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Interaction of Survivor Benefits with Your Own Benefits

interactionSocial Security Survivor Benefits can be a critical lifeline for surviving spouses. The interaction of survivor benefits with your own benefits can be a bit confusing though. Does starting to receive one benefit affect your future amount of the other benefit? How about vice-versa? There’s a lot written about the topic in Social Security’s POMS manual, but it becomes very simple after you study it a bit.

The interaction of survivor benefits with your own benefits can be played out in one of two ways: either you take your own benefit first and the survivor benefit later; or vice versa, taking the survivor benefit first followed by your own benefit. We’ll look at each of these methods and review the interaction of survivor benefits with your own benefits.

Note: in our examples, we are assuming that the survivor benefit has been calculated correctly per the late spouse’s circumstances. See How is the Social Security Survivor Benefit Calculated? for more details on the calculations. It’s also important to understand that there is a difference between Survivor Benefits and Spousal Benefits. Survivor Benefits are only available once your spouse has passed away, while Spousal Benefits are only available during his or her lifetime.

Survivor Benefits First

In this case, you will be filing for your survivor benefit first, and then filing for your own benefit at some point in the future. You might do this if you’re under FRA when you become eligible for the survivor benefit and wish to delay filing for your own benefit until later. Or you want to delay your own benefit until it’s maximized at your age 70. Generally speaking, the only way this would make sense is if your survivor benefit is something less than what your own future benefit can be.

Filing for your Survivor Benefit has zero impact on your own benefit in the future. Receipt of the Survivor Benefit in prior years (from filing for your own benefit) isn’t even noted when you file for your own benefit later.

For example, Robin, a widow age 62, has a survivor benefit coming to her that would amount to $1,000 at her present age. Her own benefit will be $1,500 when she reaches FRA (at age 66 and 4 months), or it could grow to $1,950 if she waits until she reaches age 70.

Robin can take the survivor benefit right away and collect $1,000 per month for the next several years, and then file for her own benefit (at any point). There will be no reduction to her own benefit from her “early” filing for the survivor benefit.

Own Benefits First

This is the reverse of the above situation: you are filing for your own benefit first, and then later filing for the survivor benefit. This occurs when the survivor benefit will be something more than your own benefit – and of course the amount would be maximized when you reach FRA. In the meantime you are collecting your own benefit until you decide to file for the survivor benefit.

Jack is a surviving widower, age 63. He has a benefit based on his own record that will pay him $900 per month now, at his current age. He also has a survivor’s benefit that will pay him $1,200 per month if he waits until FRA to file for the survivor benefit.

When Jack files for his own benefit, it is reduced from the amount that could be paid to him if he waits until FRA, a total reduction of $225 (his FRA amount would be $1,125). When he later files for the survivor benefit, SSA does a calculation to determine the amount of benefit he will receive:

The reduced retirement benefit is subtracted from the total survivor benefit. That difference will become the survivor portion of the benefit, and the individual will also continue to receive his or her own benefit. The two are added together.

So in Jack’s case, the survivor portion of his benefit will be $1,200 minus $900 ($300). So Jack will receive one check each month in the amount of $1,200, which is made up of his own benefit ($900) plus the survivor portion ($300).

The bottom line

The bottom line is this: in either case, starting one benefit early has zero impact on starting the other benefit at a later date. So – if you find yourself in a position where you’re widowed and eligible by age for your own benefit and a survivor benefit you should definitely look into starting one or the other benefit. It’s likely that if you don’t do this, you’ll be leaving money behind that you should have received.

Frugality Versus “Buying on Sale”

loanI wanted to write a brief note on the difference between being frugal and frugal spending. I think it really boils down to the mindset of the individual. Frugality, in my opinion, is making smart purchases when necessary, and forgoing purchasing altogether if not. I also believe that frugality is making purchases that reduce the need to spend more in the future (i.e. buying a quality product for more money in order to reduce or eliminate repair expenses in the future).

Frugal spending, on the other hand, is buying something simply because it’s on sale or cheap – regardless of need. For example, many times we see items in the store advertised as “buy one, get one half off” or “2 for $5.00”. It can be easy to fall into this trap of buying these items and leaving the store feeling good about having saved money. Sometimes we may even think that because we bought two items and one was half priced, that we saved money. This only makes sense if we needed the two items to begin with.

Let’s take a look at the “buy one, get one half off” deal. This may make sense frugally if you truly need two of the items. Otherwise, if you only need one, purchasing the other for half price is still wasting money. The other argument is buying something simply because it was on sale. Again, if the item isn’t needed, then you’re saving zero money, and in fact, wasting money buying the item even if it’s on sale. In other words, if an item is normally priced $30, and you buy it on sale for $20 but don’t need it, you’ve still wasted $20. You haven’t “saved” $10. The fact that it was on sale is irrelevant. It simply makes you feel better for spending less. In this example, it’s only $10.

But, ten bucks is ten bucks.

As items get more expensive, this concept only grows larger. Bigger purchases just mean you’re wasting more money, not saving more. This applies to housing, cars, and even buying in bulk at the warehouse store. The good news is that we can start on the smaller items and build our self-discipline from there. By practicing frugality, we can lean to resist the urge to spend, even if it’s on sale.

Higher Education Expenses Paid From an IRA


Another way to pull funds from an IRA  without having to pay the 10% penalty is to use those funds for Qualified Higher Education Expenses (QHEE).  This comes up quite often, as parents are faced with the issues surrounding the dueling requirements of retirement saving and paying education expenses for the young ‘uns.

