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Social Security


Coming ‘Of Age’ – ‘Retirement Age’ That Is…As more and more of our ‘baby boomers’ come of age and near the time for applying for social security benefits, I thought it might be appropriate to review a little bit about our social security benefit program as it applies to everyone.

It is extremely important to understand what our social security options are before we make a potentially irrevocable decision about taking and receiving our benefits as the dollar amounts received over our lifetimes could be meaningfully more!

Taxes – Funding Benefit and Receiving Benefit
Social security benefits are funded by contributions made through payroll taxes that are half paid by the employer and half paid by the employee with self-employeds effectively paying both halves. When we receive social security benefits they are income tax free unless you ‘make too much money’.

So managing income recognition and managing the character or type of income (cash flow) received when we are drawing social security benefits can be extremely important in maximizing what we keep of this otherwise income tax free benefit!

Social Security Benefits Started Before Full Retirement Age (FRA)
If you start your social security benefits before FRA you will receive a reduced benefit of about 75% at age 62, about 80% at age 63, about 87% at age 64 and age 65 about 93%. Another complication of drawing social security before the year in which you turn FRA is that if you keep working you will have to give back some of your social security earnings.

In 2013 that $1 of ‘giveback’ for every $2 of earned income starts when you make more than $15,120. In the year you reach FRA the ‘giveback’ becomes $1 for every $3 of earnings above $40,080 (2013 amount).

Social Security Benefits Started At Full Retirement Age (FRA)
Social security benefits are calculated based on a minimum of 40 credits (quarters of covered work) to be eligible for benefits. Depending on your birth date, your age of retirement, FRA, will vary between 65 and 67 years of age (if you were born after 1960).

The Social Security Benefits Administration has a calculator for you to run some what-ifs about choosing a retirement date. They also have other calculators that can run estimated benefits, offset effects (see discussion below), etc., etc. Besides the when to take retirement question, there are other strategies to consider in maximizing the social security benefits to be received.

One such strategy is called ‘file-and-suspend’ which may allow a qualifying recipient to suspend payments while the spouse files for spousal benefits.

Another strategy comes available to us when we have been married to another for at least 10 years. In those cases, you may qualify for benefits based upon the former spouses earnings. If you wait until your FRA, you can file on your former spouses earnings for a spousal benefit and delay taking your retirement until age 70. This strategy will not work if you apply for the spousal benefit before FRA!

Social Security Benefits Started At Age 70 (Post-FRA)
By waiting until age 70 to draw upon our social security benefits a person born after 1943 would have their FRA benefit increase 8% per year by waiting until age 70! Very compelling, indeed!

Social Security Benefits Post the Windsor Supreme Court Decision
As a result of the US Supreme Court decision on same sex marriages the Social Security administration is no longer prohibited from recognizing same-sex marriages for purposes of determining benefit claims filed after June 26, 2013. The decision and its social security benefits impact are being discussed by the Administration and exact details on same-sex marriage benefits will be forthcoming.

Medicare Starts At Age 65
Social security is one matter, Medicare is another! If you do not sign up for Medicare at age 65, your Medicare coverage may be delayed and cost more!

‘Other Pension’ Offsets to Social Security Benefits Received
Two issues that could impact your benefit received are the following.

  • Government Pension Offset. If you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s or widow’s or widower’s benefits may be reduced.
  • Windfall Elimination Provision. The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive.

Survivors Benefits and Benefits for Children
Benefits can be made available to others based on our benefit should we die or become disabled. Two of those are survivor benefits (spouse) and benefits for children.

  • Survivor Benefits. Your widow or widower may be able to receive full benefits at full retirement age. Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled.
  • Benefits for Children. Children of disabled, retired or deceased parents may be entitled to a benefit. Your child can get benefits if he or she is your biological child, adopted child or dependent stepchild. (In some cases, your child also could be eligible for benefits on his or her grandparents’ earnings.)

To get benefits, a child must have:

  • A parent(s) 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 he or she paid Social Security taxes.
  • The child also must be:
    • Unmarried;
    • Younger than age 18;
    • 18-19 years old and a full-time student (no higher than grade 12); or
    • 18 or older and disabled. (The disability must have started before age 22.)

Concluding Thoughts.
Social security benefits have been providing a ‘safety net’ to our citizens since the program came into existence.

Pre-retirement benefit programs like ‘Benefits for Children’ and ‘Surviving Spouses’ provide support to those qualifying families who have lost a breadwinner.

