Category Archives: Financial Planning

Say What – A New Tax on you in 2013?

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Yup – there is a new tax in town for 2013 and it can add up quick.  You can get hit in two ways (1) additional Medicare payroll tax and/or (2) new Medicare contribution tax on unearned income.  Let’s take a look at the taxes individually.

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The Medicare payroll tax increase applies to married joint filers with combined wages of you and your spouse exceeding $250,000 (singles $200,000).  If you are one of the lucky ones considered high wage, your Medicare payroll tax (technically called hospital insurance or “HI”) will increase by 0.9 percent from the standard 1.45 percent to 2.35 percent.  So if you are a couple with combined wages of $300,000, you will owe HI tax at a rate of 1.45 percent on the first $250,000 of wages, and HI tax at a rate of 2.35 percent on the remaining $50,000 of wages for the year costing you an additional $450.

The new Medicare contribution tax on unearned income (or commonly called the net investment income tax) is a little trickier to figure out.  Net investment income is generally considered income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity.  This new tax is equal to 3.8 percent of the lesser of net investment income or your modified adjusted gross income that exceeds $250,000 for married joint filers (singles $200,000).  Your modified adjust gross income is basically your income increased by any foreign earned income exclusion.  So if you are a couple with $50,000 of net investment income subject to the new tax, you would pay an additional $1,900 in Medicare tax (on top of your normal income tax).  Clear as mud?

The following types of income are excluded from the new Medicare unearned income tax, interest on tax-exempt bonds, veterans’ benefits, excluded gain from the sale of a principal residence, and qualified retirement plan and IRA distributions.

You want the best for last?  All right then, you can be subject to both taxes in the same year.  If you wages exceed the brackets listed above and if you have unearned income above the threshold, then Bibbidi-Bobbidi-Boo you win the daily double.

Looking For A Quick Summary of Income Tax Planning Ideas?

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The April 2014 edition of Kiplinger’s Personal Finance magazine has a pretty good article on income tax planning opportunities.  You can find it here.

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The piece is especially useful because it breaks the information into sections based on life stages and concisely hits the key points.

You should pay particular attention to the income phase outs as many of the tax planning opportunities phase out at relatively low income levels.

The section on “Higher Rates” highlights the impact of the new 3.8% surtax included in the Affordable Care Act (“ACA”).  This aspect of the ACA is not well understood and impacts a surprising number of taxpayers.

 

Who Cares If Stretch IRAs Are Eliminated?

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Only wealthy people benefit from the “loophole” anyways. Retirement plans were never intended to be an estate planning tool. It won’t impact me. I don’t care. These are some of the comments in the press right now regarding proposed legislation to end the ability of heirs to take inherited IRAs out over their life expectancies (referred to as “stretch IRAs”).

You should care.  My experience is the less wealthy actually benefit as much or more than the truly wealthy from stretch IRAs. For example, lets call my client Mike. Mike’s father left him and his sister each half of his IRA at death. Neither Mike nor his sister would be considered even close to wealthy. Fortunately for Mike and his sister, they now use their required minimum distributions from their stretch IRAs to help pay their mortgages on humble homes. Had they been forced under the proposed legislation to withdraw all stretch IRA funds within five years of their father’s death, I’m sorry to say they probably would have nothing remaining to help them survive in the future. This is at least partially due to the behavioral finance implications of the tax-deferred nature of the stretch IRA.  It provides a barrier to the instant gratification impulse of most people to consume the funds immediately.  If they know they can let the stretch IRA grow tax-deferred but take a minimum amount each year, the long-term incentive is enough to overcome the short-term urge.

Why shouldn’t retirement plans be an estate planning tool?  Is it better for the government to force citizens to cash in stretch IRAs or allow them to grow tax-deferred?  I vote for saving incentives not consumption requirements.  If the stretch IRA owner were forced to liquidate the account under the proposed legislation, they could still invest the after-tax amount.  However,  due to human nature this generally does not happen.  They spend it on unnecessary stuff!

What can you do to help protect the stretch IRA?  Contact your Representative and Senators and let them know you prefer saving incentives over forced consumption.  In the interim, you should check your retirement plan beneficiaries and make certain your intentions are documented correctly. Other than that, we’ll all have to wait and see.