We’ve been talking about the components of Internal Revenue Code Section 72, and specifically here we’re talking about §72(t)(2)(E).  In this portion of the code, the provision is made for an IRA owner to withdraw, without penalty, amounts “not to exceed the Qualified Higher Education Expenses for the tax year”.

So, you may ask, what is a QHEE? Essentially, this includes tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.  Also included are expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

Room and board also qualifies, but only to the extent that it is not greater than the educational institution’s allowance for room and board, or the amount that the institution actually charges for room and board.  In addition, with the passage of the ARRA 2009, computing equipment and services (including internet service) can be included as QHEE.

Who is the student? For the purpose of this provision, the student can be the IRA account owner, her spouse, eligible children (generally dependents), and grandchildren.

Amounts withdrawn must be no more than the QHEE for the tax year, reduced by any additional tax benefits applied: 529 or Coverdell ESA account withdrawals; QHEE covered by HOPE or Lifetime Learning credits; or any grants or scholarships received.

How to De-clutter Physically and Financially

Throughout our lives we acquire things. This can start at an early age when we were given things as gifts and of course, the childhood tendency to collect and save many of the items that we came across.

As we mature into adults, the desire or habit to continue to hold onto things may still linger. This leads to garages, basements, closets, bedrooms, and even storage facilities full of stuff. It can also creep into our financial lives – as we acquire different savings accounts, retirement accounts, or purchase things that continue to be automatically deducted from our bank account (a monthly subscription to a gym, perhaps).

Decluttering can have a profound effect on our behavior. It can help lower the stress of trying to keep track of so many things. It can also free up time to enjoy the things in life that are important to us. Finally, it can make a big difference financially when we focus on things we need, and allocate our money to priorities that will benefit ourselves and others.

Here are some ideas that may help should you decide that decluttering may be beneficial.

  1. Ask yourself, how often do you use/enjoy your stuff. A good rule of thumb is that if it hasn’t been used in 6 months to a year – get rid of it. This includes items such as clothing, kitchenware, clothes, toys, etc. Of course, there will be some exceptions such as holidays decorations, etc., but those items can add up as well.
  2. Ask yourself if it’s a need or a want. Asking this question can help you focus on whether it’s necessary, or if you could realistically do without. This may help when contemplating getting rid of monthly subscriptions or infrequently used items such as cable TV, gym memberships, magazine/newspaper subscriptions, etc.
  3. Could someone else benefit more from the items? This past winter I looked in my closet and saw that I had five different jackets, of which I only wore two. Talk about a first world problem! Some jackets, along with other items not needed anymore, were donated to charity.
  4. Consolidate accounts. During our lives we have different jobs, get married, divorced, etc. This can lead to having multiple retirement, savings, credit cards, and other accounts. If possible, consolidate those accounts into as few as possible. This will allow you to focus on fewer accounts, and more easily manage your money since it’s in fewer places.
  5. Go paperless. This eliminates the clutter of paper statements filling up your file cabinets and attics. If you can, try to get online billing for bills and make your savings and investing automatic – through bank draft or paycheck deductions to your retirement. Think of this rhetorical question: How many people would save for Social Security if they had to physically write a check?
  6. Donate your items, don’t try to sell them. Except in very rare cases, trying to sell your stuff will only lead to hanging onto it longer – and creating more of a mess and clutter. And while you’re at it, skip the garage sale (both having and going to). From an economic standpoint, you’re much more financially better off if you donate your stuff and take the tax deduction. I’ve seen individuals put in over 30 hours of time setting up, monitoring, and working a garage sale to make only $100 or so. And in most cases, most stuff doesn’t sell and it’s donated anyway or worse, goes back into storage. What’s your time worth?
  7. Delay gratification. Much clutter and build-up of items we don’t use can be attributed to impulse buying. Avoid the temptation to buy on impulse. Infomercials, advertisements, and our peers are constantly bombarding us with the urge to buy more stuff. Take a few moments to gather your thoughts and ask if you really need the item you’re about to purchase. Is your money best utilized elsewhere (saving for retirement, college, emergencies, charity)? Paying yourself first helps delay gratification. By paying yourself first and making your retirement and other financial goals priorities, it leaves less money (and temptation) to spend on clutter.

What to do When You Owe Taxes

owe taxesFor all your good intentions, you’ve found yourself in a position where you owe taxes to the IRS that you can’t pay right away. All is not lost, there are ways to deal with this situation that can be helpful if you can’t pay. The IRS has several methods you can use to arrange a plan to pay the IRS taxes that you owe over time.

The most important part is to not ignore the situation, you need to take action and make arrangements. If you ignore it, like most things, your situation will only get worse, costing you more in interest and penalties.

Recently the IRS published a Special Edition Tax Tip 2017-09 which details what you can do in this situation. the actual text of the Tip follows below:

Tips for Taxpayers Who Owe Taxes

The IRS offers a variety of payment options where taxpayers can pay immediately or arrange to pay in installments. Those who receive a bill from the IRS should not ignore it. A delay may cost more in the end. As more time passes, the more interest and penalties accumulate.

Here are some ways to make payments using IRS electronic payment options:

  • Direct Pay. Pay tax bills directly from a checking or savings account free with IRS Direct Pay. Taxpayers receive instant confirmation once they’ve made a payment. With Direct Pay, taxpayers can schedule payments up to 30 days in advance. Change or cancel a payment two business days before the scheduled payment date.
  • Credit or Debit Cards. Taxpayers can also pay their taxes by debit or credit card online, by phone or with a mobile device. A payment processor will process payments.  The IRS does not charge a fee but convenience fees apply and vary by processor.