Retirement benefit program options are diverse and not readily understood by many. For some households social security retirement benefits comprise as much as 85% of household income so ensuring that one receives as much as is legally possible of the benefits that they have earned the right to, is so important! Consult with your advisor before you make any decisions. You may well be bound to them for your lifetime!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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FAMILY TAXATION


Skippin’ RocksMost of what we, as taxpayers, understand about taxation comes from our focus on taxes and how they affect us either individually or as a business. With the business owner, tax strategies will often be managed in aggregate between the business tax return and the owner’s personal return so as to optimize benefits and deductions and minimize taxes.

Rarely, however, do households look at aggregate family taxation to develop strategies for life’s expenditure requirements or desires – college education, first time homebuyer assistance, weddings, family member ‘support’, inter vivos wealth transfers, etc., etc., etc. The concept here is one of wealth and resources management through family income shifting and tax effect optimization. When, as practitioners, we do see family taxation considered in family financial activities there is usually a CERTIFIED FINANCIAL PLANNING™ professional involved.

So what are some of those family taxation considerations that the “pro’s” use for income shifting and tax effect optimization?

ASSETS YOU WON’T NEED AND ASSETS FOR SPECIFICALLY FUNDED PURPOSES

If you gift assets away, $14,000 per individual in 2013, they become the property of the transferee, your daughter for example, presuming you made what is called an irrevocable gift. The income on that asset will now become the income of, in this case, your daughter. If the asset gifted away is sold by your daughter, a gain or loss may be recognized by her based on your original purchase value and the tax rate upon the sale by the daughter will generally be based on the holding period (long term or short term) starting with you, not your daughter’s date of ownership. The strategy here for tax effect optimization is to have the income or gain from the asset taxed at the lowest rate of a family member.

If the gift was made to a minor, it would be made through a Uniform Transfer to Minors Account or a Uniform Gift to Minors Account. The purpose of this type of arrangement is to provide oversight of the asset until the child reaches the age of majority in the state. One issue that comes up with gifts to minors (and to those under age 24) is what is called the “Kiddie Tax”. The “Kiddie Tax” may limit the tax benefit from this income shifting opportunity by subjecting amounts of unearned income exceeding $2,000, in 2013, to taxation at the applicable parent’s tax rate.

This shifting assets (income) strategy also is designed to take assets that might be taxed upon death at an estate tax rate that might reach 40% and puts them into the hands of the beneficiary whose individual tax rates might be, today, perhaps as high as 43.4%. The ‘estate’ tax ‘individual’ tax rate differential obviously is not as compelling today (individual rate is higher than the estate rate) for the avoid estate taxation argument of inter vivos wealth transfers nonetheless they should be looked at depending on the facts of each situation. Additionally estates are not even taxed until they exceed $5,250,000 in 2013 so for most there will never be, lol, an estate tax to worry about.

An advantage to your receiving an asset after someone dies rather than having it gifted to you during their lifetime is that there is a step-up in value (presuming an increased value in the asset) to the value at the date of death. For example, if Mom was the last to die and she and Dad paid $100,000 for a home that you inherit when it is valued at $900,000 and you sell it for $900,000 there is no gain or loss. Under the gift scenario, based on these facts alone, the $800,000 gain would not be ‘stepped up’ so a tax would be due on that appreciated value upon a dispositive event – a sale. With respect to this ‘step up in value concept’, one should be aware that IRA’s, annuities, Pensions and Retirement Accounts that have never been taxed do not get a step up in basis.

So if we know we would not need an asset in our lifetime, or if we know that we are dedicating an asset for a specific life expenditure occurring at some date in the future (college, bar or bat mitzvah, etc.), would we benefit from shifting that asset, and the income thereupon, to another in order to most optimally accumulate funds for our dedicated expenditure purpose? Would that give us more available for the expenditure or, perhaps, give us the amount needed sooner? Should we do this type of thing now, and if not, when? In doing so, would we be putting assets into the hands of someone, a child for example, who then would be precluded, for example, from getting financial aid for school because they ‘owned’ too much in assets? Would the asset transferred become subject to the control or potential attachment of another? There are lots of causes and effects to any strategy hence the need to think not only of tax optimization but asset preservation and protection.