Why Should You Freeze Your Credit?

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I first heard about how to freeze your credit on the Clark Howard radio show several years ago. photo

Why would you want to freeze your credit?  As Clark states in his Credit Freeze and Thaw Guide, “credit freezes are one of the most effective tools against economic ID theft available to consumers.”  It is a quick, easy, and a low-cost alternative to paying for a credit monitoring service.

What is a credit freeze?  Wikipedia describes it this way. “A credit freeze, also known as a credit report freeze, a credit report lock down, a credit lock down, a credit lock or a security freeze, allows an individual to control how a U.S. consumer reporting agency is able to sell his or her data. The credit freeze locks the data at the consumer reporting agency until an individual gives permission for the release of the data.”

How do you freeze your credit?  Clark’s guide is the best source I’ve found to date. It outlines how to contact each of the three major credit bureaus and how to thaw them.

After several of my family members and clients had their identities stolen, I finally got around to freezing my personal credit this past summer.  It was pretty painless and took no more than 30 minutes to complete (and cost less than $30 total – the cost depends on your state).  Check it out and see if it makes sense for you.

When Can You File Your 2012 Tax Return?

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The IRS just announced their plans for 2012 tax season filing.  Due to the last-minute fiscal cliff deal, known as the American Taxpayer Relief Act of 2012 (ATRA), the IRS will start accepting most 2012 tax filings beginning January 30.  The IRS warns filing a paper return will not speed up the process.  They suggest you use e-file with direct deposit for faster tax refunds.

If you have special forms (some examples – residential energy credits, depreciation, or business credits), you may not be able to file until later in February or March so they can get their systems updated.

You can check out the full press release here.

irs news release

Time to Pull Your Credit Again – But Why Should You?

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  1. It is free at www.AnnualCreditReport.com.  Make sure you use this site and not the sites you see on TV with the catchy jingles.  Those sites are not free even though “free” is usually in their names.  This central site allows you to request a free report once every twelve months from each of the national reporting companies: Equifax, Experian, and TransUnion.photo
  2. You can keep current by pulling a different reporting company every four months.  You get one free report from each of the three national reporting companies every twelve months so pull your Equifax this time, Experian the beginning of May, and TransUnion in September (3 companies over 12 months equals one every four months).
  3. It only takes about ten minutes to do.
  4. Spot identity theft early without paying fees to monitoring companies.  When you request the free reports, the reporting company may try to sell you monitoring service or credit scores.  I generally purchase my credit score once per year (cost of about $7.00) but you could use sites like www.creditkarma.com instead (beware of the non-stop sales pitches though).
  5. Verify the accuracy of your credit report by proactively spotting errors and cleaning up old accounts.  You should review the report in detail and contact the reporting company with any errors.  This is also a good time to scan the report for old accounts or accounts you no longer use.  You will be surprised by the ghost accounts still living out there in the spooky credit universe.

Pulling your credit every four months is a great habit to establish (not a ton of fun but not real difficult or time-consuming either).  In a future blog post, I’ll discuss freezing your credit to further protect yourself against identity theft.

Now That The Fiscal Cliff Was Avoided – How Does It Impact You?

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The American Taxpayer Relief Act of 2012 does the following:

  • Tax Rates – For most individuals it extends the lower federal income tax rates that have existed for the last ten years.  However, if you make more than $400,000 (or $450,000 for joint filers), your top rate will increase to 39.6%.
  • Capital Gain Rates – Again for those under $400,000 things stay the same as in the recent past.  For those in the new top bracket, you will be subject to 20% (instead of 15%) for long-term capital gains and qualifying dividends.
  • Alternative Minimum Tax (AMT) – If you didn’t pay enough under the “normal” tax system, you may be subject to a separate tax system with its own rates and tougher rules.  The Act permanently extends AMT relief by indexing the exemption for inflation in future years.  They also retroactively fixed the patch for 2012.  This is a big deal to tax accountants as the annual patch created many tax planning headaches.
  • photo-1Estate Tax – The Act permanently makes the exemption $5 million (indexed for inflation) for the estate tax and gift tax but increases the top rate from 35% to 40% beginning in 2013.  Portability is made permanent as well (the transfer of any unused exemption from deceased estate to surviving spouse).
  • Phaseout of Itemized Deductions and Personal Exemptions – Since 2010, personal exemptions and itemized deductions have not been subject to a phaseout or limitation.  Beginning in 2013, both will be subject to phaseout beginning at $250,000 ($300,000 for joint filers).
  • Others – There are a handful of other provisions and temporary extensions we won’t get into here.