Those wishing to use a mobile devise can access the IRS2Go app to pay with either Direct Pay or debit or credit card. IRS2Go is the official mobile app of the IRS. Download IRS2Go from Google Play, the Apple App Store or the Amazon App Store.

  • Installment Agreement. Taxpayers, who are unable to pay their tax debt immediately, may be able to make monthly payments. Before applying for any payment agreement, taxpayers must file all required tax returns. Apply for an installment agreement with the Online Payment Agreement tool.

Who’s eligible to apply for a monthly installment agreement online?

  • Individuals who owe $50,000 or less in combined  tax, penalties and interest and have filed all required returns
  • Businesses that owe $25,000 or less in combined tax, penalties and interest for the current year or last year’s liabilities and have filed all required returns

Those who owe taxes are reminded to pay as much as they can as soon as possible to minimize interest and penalties. Visit for all payment options.

IRS YouTube Videos:

Traditional IRA v. Roth IRA – Compare & Contrast

What’s the difference between the two types of IRAs?  And what is similar?

compare-contrast-by-suvodeb-croppedYou probably know a little bit about this subject – like one IRA is deductible on your income taxes, and the other one has some kind of tax benefit… but the differences are hard to understand, and can be even harder to explain!  Below are the major differences between the two, followed by the similarities.  This discussion is liable to be useful as you consider which kind of IRA is best for you (and both could be best for you, at different times in your life).

Differences Between Traditional IRA and Roth IRA

Deductibility is a feature of the Traditional IRA (Trad) that is not available in the Roth IRA (Roth).  What this means is that, subject to the limits we discussed here, you may be able to deduct the amount of your contribution to your Trad from your Gross Income in the year of the contribution.  When the Traditional IRA was originally introduced in 1974, the deductibility feature was not included.  This was added in 1986, and is one of the primary reasons that Trads have remained as popular as they are to this day.  At the time of the introduction of the deductibility feature, very few companies offered 401(k) plans so the Trad offered one of the only tax shelters available to nearly every taxpayer.

Tax treament is another major difference between the two kinds of IRA.  The Trad’s distributions are always taxable (if not rollover distributions) as ordinary income, while the Roth’s distributions are always tax-free (as long as they meet the requirements, such as after age 59½).  What is also very different about the two is that your contributions to a Roth are always available for withdrawal at any time for any reason – tax free.  The growth in the Roth (interest, dividends, capital gains) would be taxed and subject to penalty if withdrawn for an ineligible reason, though.  The Trad does not have such a provision.

Required distributions are the final major difference covered here.  The Trad has Required Minimum Distributions (RMDs) that must begin at the owner’s age 70½, while the Roth has no requirement for distribution.  In other words, the Roth IRA never needs to be distributed during the IRA owner’s life, while the Traditional IRA must be distributed beginning at the owner’s age 70½.

Similarities Between Traditional IRA and Roth IRA

Income requirement. A component of the requirements of both the Trad and the Roth is that the holder (or the holder’s spouse) must have earned income in the year of the contributions.  The income must be at least equal to the total of all IRA contributions for the year.  This includes two additional types of contributions: spousal contributions and non-deductible contributions.

Spousal contributions are allowed for both the Trad and the Roth, and they essentially allow a spouse with income to contribute to the IRA (either variety) of the spouse who either does not have income, or whose income is below the maximum available contribution for the tax year.  The contributions are limited, however, to the total of both spouses’ earned income for the tax year.

Earned income, for the purposes of IRA contributions, includes wages, salaries, tips, commissions, self-employment income, or alimony (or separate maintenance payments).  Not included as earned income are earnings and profits from property (rental or royalty), interest income, dividends, pensions, annuities, deferred compensation (such as 401(k) distributions), certain non-participatory partnership income, and capital gains.

Non-deductible contributions to a Traditional IRA are allowable when your MAGI is above the limits (described here).  In essence, if your income is too high to make either a Roth contribution or a deductible Trad contribution, you are allowed to make a non-deductible contribution of up to the maximum amount allowable for the year into your Trad IRA.  These contributions are after tax, and so when distributed there will be tax only on the growth that has occurred on that contribution.  Non-deductible contributions are a way to defer tax on the growth of funds in an account, and are also available as a spousal contribution.

Tax Year Specification. Trad and Roth contributions must be made for a specific tax year.  That is, since there are strict limits on the amounts that can be contributed, you must specify the tax year of the contribution to your IRA.  You are generally allowed to contribute for a tax year beginning on January 1 and ending on the tax due date for the year (generally April 15 of the following year).  In other words, for 2017, you may make your 2017 contribution to your IRA at any time between January 1, 2017 and April 17, 2018.

The same deadline applies to establishing the account as well.  You can even file your tax return early, indicating a contribution to your Trad IRA (and deducting it from your gross income) before you make the contribution!  Just make sure that you do go ahead and make the contribution… the IRS has very little sense of humor about things like that!

Penalty for withdrawal applies to ineligible distributions from either type of account.  A 10% penalty will be applied to any distribution from an IRA of either variety that is not specifically allowed under §72(t), above and beyond the ordinary tax that would be applied to the distribution.

Save Money with an Energy Audit

loanWhen we hear the word audit it’s often associated with a negative connotation. However, an audit does not necessarily have to be a bad thing – especially when it can save you some money. I’m talking about having an energy audit done at your home or business.