EMPLOYING FAMILY MEMBERS IN A BUSINESS OR IN THE HOUSEHOLD

If we have a business, or if we have a housekeeper or maintenance worker (gardener), rather than employing other than a family member to work in those activities, we could employ our child, family member, or related children in doing that work. An advantage to employing family members in our business or in our household is that they will have earned income shifted to, or earned by, them by being paid a wage. Earned income can be excluded from taxation up to the amount of our personal exemption and standard deduction. So for a 16 year old child claimed as a dependent on her parent’s tax return helping with filing and office clean up during the year in Mom’s business they could earn $6,100 + $1,000 in income and not pay any taxes on that income. With just $6,000 of ‘earned’ income the child could fund a Roth IRA which would not be a tax deduction to the child but it wouldn’t be needed as such anyway. The advantage to a Roth over other types of IRAs is that you can access your contributions to a Roth IRA at any time. You do not have to wait five years. You do not have to wait until age 59 ½. Contributions to Roth’s can be accessed at any time, earnings on Roth’s, however, are another story.

Even if there is not a business for a child to work in they certainly can do work around the home, do gardening or do baby-sitting, for example, all of which are examples of earning ‘earned’ income in a household doing domestic services. Of course, unlike the business activity, employment of your children in the household would not provide a tax deduction to the family just like the gardener or pool man is not deductible to the family today. For certain businesses employing under age 18 family members there may even be payroll taxes avoided (See Pub 15 Page 12).

CONCLUDING THOUGHTS

Making the most of what we are able to earn and keep for ourselves is so important to families today. Parents who have worked their whole lives to have what they have want to ensure what they have earned and accumulated is most fully shared by those they wish to benefit. Having income or transfer taxes eat up what we have or are able to acquire is a terrible thing if it can be avoided. Making the best of good family tax strategies is a wonderful thing. Take the time to think about your fiscal responsibilities and life’s expenditures and see if you are optimizing your resources for them.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Keeping What You Make – Managing Taxes Owed on Income Received


The Debt Crisis Isn't Over YetTax Rates Overview

Under our current tax code, The Tax Act of 1986, as amended to date, the income that we earn for income tax purposes can be subject to either ‘no taxation’, ‘regular income taxation’, or an ‘alternative rate of taxation’ known as capital gains rates.

For some taxpayers the regular income taxation rate will be defaulted to a ‘parallel’ tax system known as the Alternative Minimum Tax (AMT) and an alternative tax rate on that income which is a flat tax rate of 26 or 28%.

For individuals who are not subject to AMT, their income would be subject to one of the following tax rates – 10%, 15%, 25%, 28%, 33%, 35% and 39.6% ($400,000 single or head of household or $450,000 if married filing jointly). Well technically one who is subject to the 33% tax rate, for example, is subject to each of the 10, 15, 25, and 28% tax rates because we have a progressive tax system that taxes us at various levels as we fill up those lower income tax rate buckets with income. If we took each bucket’s tax and related income number, we could calculate a weighted average tax paid from all of those buckets of income and we would call it the taxpayer’s ‘effective tax rate’. The lower one can get that effective tax rate for a given level of income, the better one will have done to ‘manage’ their tax liability on income.

For taxpayers making over $200,000, as single or head of household, and $250,000, as married filing jointly there will be an additional 3.8% tax on investment income which could be either (1) regular income, called ordinary income, like interest earned, (2) qualified dividend income, like income on your NYSE traded stock, or (3) capital, like capital gains. This new 3.8% tax will alter how we manage our income resources for those at these income levels.

Capital gains and qualified dividend taxes could be 0%, 15%, 20% (taxpayers making over $400,000 single or head of household and $450,000 married filing joint), 25% (real property depreciation unrecaptured gain) or 28% if a collectible is sold at a gain.

Social Security income is tax free if we do not earn too much income so for those who are receiving social security benefits managing income and the taxability upon it is crucial. Too much income annually is defined by the IRS as $25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year; $32,000 for married couples filing jointly; and $0 for married persons filing separately who lived together at any time during the year. For every dollar of income earned over those thresholds a dollar of otherwise tax free social security benefits becomes taxable. For a taxpayer in the 35% tax bracket, for example, the loss to taxes from social security benefits becoming entirely taxable would be 32 cents on a dollar – (85% maximum of benefits that could be taxed) times (35% the marginal tax bracket). The least amount of benefits that could become subject to taxation if you go over the threshold is 50%.