Bottom-line, if make less than $250,000 ($300,000 for joint filers) your tax situation will not be dramatically impacted either way (a few caveats though, your payroll taxes will go up as the Payroll Tax Holiday of 2% was not extended and some of the provisions of ObamaCare go into effect which could impact you).  For the top earners out there making more than $250,000 ($300,000 for joint filers), you will definitely see your taxes climb on a several fronts.

How Will the Fiscal Cliff Impact You? Find Out Here.

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Much of the rhetoric coming out of Washington DC is white noise.  No one really knows what it means to them personally.  To give you an idea, let’s look at the following situation.

  • Married couple with two children under 17 (personal exemption of $3,900 times 4 = $15,600)
  • Combined wages of $100,000
  • No itemized deductions (meaning they take the standard deduction of $12,200 for a married couple filing jointly)
  • Taxable income equals $72,200 ($100,000 – $15,600 – $12,200)

According to the Tax Foundation (click here for the actual example), the increase in taxes including payroll taxes would be $7,650 more off the cliff or 53% increase over 2011 amounts.  Would this impact this family?  Yep no doubt $637.50 per month would lead to changes.

How can you calculate the impact on your family.  Follow the link here to the Tax Foundation’s calculator. The Tax Foundation is a non-partisan tax research group based in Washington, D.C.

Do All CFPs Have a Fiduciary Duty to You?

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NAPFA member Tim Decker recently authored an article explaining that many CFPs are salesmen and not always working in the best interests of those they serve.  This spurred my thinking about the question and the how you see my industry.

With all the credentials out there, it can become confusing as what each one means and offers.  Many stakeholders in the profession may actually benefit from the confusion.  The CFP credential does not imply the advisor has a fiduciary duty to you.  A fiduciary duty requires an advisor to act solely in the best interest of the client at all times. All Registered Investment Advisors (RIA) are held to this fiduciary standard.  However, you could have a CFP that is a broker which is different from a RIA and not held to a fiduciary standard.  Confusing?  Yes.

Broker-dealers are required to disclose that their “interests may not always be the same as yours.”  The broker has a duty to their home office but not to you.  They are held to what is called a standard of suitability.  The SEC’s website defines it this way, “In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.”  Notice your best interest is missing?

Ok – are you bored yet?  I am.  Bottom line is RIAs have a legally defined duty to act in your best interest and broker-dealers do not.  Easiest way to figure it out is to ask your advisor how they are compensated.  Generally, commissions = broker-dealer and no fiduciary duty and assets under management fees = RIA with fiduciary duty.

Ever Wonder How Much You Pay in ALL Taxes?

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With all the talk of raising taxes and the wealthy paying their “fair share,” have you thought about how much you pay in taxes?  It is not just income taxes but real estate taxes, sales taxes, gas taxes, hotel taxes, excise taxes, governmental fees, and license plate tabs.

How can you figure it out?  The American Institute of Certified Public Accountants (“AICPA”) has a new program called the Total Tax Insights™ Calculator.  The AICPA is the governing body of the US accounting industry.

According to the AICPA, “The Total Tax Insights calculator was developed by the AICPA as a public service to give taxpayers a clearer picture of the types and number of taxes they pay throughout the year and the estimated amounts of each. By linking federal tax rules with the country’s abundant and varied state and local tax conventions—including more than 20 of the most widely applied taxes—this first-of-a-kind online tool fosters greater public understanding of taxes and provides key insights to enhance one’s financial well-being.”

Wow do the taxes add up…..you’ll be surprised when you see the total.  At least knowing where we are at now, will give you a framework to gauge all the rhetoric over the coming weeks and months.