What an energy audit can do is let you know how much energy and utilities your home is using as well as let you know how much energy and utilities your home may be wasting. Of course, wasted utilities means wasted money. Let me give you an example from my perspective.

About 5 years ago my wife and I decided to have an energy audit done. We called our local utility provider and inquired about the specific programs that were available. Our utility company was more than willing to point us in the right direction and they recommended a third-party contractor that was qualified to do an energy audit.

The good news is that if we had the audit done and made the suggested improvements to our home, the utility company had a program where there would cover some of the costs of the improvements. We decided to have the audit done.

A few weeks later, the audit company came and did the audit. They ran an analysis of our home energy use, water use, etc. They also provided some free tips as well as some free items to help right away. These included sink aerators to reduce the water flow from our faucets and showers. I also went around and replaced all of the light bulbs with energy efficient bulbs.

Next came an estimate of the work that needed to be done. While the bill was a bit high, we did remember that our utility company would help with some of the costs. We agreed to have the improvements made. The improvements included insulating our basement and crawl space as well as blowing insulation into our attic. This increased the R-value substantially and we could feel the difference almost immediately (this was done during one of the hottest weeks on record).

Here’s the best part. When we did the break-even on the costs, it would take just over 3 years for the cost of the improvements to be paid for by the annual savings in utilities. Now, the improvements have not only paid for themselves, but the difference in savings allows us to allocate that money elsewhere (to retirement or college savings). Our home is much more comfortable in the summer and winter months, and we’re saving money.

The Remarriage Rule (Possibly the Dumbest Social Security Rule)

remarriageIf you’re familiar with the remarriage rule for Social Security survivor benefits, you likely know what I’m talking about. This is, in my opinion, quite possibly the dumbest rule that we have in the whole Social Security system. There are several really dumb rules, but this one takes the cake.

Briefly, here’s the remarriage rule: If you are a widow or widower who is otherwise eligible for survivor’s benefits from your late spouse, you must be unmarried as of reaching age 60 to actually receive the benefit. If you remarried even one day before reaching age 60 (and remain married) you are not eligible for survivor benefits. If you remarried the day after your 60th birthday, you’re still eligible to receive the survivor benefits based on your late spouse’s record.

Example of remarriage rule

Joan and Richard were married for 27 years when Richard died. Joan was 57 years old at the time of Richard’s passing. Upon reaching age 60, Joan will be eligible to receive a survivor’s benefit based on Richard’s record.

Joan met David when she was 59 years old, and the two plan to marry soon. The timing of this marriage is critical to Joan, as explained above. If Joan remarries before she reaches age 60, she loses her eligibility to receive the survivor’s benefit while she’s married to David. If she waits until some time after her 60th birthday, Joan will retain eligibility for the survivor benefit.

Likewise, if Joan’s (early) marriage to David ends, either through divorce or David’s death, Joan’s eligibility for the survivor benefit based on Richard’s record will be restored. In fact, if David has died, as long as he and Joan were married for at least 1 year (and still currently married upon David’s passing), Joan will be eligible for survivor benefits on either Richard’s or David’s record, whichever is more advantageous to her.

What does this rule protect?

What exactly are we trying to resolve with this rule? I can’t for the life of me figure that one out – except that apparently we want to provide disincentive for widow(er)s to remarry prior to age 60. If anyone in readerland has other ideas for the value of this rule, I’d love to hear them!

I doubt seriously if this particular rule results in much benefit to the bottom line for Social Security as a system. But what it does is to cause much confusion for individuals who could be affected by it. I’ve heard from more than one individual who made changes to their remarriage plans because of the rule.

Plus, I’ve also heard from multiple individuals who were planning a quiet divorce in order to get around the rule. This could be done, restoring eligibility, and then after at least 12 months has passed the two could be remarried again (as long as the widow(er) is over age 60).

In a system that’s fraught with much confusion and complexity, it’s my opinion that this is a rule we could definitely do without, and no one would be harmed for the lack of it. What do you think?

Axioms for Graduates

As the spring semester comes to end for high school and college graduates, I wanted to perhaps give some unsolicited advice as these newly christened adults start out on their own and begin making life choices and financial decisions that will impact their future.