3.8% Investment Tax Effect

Interest Income from a bond taxable at 35% or interest free? What is better? The formula for determining net yield after tax would be (yield) minus [(yield) times (tax)]. So to determine the tax equivalent of a municipal (tax free) bond to a corporate bond we would divide the tax free yield by (one) minus (marginal tax rate). For example, before the 3.8% extra tax a taxpayer in the 35% tax bracket would have been indifferent between a corporate bond that paid 5% and a tax free bond that paid 3.25%. Now, after the 3.8% additional tax is imposed, the same taxpayer earning the taxable 5% would be indifferent if the tax free rate was only 3.07%. Alternatively stated, to earn the equivalent of a 3.25% tax free, now the taxpayer would be looking for a taxable bond earning 5.29%.

Strategy Considerations

For Investment Income: Interest, Qualified Dividends and Capital Gains

The first thought is to re-allocate your CD type money into a dividend paying stock. For a single person in the 28% tax bracket ($87,850 to $183,250) that would save .13 cents on every dollar of earnings (.28 – .15). For a single person in the 15% tax bracket ($8,925 to $36,250) that would save .15 (.15 – 0) cents on every dollar. But is that penny wise and pound foolish? It might be because unlike your CD investment where your principal is secure, and most likely FDIC protected, the stock price associated with your investment paying that dividend may decline. A 1% negative move in a $20 dividend paying stock, 20 cents, would wipe out the tax gain you were trying to achieve by seeking out dividend income over ordinary income. So consider both your personal ability to tolerate risks of loss and determine the appropriateness to your financial circumstances of putting your principal to that risk.

To ensure that your capital gains get the favorable 0, 15%, or 20% (plus 3.8%, if applicable) tax treatment the investment must be held for more than one year. Knowing that the market does not go straight up, it might not be appropriate to seek capital gains by investing in the stock market if the money you are investing might be needed in the short to intermediate term – 3 to 5 years. Again, risk tolerance and diversification should always be taken into consideration.

For those subject to the 3.8% tax muni bonds can avoid that tax so they have become somewhat more attractive (as illustrated above a tax free rate of 3.25 is now equivalent to 5.29% rather than 5% without that tax being imposed. There are a significant number of strategies with regard to the 3.8% tax so consult with your advisor if you are subject to the tax.

For Social Security Taxability

When one is receiving social benefits it is even more important to manage the timing and character of income (ordinary, tax free, capital) so that one minimizes the impact of taxation on those benefits. Municipal bond income is tax free but it is considered taxable for purposes of determining whether or not, and how much of, your social security benefits could become taxable. To the extent the muni bond can provide more income than the taxable bond considering all of these factors it may (always run the numbers) be a tax optimizing investment choice when one is drawing social security benefits. Alternatively, an investment that provides cash flow without large taxable components to the cash flow might be a very good strategy to manage social security benefit’s taxability. An immediate annuity purchased with after tax dollars will have an exclusion ratio to the payments received that will then provide cash flow without taxation.

Concluding Thoughts and Observations

Wealth accumulation and wealth management require vigilance in both tax and portfolio risk management from the investment perspective. Tax rates have a huge impact on our net returns so strategizing for optimizing our tax impact with consideration of our own risk tolerance, and need to take risk, if any, for investment returns is an ongoing responsibility. Choices of tax-free, tax deferred, ordinary or capital gains income are very important in achieving optimal results with our resources earned over our lifetime. I hope you are maximizing and keeping all that you have worked so hard to earn.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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How A Six-Year-Old Saves For Retirement


In our society of conspicuous consumption and spending-beyond-means, many parents face an uphill battle to encourage children to save for the future, resist instant gratification, and most importantly, understand how to budget and use credit wisely. At a recent dinner party with a group of parents with young children, the conversation turned to this exact topic. When I shared how I teach our kids about money, these parents encouraged me to write an article to share my approach. This article explains how my wife and I attempt to instill financial values in our six-year-old son. I recently began giving our six year old an allowance, but with a twist.

Taxes:
It’s never too early to learn about taxes. As Benjamin Franklin said, “The only things certain in life are death and taxes.” My six-year-old receives a gross allowance of $6 per week (one dollar for each year of his age), in the form of one-dollar bills. From this $6, he has to pay $1 in taxes to the Oghoorian-Family-IRS. In this way, he experiences the impact of “earning” (in this case getting) money and having to pay a portion of it to taxes. Of course the first thing he asked when I first collected taxes was what exactly his taxes pay for; my response was that his taxes pay for food, shelter, travel, and other services we deem “public” goods. So far, our son is subject to only a flat tax. But as his allowance grows with age (and he learns percentages), so will his tax bracket. I just hope he doesn’t get ensnarled in the Alternative Minimum Tax.

