end of this year, the estate tax will disappear in 2010, but only for one year. The tax will then reappear in 2011 with just a $1-million exemption and a 55% maximum rate. In addition, many heirs of folks who die in 2010 will have to use the decedent’s tax basis for inherited assets.

The House has OK’d a permanent extension of the law in effect for 2009… a $3.5-million exemption with a 45% rate. Its bill repeals the carryover basis rule.

But the Senate has its own ideas. Finance Com. head Max Baucus (D-MT) favors continuing the $3.5-million exemption and indexing it to inflation each year, while maintaining the 45% rate. A coalition of Republicans and moderate Democrats is pushing for broader relief…a $5-million exemption and a 35% maximum tax rate. They have enough support to demand a vote for their proposal on any estate tax bill, and are likely to keep the Senate from voting on a permanent extension this year.

So a simple one-year extension of 2009 law is the likely result. This way, lawmakers can revisit the estate tax next year, after the health care debate ends. The bill will also kill carryover basis. To speed passage, the Senate may even add it to a fast moving appropriations bill that will be approved in the next week or so.

Two easings that could’ve passed in 2009 must wait because of the delay: Portable estate tax exemptions. Under current law, if a spouse passes away without having fully used up his or her exemption, the balance is wasted. Taxwriters want to ensure that any unused exemption goes to the surviving spouse. That way, taxpayers needn’t set up complicated trusts in their wills solely to save estate taxes.

And reintegrating the gift and estate taxes. The lifetime gift tax exemption is $1 million, less than a third of the estate tax exemption. Combining the two again would let taxpayers make larger lifetime gifts tax free to their heirs. Both changes must wait till 2010, when Congress will have more time on its calendar for debate.

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

Tax Strategies Now save taxes later – year end planning

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Now is the time to begin planning for 2009 taxes – and for 2010 tax strategies.

As with past years, the goal is to pay the least amount for 2009 and 2010 together. To do this, the common wisdom is to push income into 2010 and accelerate deductions into 2009. This is especially true if rates will go up in the future.

However, if you will be in the AMT for either year, or if one year with have especially large deductions or income, then the strategies change.

Also, there are some special considerations for planning this year:

* There are certain benefits only available in 2009 or 2010 such as the conversion to a Roth IRA with no income cap and the first time home buyer credit;
* Tax rates after 2010 are likely to go up as reductions in rates from the Bush tax laws end after 2010;
* You may have capital losses to shelter capital gains so you want to use them well;
* Furthermore, there may be taxes to pay for health care law and the stimulus package;
* Make sure you use your Flex account funds and any frequent flyer miles that will expire; and
* Finally, some features may be extended, such as the $8,000 first time home buyer credit.

Sitting down to review 2009 and 2010 could save you money. Also, the work you do now will help on what you owe for 2009 as well as the tax preparation.

There is a very good article with details on this from Kiplinger’s Tax Newsletter that I can forward to you if you wish – Let me know

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.