  1. Resist the temptation to spend everything you make. Instead, do your best to save as much as you can. In fact, it’s possible for a recent college grad to go from making hardly anything during their college years to a decent starting salary. Pay yourself first. Establish an emergency fund of 3 to 6 months of living expenses and save to your 401k and IRA. It’s absolutely possible to save $23,500 annually ($18,000 to the 401k and $5,500 to the IRA). In ten years, without interest or compounding, you’ll have saved close to a quarter-million dollars. All by the time you’re between the ages of 28 and 31. It’s simply a matter of what you prioritize.
  2. You don’t need a new car. Throwing money away with a car payment or worse, a lease payment isn’t necessary. Save up and buy a nice used car with cash, or simply keep driving the vehicle you have. Depending on where you live, you may not need a car at all. Public transportation, riding a bike, or carpooling are other ways to forgo making a payment on a depreciating asset.
  3. Live below your means. Simply put, this means living on less than you make. Scrutinize every expense. Ask yourself if it’s necessary to live, or if it’s just a want. Do you need to go out for dinner or would you be better off grocery shopping and making a cheaper meal at home? Is cable TV necessary or will an inexpensive HDTV antenna fit the bill? Do you  that smartphone or phone plan? Spending less than you make and living below your means puts you at a huge financial advantage both now and later in life.
  4. Avoid debt. Debt can get you into trouble – and fast. Should you acquire and use a credit card, pay it off immediately. Having consumer debt is just another way of saying you couldn’t afford it in the first place. The only debt that you should realistically have is your home – and even then, don’t buy more than you can afford. Consumer debt compounds and works against you. Before buying anything with a credit card, ask yourself if you really need it, and if you can pay it off immediately. If the answer is no to either question, don’t buy it.
  5. Ignore the Joneses. You may have heard of the phrase “keeping up with the Joneses”. Whatever the last name of your friends, colleagues, or acquaintances, try your best not to keep up with their lifestyle. Often you will see these people with new cars, new houses, and all sorts of new “stuff”. On the outside, all of this “stuff” may give the impression of success. In reality it’s often masking what they are keeping up with – debt payments. The Joneses have the appearance of success, wealth, and freedom when in fact they are slaves to their debt and living paycheck to paycheck. Find friends that share your view on finances and frugality. You’ll enjoy their company more and find it less stressful to associate with them.
  6. Invest wisely. When you save to your 401k and IRA, choose low-cost, well-diversified index funds. You can’t control markets and you can’t control the economy. You can control your expenses. Low-cost index funds or ETFs provide excellent diversification among asset classes while keeping your expenses low. Once your portfolios are set up, leave them alone! Check them once a year at most. Time is on your side. Your human capital is huge (why you went to college) but your financial assets are scarce (why you can afford to save so much). Save as much as you can and let time do the rest.
  7. Focus on experiences, not stuff. Much of what you buy loses its luster after a short period of time (a new car, for example). Focus on enriching yourself with experiences. Take time to read that book you’ve always wanted to read. Learn that new hobby or leisure activity you’ve been interested in. Explore new places that don’t cost a lot to experience.
  8. Be grateful. Make it a habit to be grateful for what you have, where you are, and what you’ve been given. The more appreciative you are of what you have, the more likely you’ll be happy with your life and what you have. The simple please and thank you your parents taught you is just as important when you’re an adult.
  9. Give back. Chances are, you didn’t get to where you are on your own. A parent, friend, colleague, or someone you don’t even know was beneficial to your success. Give back. Pay it forward. This could be through service work, volunteering, or making charitable donations to a local charity or someone in need. Donate “stuff” you no longer need or use. It will benefit someone else. And when you give, give without expectation of receiving something back and try to give in secret.

Good luck!

IRS’ Offer in Compromise

compromiseYou’ve heard the ads on radio and TV:

Settle your debt with the IRS for pennies on the dollar! Our staff of former IRS employees will work with you and make your problems go away!

They’re talking about an Offer in Compromise. It’s a real thing, and it is possible to settle your debt with the IRS for less than you owe. But it’s nowhere near that simple. And it’s certainly not automatic, nor is it available to everyone. Recent information from the IRS indicates that approximately 60% of all requests for an Offer in Compromise (OIC) are not successful in reducing the amount of the tax owed. The good news is that 40% have been accepted, and the taxpayer was allowed to compromise on the tax they owe.

If you are successful with an Offer in Compromise, you’re truly in dire straits, financially speaking. You need to prove to the IRS that you have no (or severely diminished) capacity to pay, either from your wages or assets (such as your retirement plans, bank accounts, or other assets). This review of your wherewithal is rigorous. The IRS will impose its will on how you budget – no paying off other debts in advance of the IRS debt, for example. And you may have to give up certain lifestyle items that you have become accustomed to as part of this budgeting process. If it turns out that you have the capacity to pay the debt, instead of compromising you’ll wind up with a payment plan to pay the full amount.

It’s not a fair system; it’s based on how collectible the debt is, not on whether it’s applied fairly to all taxpayers. These factors aren’t divulged in those ads – odd how that works.

Recently the IRS issued a Special Edition Tax Tip 2017-07 that details some information you need to know about how the Offer in Compromise works, in addition to several resources to help you decide if this is something that can help in your situation. The text of the Tip follows:

IRS Explains How Offer in Compromise Works

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

  • In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit for information on Payment Plans – Installment Agreements.
  • A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
  • The IRS has an Offer in Compromise Pre-Qualifier tool on Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
  • Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.

Additional IRS Resources:

IRS YouTube Videos:

Book Review: Financial Advice for Blue Collar America

blue collarRecently I had the privilege to read my colleague Kathryn B. Hauer’s book, Financial Advice for Blue Collar America. Kathryn comes from a blue collar family herself. Her father was a steelworker, and her mother a nurse in the days when nursing didn’t require a college education. With this experience, Kathryn has always had a passion for helping folks with similar backgrounds. This book is an outgrowth of that passion.

“Blue collar” used to mean difficult life and circumstances for the worker and his family.  These careers have transitioned in the past several decades, however. These days blue collar careers include highly-trained, very well paid positions. These careers range from carpenters, ironworkers and pipefitters to police officers, other safety workers and enlisted military personnel. The pay ranges for many of these careers can be higher than many white collar workers, without the drag of student loans.

Kathryn Hauer wrote this book in response to the opportunities that folks in blue collar careers have these days. Throughout the book, she points out how the standard of “college is necessary to succeed” no longer applies across the board. Opportunities for new entrants into these careers have never been more abundant nor promising than they are today. With these opportunities comes the need for financial advice to folks who haven’t traditionally sought advice.