Savings:
After paying taxes, our son must allocate another $1 toward savings; “forced savings”. Unlike the $1 tax that’s taken by the IRS, he gets to keep the $1 savings per week in a separate part of his cash box so that he can see it grow (rather than as a theoretical value he would see on a bank statement.) His savings rate is only 17 percent of his gross allowance, which is less than I typically recommend to my clients, but I wanted to keep things simple and in round numbers for now. Once he learns percentages, he will be required to save at least 20 percent.

Overspending:
Should our son be inclined to spend more than his net allowance, he may be granted a loan from the Bank of Mom & Dad at prevailing market interest rates charged by credit cards. A lower rate may be available if he’s willing to collateralize one of his toys. This will hopefully teach him the negative impact of interest as a debtor.

Keeping Track:
I also created a ledger, similar to an old checkbook for those of you who still remember them, for our son to write down his gross allowance, itemized deductions, calculate his net weekly allowance and his cumulative earnings and savings. This exercise strengthens his math skills and further reinforces the concepts already discussed.

Of course this is just the beginning. As our son learns more about money and saving, I will begin to introduce financial priorities that are important in our family such as charitable contributions and investing savings for capital appreciation. While he will certainly have to pay capital gains tax on his investment earnings, I haven’t decided yet whether to give him a tax deduction for his charitable contributions.

We hope that with this early and continued education in sound financial planning, that no matter what our son grows up to be and do in his life, he will always spend and save wisely. Of course, even with all our good intentions, we never truly know what the outcome will be. Check back in 20 years to hear about how our allowance experiment turned out!

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


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We’re Married. Now What?


With six wedding ceremonies to attend this year, 2012 has been the year of marriage celebrations for me. It’s an exciting time in many of my friend’s lives and I couldn’t be happier for them! However, as the months after the ceremony roll on, questions have been popping up as to the best way to merge finances, what debt to pay down first, what steps to take to change names, and what else is out there that they haven’t even considered. In hopes of assisting my friends along with the many other newlywed couples out there, below are some items to consider in the days and weeks after your marriage:

Name Change: Post wedding, make sure you obtain at least 3 copies of your official marriage certificate from the county clerk, which is where your name change will be indicated. You’ll begin the name change process by first obtaining a new social security card (visit http://www.socialsecurity.gov for more information). From there, visit the DMV to update your driver’s license and then move on to your passport, employer, voter registration, bills, bank accounts, etc. It may be helpful to make a list of all the accounts you’ll need to update.

Taxes: You and your spouse may begin to file your taxes as “Married Filing Jointly” in the year that you are married. Be sure to check in with your accountant as to if that is the best route for you two and update your withholding elections through your Human Resources department if appropriate.

Money Mergers: Hopefully you and your spouse had more than just one conversation about money pre-nuptials. Some things to consider in the days ahead are whether or not to open a joint account. If you decide to go this route, also discuss if you will maintain separate accounts or if everything going forward will be deposited into your joint account. Work out a detailed spending and savings plan and ensure the two of you are on the same page with how your money is being managed and spent.

Assets & Liabilities: Create a list of all of your accounts, including Roth IRAs, 401(k)s, checking, savings, and any other personal cash or investment accounts. Decide if any accounts (aside from retirement) should be consolidated and if you’d like to add each other to titles of cars, property, or any other assets. In addition, review your investments and take some time to adjust your allocations so that it is appropriate based on your combined goals. Also create a list of any outstanding debts such as: credit cards, student loans, mortgages, and car loans. Prioritize your debt re-payment plan by focusing on those balances with the highest interest rates first – likely your credit cards.

Insurance Needs: For items like car and health insurance, evaluate each of your plans and pick the better of the two. Your car insurance should provide the best coverage for the most reasonable price. For health insurance, ensure that your current doctors are available under your spouse’s plan or that you’re okay with making a change if necessary. With life insurance, first determine the amount of coverage needed by considering outstanding debt and the loss of household income that would occur should something happen to either you or your spouse. For young couples just starting out, look into term coverage, which should provide coverage at the most reasonable rate.