The problem with the traditional delivery of financial advice is that many (most?) financial advisors do not have an understanding of the culture. Without this upbringing seasoning their experience, many financial advisors have difficulties relating to this group in a meaningful way. Hauer demonstrates her deep understanding of the issues facing blue collar workers throughout her book. She has blue collar experience in her own personal background, having served in the military, as well as a stint building concrete nuclear waste storage facilities prior to her current work as a financial advisor.

Financial Advice for Blue Collar America answers the call for this advice, providing sound recommendations in context with the worker’s background. Examples fit in with the common financial wants and needs of the blue collar worker. The advice given is a good place for anyone, in any career, to start, but the context really makes it come to life for someone in a blue collar job. The appendices provide a wealth of useful references to continue the educational experience.

If you are currently working in or considering a blue collar career, you can definitely benefit from Hauer’s book. You’ll find the material that can get you started toward financial success, as well as provide yourself and your family with a great foundation of knowledge as you plan for future financial needs. Kathryn Hauer does a great service to America’s blue collar workers with this book, bridging the gap to give wonderful advice in a style that meets their needs.

As an advisor I learned quite a lot about issues that I hadn’t considered that are paramount for blue collar workers. I never realized how this group’s needs weren’t being met with our traditional delivery of advice. I’ll use this knowledge in the future as I attempt to provide similar service to blue collar America in our practice. This is an important component of our society that has been left to fend for themselves (largely) by the traditional financial planning community. I hope I can help – as I know Kathryn does, every day. Thank you, Kathryn!

Index Mutual Fund or ETF?

Over the last few years exchange-traded funds (ETFs) have greatly increased in popularity. As of 2016, there was approximately $2.9 trillion held in ETFs globally. Because of their growing popularity with financial advisers and individual investors alike, understanding the nuances of ETFs is critical in order for advisers to be better equipped to meet the ever-changing needs of their customers.

ETFs are comprised of a portfolio securities designed to replicate a particular index. Common examples of indices that ETFs replicate are the Dow Jones Industrial Average, the Standard & Poor’s 500 index, the Wilshire 5000 Total Market Index, and Barclays Capital US Aggregate Bond Index. Like many stocks, bonds, and mutual funds, ETFs can also be tracked daily in many financial publications and online.

Due to the lack of trading in the portfolio there are very little capital gains distributions in which investors must pay taxes. Because of this low turnover, investors rarely need to worry about the tax implications of security fluctuations in the portfolio.

Index Mutual Fund or ETF?

Although there are some similarities between index mutual funds and ETFs, there are some subtle differences to be noted.

  • ETFs can be traded throughout the trading day just like individual stocks. Index mutual funds are purchased or redeemed at the end of the trading day.
  • ETFs can be purchased on margin and sold short. Index mutual funds do not allow this.
  • Generally, ETFs are inexpensive to own. Since most ETFs are passively managed (they track an underlying index) there is little management once the portfolio is established. Expense ratios are generally lower than mutual funds, although some index mutual funds will have similarly low expense ratios as well.
  • Because of the low turnover an “in kind” exchanges in the portfolio, ETFs are extremely tax efficient. This can be advantageous for non-qualified (non-401k, non-IRA) accounts. Index mutual funds to have some tax efficiency, however they may not be as efficient due to transaction costs, index composition changes (a company leaving/joining the index), and fund cash flows.
  • In qualified accounts, there is little difference in tax efficiency between ETFs and index mutual funds. In non-qualified accounts, ETFs provide more tax efficiency.
  • Since ETFs trade like stocks, they may have trading commissions when they are bought and sold. Generally, index mutual funds are no load. However, some custodians offer commission-free ETFs.
  • ETFs may trade at a discount to the portfolio’s net asset value (NAV) while index mutual funds will trade at NAV.

If you’re considering an index mutual fund or an ETF and need some clarity, don’t hesitate to contact us.


Calculating your Required Minimum Distribution

minimum distributionRecently I wrote about how the first Required Minimum Distribution (RMD) has a due date of April 1 of the year following the year that you reach age 70½. Today we’ll review the method of calculating that RMD, and provide you with a tool to actually do the calculation.

The discussion that follows (as well as the link to the calculator) illustrates the procedure for calculating Required Minimum Distributions (RMDs) for an IRA, 401k, or other qualified retirement plan that you own. Inherited IRAs and other accounts follow a different procedure which we’ll cover in another article. These RMDs for your own, non-inherited accounts are required when you reach age 70½.

Calculating the Required Minimum Distribution

Determine your age in years at the end of the previous year. For example, if you were born on July 10, 1943, your age in years on December 31, 2016 was 73.

Next, get the balance of your IRA account (or accounts) as of the same date, December 31 of the previous year. Continuing our example, let’s say your balance on your year-end statement for your IRA was $104,804.

With your age in years (from the first step), go to IRS Table III, and look up the distribution period for your age in years. This number is an actuarially-calculated expected distribution period for your age.

IRS Table III is specifically for IRA owners who are either single, are married and their spouse is less than 10 years younger, or are married and their spouse who is more than 10 years younger is not the sole beneficiary of the IRA. If your spouse is more than 10 years younger and not the sole beneficiary of the IRA, you must use IRS Table II (find this at in Publication 590, Appendix B).

Looking at Table III, we find that the distribution period for age 73 is 24.7 years.

Now, take the balance from last year’s year-end statement ($104,804) and divide by the distribution period (24.7):

$104,804 / 24.7 = $4,243.08

This amount, $4,243.08, is required to be distributed from your IRA by December 31 of the current year. The only time that April 1 of the following year is your RMD deadline is for the year that you reached age 70½.

You must go through this procedure each year that you have an IRA (or other plan, such as a 401k) after you reach age 70½. With IRAs, you’re allowed to combine all plans together and take a single RMD based on the total balance if you wish; with 401k, 403b and other employer plans you must calculate and take the RMD separately for each account.


The Calculator

In the page with Table III, you’ll find an RMD Calculator that you can use to determine your RMDs. Just scroll down past the table, and you’ll find the calculator.

Read the Fine Print

As I was reading the paper the other day I came across an ad for a pretty prominent mutual fund broker-dealer. The ad was touting the investment acumen and performance of its mutual funds and fund managers. It mentioned how many of its funds had outperformed category medians over a certain span of years.

Then I read the fine print.

The fine print stated the following:

  • Rankings are based on total return and do not include the effects of sales charges
  • The rankings were based on the funds’ Class Z shares.
  • Past performance does not guarantee future results.
  • In providing these materials the company is not acting as your fiduciary as defined by the Department of Labor.

Let me summarize what these fine print statements mean. First, sales charges reduce returns. In other words, their rankings didn’t include the expenses associated with commissions earned by the salespeople that sell the funds. This would inevitably lower performance and I would argue, drop their rankings considerably.

Second, Class Z shares are generally offered only to the fund company’s employees, large institutional investors, or they may not be available altogether (the fund’s share class is closed to new investors). In other words, a typical investor has little chance of getting them.

Third, past performance is not a guarantee of future results. This statement I can agree with – and kudos to the company for mentioning it. However, the company also said most of their funds beat the category median – the midpoint of all fund returns in that category. Notice the company did not say their funds beat the benchmark – which is generally an index.

Fourth – their comment on not being fiduciaries is self-explanatory. In other words, keep your best interests in mind – because this company won’t. Their words, not mine.

What is interesting about this ad is that it was simply an ad. There is other, more nuanced fine print in company prospectuses. Read carefully, and do your due diligence when investing. If that seems too daunting, work with a fiduciary that will be comfortable explaining things simply, and in bold print.

The Sharing Economy and Taxes

sharing economyIf you rent out a room to others using airbnb or a similar site, if you drive your car for Uber (or an alternative), or if you otherwise take part in the sharing economy, the money you earn may be taxable. (Psst: Even if you get paid in cash without any record of the transaction, you still may be liable for income tax on the earnings.) This is true whether this is a one-time thing or if you treat it like a side-gig. Plus, if you don’t earn cash but rather get something else of value in exchange (such as a barter transaction), there is likely taxable income on the transaction.

Recently the IRS issued a Tax Tip 2017-39 which addresses the sharing economy and taxes. Given that these transactions are often a minor side action for a lot of participants, some folks may not realize that this income is taxable.

Any time you take monetary value in exchange for goods and services, the value you’ve received is gross income. There may be deductions allowable depending on what is provided, which would potentially reduce the taxable income on the transaction. Deductibility of expenses related to renting your personal home can be complicated, so you might want to bone up on those rules. See below for the actual text of the Tip from the IRS on taxes in the sharing economy:

Keep in Mind These Basic Tax Tips for the Sharing Economy

If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or a number of other goods or services, they may be involved in the sharing economy. The IRS now offers a Sharing Economy Tax Center. This site helps taxpayers find the resources they need to help them meet their tax obligations.

Here are a few key points on the sharing economy:

  1. Taxes. Sharing economy activity is generally taxable. It does not matter whether it is only part time or a sideline business, if payments are in cash or if an information return like a Form 1099 or Form W2 is issued. The activity is taxable.
  2. Deductions. There are some simplified options available for deducting many business expenses for those who qualify. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which was 54 cents per mile for 2016.
  3. Rentals. If a taxpayer rents out his home, apartment or other dwelling but also lives in it during the year, special rules generally apply. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.
  4. Estimated Payments. The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year to cover their tax obligation. These payments are due on April 15, June 15, Sept. 15and Jan. 15. Use Form 1040-ES to figure these payments.
  5. Payment Options. The fastest and easiest way to make estimated tax payments is through IRS Direct Pay. Or use the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). 98005
  6. Withholding. Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. File Form W-4 with the employer to request additional withholding. Use the Withholding Calculator on

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

IRS YouTube Videos:

Your Taxes in the Sharing Economy – English | ASL

Tax Bill Too High? Try This Trick

loanSome individuals get the nice surprise of a big tax refund every tax year (if this is you, don’t be too happy – you’ve been lending Uncle Sam money interest free). Other folks get the unpleasant surprise of having to write a big check to Uncle Sam. For the latter individuals, there may be a way to lower their tax bill and save more for retirement.

Let’s look at an example. Assume an individual has a tax bill of $4,000 and they want to reduce this. Naturally, there are other deductions they may qualify for, but in this case, they’ve exhausted all other options except this one: saving to their 401k. Let’s also assume this individual’s marginal tax rate is 25%. The individual can take their tax rate and divide it into their tax liability for the year – in this case $4,000 divided by 25%. This comes to $16,000. Thus, if the individual wants to lower their tax liability effectively to zero, they can save $16,000 to their 401k on a pre-tax basis. This gives the effect of reducing tax liability and saving for retirement.