Beneficiary Update: An item that is commonly overlooked by newlyweds is the updating of beneficiary information. If you and your spouse determine that you’d like to name each other as beneficiaries, be sure to contact your HR department at work and any companies that hold a life insurance policy or retirement account for you to make necessary updates.

Estate Planning: In the months ahead, consider establishing Durable Power of Attorneys for finances and health care and creating a Will that addresses your combined assets and wishes.

The list above won’t address all of your financial concerns as newlyweds, but by taking the time to go through each item together and consulting your accountant, financial planner, or attorney, you will start your new marriage on a financially healthy road to success.

Mary Beth Storjohann, CFP®, CDFA
Senior Financial Planner
HoyleCohen
San Diego, CA


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6 Tips for a Better Financial Future


Summer is upon us and in full swing. While you (hopefully) have some well-deserved time off, take the necessary steps to get your financial life back on track. No matter what stage of your life you are currently in, these simple but valuable financial planning tips may help you do so.

  1. Take 5 minutes to check your beneficiary designations– Young or old, chances are you have some type of life insurance policy or retirement plan. And chances are, you have not taken a look at who will inherit these funds/accounts since you opened the account several years ago. Countless times I have seen clients shocked when I uncover their beneficiary designations to be an ex-spouse, a deceased family member, or even worse – a big blank line. Take the time now to check to ensure that you have the appropriate beneficiary designations in place on all retirement accounts and insurance policies. Your financial professional can help you with the tax and estate planning advantages to certain beneficiary designations for each type of account.Tip: The most common (and basic) type of life insurance most employees have is an employer-paid policy with a $50,000 death benefit (this is the most common type because the IRS requires you to be taxed on the value of employer-provided group term life insurance over this amount). More often than not, when employees go through their first-day-of-work orientation and elect their new benefits, they leave the beneficiary designation for this standard policy (and probably their 401(k) account) blank. Check it out now and make sure you have elected a primary AND contingent beneficiary.
  2. If you don’t know how to do taxes; it may not be a great idea to do your own taxes– It’s really as simple as that. Oftentimes, we attempt to do our own income taxes in order to save some money, but have no real knowledge of our complicated tax system. This may be a costly mistake if you are not aware of many important and ever-changing tax laws. Are you aware of all of the various deductions and credits you are entitled to? Are you aware of the rules for claiming dependents? Do you know how to properly calculate your charitable contribution deductions? Do-it-yourself tax software has made it very convenient to complete your own taxes, but tax planning is not simple and the decision to do your own taxes should not be taken lightly.Tip: One of the most common mistakes people make when they attempt to do their own taxes is failing to utilize carry-forwards from prior tax years. For example, you can carry unused capital losses (say, from a bad investment loss) forward for your lifetime. Your capital losses will offset other capital gains, and if there’s still a loss remaining, you can deduct $3,000 p/year from other taxable income. If you do not keep track of your carry-forward balances or look at your previous returns for guidance (assuming these prior returns are correct), you may miss this valuable deduction, costing you hundreds or thousands of dollars in tax savings. If you are not confident in your ability to prepare your return, consider having a professional complete them this time around.
  3. Can you name three investments in your 401(k) account?– If someone asked you if your car had leather seats and air conditioning, would you be able to tell them? Absolutely. Then why shouldn’t you know what your biggest retirement asset is made up of? Take the time to understand your 401(k) account as it will be an important savings vehicle for your retirement years. Explore your available investment options, know the deferral percentage rate you need to elect in order to take advantage of your employer match (if any), and ensure that your investment allocation is appropriate for your risk tolerance, time horizon and retirement goals.Tip: Some 401(k) plans allow you to automatically increase your deferral percentage each year by a desired increment. This will allow you to gradually increase your contributions effortlessly and systematically without dramatically impacting your cash flow. Consider the following example which shows the difference in ending account values between keeping a constant deferral rate compared to increasing it incrementally over the years. Both examples assume a starting account balance of $20,000 and a beginning gross salary of $65,000 p/year:

    Constant 3% p/year deferral rate: $1,576,264*

    Starting at 3% deferral and increasing by 2% p/year until 10%: $2,693,714*

    *Assumes 3% raises p/year, 7% annual return, and a 3% employer match, for 40 years.

     

  4. Do you know what will happen to you, your children and your assets when you pass away or become incapacitated?Estate laws are complicated, ever-changing and mostly misunderstood by the average American. Not having a basic estate plan in place is like showing up to a job fair without a resume. Did you know that in 2011, over 70% of Americans did not have a basic will in place? This is one area of your life that you do not want to risk being unprepared. At the very minimum, you will want to have a will, guardianship provisions (if you have children or legal dependents), and power of attorney documents. A revocable living trust is also an important estate planning tool you will want to consider, depending on your situation, estate planning goals and objectives.Tip: Many people believe that only the very wealthy need estate planning. This is simply not true. Basic estate planning documents are important to ensure you have control of your assets and well-being during your lifetime and after your death. Do not let the state decide how your assets will be distributed or who will care for your loved ones.
  5. Planning for educational expenses begins at birth– Far too many parents begin to plan for their children’s college expenses when it’s far too late – when the college-bound child is sitting in their driver’s education course. At this point, the tax advantages and compounding advantages of a 529 college savings plan are greatly diminished, and the impending expenses are likely to be paid out of any cash flow and lots and lots of debt.According to the College Board, the increase in college tuition at a public four-year school was 8.3 percent between the 2010-11 and 2011-12 school years. That’s over twice the inflation rate over the same period! Take actions as soon as possible to begin planning for your child’s education. All things being equal, the earlier you start saving, the longer you have for your savings to grow and compound.

    Tip: Once a college savings vehicle is established, try to increase the amount you contribute each year. Aim to increase the total amount you save each year by at least 6%. For example, if you save $100 a month this year, you should save at least $106 a month next year. This will help your savings keep up with the high college inflation rate.

  6. Do you know what your risk tolerance is?– The old adage that says you should hold your age in bonds (as a percentage of your overall portfolio allocation) may no longer be appropriate for today’s investor, especially in today’s economy. Don’t know what your risk tolerance is? Think about the following scenario. You are given a choice between two cars to take on a cross country vacation. Option 1 is a fast, attractive, high risk sports car with very bad crash ratings. Option 2 is a slower, unattractive, safe sedan with excellent crash ratings. Which do you choose and why?Consider another scenario in which you have the option to stay in one of two resort hotel rooms. Option 1 is a suite on the 25th floor with great panoramic ocean views. Option 2 is the same sized suite, but on the first floor with convenient emergency exits. Which do you choose and why?

    The amount of risk you are willing to assume for a chance at receiving a desired return can help you begin to design your overall investment portfolio. Among the various factors to consider when deciding on an appropriate allocation are: your proximity to retirement, how comfortable you are with investing, your other available income streams, liquidity needs, and your general comfort level with the financial markets.

    Tip: Your risk tolerance (once you determine it) should help you and your financial professional design an appropriate and diversified investment portfolio that will help you achieve your goals and objectives. It is important that you are comfortable, knowledgeable and confident in your investment plan, or else it may be very difficult to stay on course.

By FPA member Grant Webster, MSBA, CFP®
AKT Wealth Advisors
Special to FPA

 


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Limited Time Offer: Taxes on Sale through Year End 2012


“Pay no tax before it’s time” is generally good advice, except when you think taxes may cost more in the future than they do now.  

What are the odds that tax rates could be higher after 2012? 

Ask yourself if you believe one of these two scenarios could happen: 

  1. Congress introduces new, higher taxes for wage income, capital gains and/or estates, or 
  2. Congress lets the current tax law expire at year end 2012, without a new tax plan, thereby defaulting to the higher tax rates that existed under “pre-Bush tax cut era”, as seen below.

Federal Taxes: 

2012
NOW

2013
“Pre-Bush Tax Cuts”

Top Rate on Ordinary Income

35%

39.6%

Unearned income Medicare Contribution Tax

0%

3.8%

Top Rate on Capital Gains
*18% for assets held > 5 years. 

15%

20%*

Top Rate on Qualified Dividend Income

15%

39.6%

Federal Estate Tax Exemption
(single person – married couple)

$5.12 – $10.24 Million

$1 – $2 Million

Top Rate on Estates

35%

55%

If it seems possible that you may pay higher taxes in the future, talk with your CPA and/or estate tax attorney now to explore legitimate tax saving strategies, such as:

  • Accelerating Income
  • Giving Gifts
  • Selling “Winning” Investments

Take the time to plan and save while you can. Hurry! The current deal on taxes may expire after December 31, 2012.

karinMaloneyStiflerKarin Maloney Stifler, CFP®, AIF®
President
True Wealth Advisors
Hudson, OH