In another example, let’s say a couple has a liability of $9,500 and is in the 28% bracket. To reduce their liability to near zero (all else being equal) they can save $33,928 to a pre-tax 401k. Now you may be thinking that amount is way over the annual contribution limit. That’s true – on a per person basis. In other words, a married couple could split this in half and save $16,964 each to their 401ks.

This is an excellent way of having your money do double duty for you. You can reduce your tax bill and still save for retirement. In many cases, it may turn out that an individual or couple will pay less tax overall on the money deferred to the 401k since they are deferring it from a higher bracket today to a potentially lower one in retirement.

Naturally, should you have questions on this strategy, consult a competent tax professional.

April 1 is the deadline for first RMD

photo taken april 1If you have reached age 70½ in 2016 and you have an IRA or other retirement plan (such as a 401k) you must take a distribution from the account by April 1, 2017. This special deadline is applicable only for your first year of required distributions. Every subsequent year you must withdraw your required distribution by the end of the calendar year.

Recently the IRS issued a Newswire (IR-2017-63) which provides more information about this upcoming deadline. The complete text of the Newswire follows below.

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions

The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017.

Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.

More information on RMDs, including answers to frequently asked questions, can be found on


Taxability of Social Security

taxation of social securityIn a comment on the article last week (Adjusting Withholding Saved 44% of the Tax Bill), a question came up about the taxability of Social Security benefits. It can be complicated, hopefully this explanation will help you understand taxability of Social Security a bit better.

Social Security is taxable at three different levels, based upon how much other income you have and your income tax filing status.

First, you need to calculate your Provisional Income – which is 50% of your household Social Security benefits plus all of your other taxable income, plus any tax-free income.

Next, there are two breakpoints in the taxation – if your filing status is Married Filing Jointly, the breakpoints are $32,000 and $44,000. If your filing status is Single or Head of Household the breakpoints are $25,000 and $34,000. These breakpoints are the same if your filing status is Married Filing Separately and the couple does not live together during the tax year. If your filing status is Married Filing Separately and the couple lives together, there are no breakpoints; in this case your Social Security is always 85% taxable.

The Calculation

Now it gets complicated – if your Provisional Income (defined above) is less than the first breakpoint based on your filing status, then none of your Social Security is taxable.

If your Provisional Income is greater than the first breakpoint but less than the second breakpoint, the amount greater than the breakpoint is 50% taxable. The amount under the first breakpoint is not taxed.

If your Provisional Income is greater than the second breakpoint, the amount above the second breakpoint is 85% taxable. This amount is added to the part that is 50% taxable (between the two breakpoints). The maximum amount that is taxable is 85%.

So for certain income levels, there is a sliding scale of the rate of taxability, ranging from 0% up to 85%. The chart below shows the taxation rates for a few levels of Social Security benefits with various income ranges. The chart shows only Married Filing Jointly status.

taxability of Social Security

As you can see, as the amount of your Social Security benefit increases, the window of taxation between 0% and 85% widens.

Taxability of Social Security Calculator

Below is a calculator I’ve developed to show you the amount of taxable Social Security benefits depending on your filing status and your other income amounts. Let me know if you have questions about this.


How we think and the way that we perceive information can have a powerful impact on our decisions. Often, the first piece of information we receive is what we will use for future reference when making decisions – and whether we feel those decisions are good or bad. This is referred to anchoring or anchoring bias and is very well described in Daniel Kahneman’s book, Thinking, Fast and Slow.

Let’s look at an example. Recently, I had a student ask me regarding his benefit package and starting salary he was offered from a potential employer. This student will finish a master’s degree in May and this will be the first “real” job the student will have out of school. Initially, the employer was talking to the student about project management and leadership opportunities. When it got down to brass tacks, the company was talking about a potential starting salary of approximately $140,000 annually. During this time another company was interviewing the student and was expecting to make an offer to him as well.

About a week later, the first company called the student and said they would like to offer him an entry level position starting at $90,000 annually. Initially, the student was dismayed and disappointed. How could they be talking just a week ago about $140,000 and then come back with an offer for $50,000 less? Needless to say his disappointment was evident when he was discussing his options with me. I told him that it can be tough to entertain an offer for $50,000 less than he was expecting when he was anchored to $140,000. In my head I was thinking, “Are you kidding me? You’re disappointed at ninety grand?”

Along with some other things, I mentioned to the student to think about job location, advancement and ultimately what would make him happy. He also mentioned that he was waiting to hear from the second company and that may impact his decision as well. It did.

A few days later I asked how thing were progressing and he said he had some wonderful news. He was smiling and couldn’t wait to talk until after class. When the time came, he said he had made a decision. He had chosen the first company. I was surprised. I was thinking surely the second company had come in with something bigger and better. As it turns out, the second company offered $20,000 lower than the first company. His anchoring point had changed.

What was once dismay at an offer $50,000 less than what he was expecting turned out to be $20,000 more than what he could get elsewhere. He was elated! Additionally, it also meant he could still live at home, save a ton of money, and get out of debt in no time. He left class that day happy with his first offer and excited to be a part of the company – even though they had cut his starting salary by $50,000! Since his anchoring point had changed (he was now anchored to $90,000) when another offer that came in was less, he was happy with the first offer.

Anchoring affects us in other ways as well. We can get anchored to stock returns, salaries, and many other financial and non-financial aspects. What may help in our decisions is to understand that we are susceptible to this cognitive bias and try to understand where our reference point is – the original thing to which we’re anchored. From there, we can try to consider other factors, such as what will make us happy, how the decision will affect our future, our family, and goals.

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