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Dependents and Exemptions

A young child

When filling out your tax return this year, you may have questions about dependents – such as who can be claimed on your return.  Claiming a dependent can have a significant impact on your return, including increasing exemptions and possibly increasing certain credits like the Earned Income Credit and various others.

The IRS recently published Tax Tip 2016-08, which lists ten facts about dependents and exemptions.  Below is the list of facts, along with some additional information that I’ve included (my comments are in italics):

Exemptions and Dependents: TopTen Tax Facts

Most people can claim an exemption on their tax return. It can lower your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

  1. E-file Your Tax Return.  Easy does it! Use IRS E-file to file a complete and accurate tax return. The software will help you determine the number of exemptions that you can claim. E-file options include free Volunteer AssistanceIRS Free File, commercial software and professional assistance.
  2. Exemptions Cut Income.  There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,000 for each exemption you claim on your 2015 tax return. (So a family of four can claim exemptions of up to $16,000!)
  3. Personal Exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
    • Had no gross income,
    • Is not filing a tax return, and
    • Was not the dependent of another taxpayer.
  4. Exemptions for Dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Get Publication 501 on Just click on the Forms & Pubs tab on the home page.Essentially, the dependent must either be a qualifying child or a qualifying relative. To be a qualifying child, the following tests must be met:
    • The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
    • The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.
    • The child must have lived with you for more than half of the year. There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The child must not have provided more than half of his or her own support for the year.
    • The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

    If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person to find out which person is the person entitled to claim the child as a qualifying child.

    To be a qualifying relative, the following tests must be met:

    • The person can’t be your qualifying child or the qualifying child of any other taxpayer.
    • The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or (b) must live with you all year as a member of your household (and your relationship must not violate local law). There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The person’s gross income for the year must be less than $4,000. There is an exception if the person is disabled and has income from a sheltered workshop.
    • You must provide more than half of the person’s total support for the year. There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children.

    See Publication 501 for more details on dependents if you have additional questions.

  5. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

    Visit for more on these rules.

  6. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
  7. Dependents May Have to File.  A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.
  8. No Exemption on Dependent’s Return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.
  9. Exemption Phase-Out.  The $4,000 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
  10. Try the IRS Online Tool.  Use the Interactive Tax Assistant tool on to see if a person qualifies as your dependent.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on

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What to do with an extra 1,000 dollars

One Thousand Dollars!

One Thousand Dollars! (Photo credit: The Consumerist)

I occasionally get this question – especially around the time of tax refunds.  When someone comes up with an extra $1,000, they often want to know how to best use that money wisely to help out their overall financial condition.

Of course this question has different answers for different situations.  I’ll run through several different sets of conditions that a person might find him or herself in, and some suggestions for how you might use an extra $1,000 to best improve your financial standing.  (It’s important to note that you don’t have to have an extra $1,000 lying around to use this advice – you could have an extra ten or twenty or fifty bucks a week and put it to work with the same principles.)  The point is to find money that isn’t being spent on something critical, and put it to work for you!  Even small steps amount to wonders.


If you have consumer debt, including credit card debt, auto loans, student loans and the like, it makes the most sense to use this money to bring down your overall debt balance or eliminate it if you can.

If the interest rate on your debt is greater than about 3% or 4%, you aren’t likely to find a better way to invest an extra $1,000 than to eliminate some of your interest costs.  This is because debt is a negative investment – when you have debt that carries an interest rate of 8%, year over year while the debt balance is there, you are “earning” a –8% return on that money.

Some folks recommend eliminating all debt, but that’s a bit impractical in today’s world.  Low-cost mortgage debt and auto loans can be good uses of leverage – especially mortgage debt at the rates we’ve seen of late.  I suggest that you focus on the highest rate consumer debt first and foremost, eliminating this drag on your financial state.  Once you’ve eliminated every debt except for mortgage debt, you can move on to other pursuits.  Eliminating consumer debt at high interest rates is the best move you can make to  improve your financial self.

Emergency Fund

An emergency fund is an amount of money set aside that can be used to cover all of the unexpected expenses that come up and surprise you: new tires for the car, roof replacement, or medical expenses not covered by insurance, for example.  The other thing that an emergency fund is for is to give you some “cushion” if you find yourself unemployed for an extended period of time.  It’s for this reason that an emergency fund is typically referred to as a certain number of months’ worth of expenses – such as 3-6 months’ worth of expenses.  You should have an emergency fund of an amount that would provide for your living expenses for several months should you be unexpectedly laid off.

If you don’t have an emergency fund, or if your emergency fund is smaller than you should have set aside, this is another great place to put an extra $1,000.  Typically an emergency fund is in a place that’s a bit difficult to get at – such as a bank savings account without debit card or ATM access.  This way you’re not tempted to invade this money for non-emergency purposes.  Sometimes folks use a Roth IRA as a dual-purpose account until they can establish separate accounts for retirement and emergency funds.

A Roth IRA could be used as your emergency fund, since you can withdraw your contributions to your Roth IRA at any time for any purpose without tax or penalty.  I don’t recommend this option for long-term use, because if you have to get at the funds for an emergency purpose and you’re not able to replace them in the account within 60 days, you’ll lose the Roth treatment of those contributions forever.  You can always put more into the Roth IRA at a later time, but once you’ve got the money in there, you shouldn’t take it out before retirement without a very, very good reason.


The most important tool for achieving financial success is knowledge.  For this reason, I suggest that you use some of your new-found riches to improve your financial knowledge.  There are many good books out there that will help you to better understand your finances and how you can improve things.

I wouldn’t suggest spending an extra $1,000 totally on education – maybe as much as $50 or $100 for several good books.  This will help you to make good decisions with your remaining windfall.

Retirement Savings

If you haven’t maxed out all of your retirement savings for the year, such as 401(k) plans and IRAs, this is another good place to put an extra $1,000 to work.  For an IRA or Roth IRA (if you’re eligible by your income level) it’s simply a matter of making the contribution to the account and investing it appropriately.

If on the other hand you haven’t maxed out your 401(k) plan, you can defer an extra $1,000 by your paychecks throughout the remainder of the year and earmark an extra $1,000 to make up the difference in reduced take-home pay.  If you started in July and you have 13 more pays left in the year, you’d set aside around $75 per paycheck (if paid every two weeks) and your income will be reduced by a little less than that, since the money you deferred isn’t taxed.

Charitable Donations

Consider making a donation with your extra money. There are many deserving charities (I’m sure you can come up with a list of several without much difficulty) that would LOVE to have a donation of $1,000. And you can take a deduction on your tax return for the donation (assuming that you itemize your deductions).

Who Does Each Option Work Best For?

Folks who are just starting out in improving your financial situation quite often need to focus on all of the options I mentioned above – debt reduction, emergency fund, knowledge and retirement savings.   The list was put together in priority order, so you should focus on debt reduction first, then emergency funds, and so on.

If you’re a little farther down the timeline and have eliminated all consumer debt and have established an emergency fund, improve your knowledge first, and then add more to your retirement savings.  I mentioned before that the most important tool that you have is your knowledge.  The most important action you can take to improve your financial standing is to increase your bottom line.  We did this first when we eliminated all debt.  The next step is to add to savings.  Both moves will increase your net worth – your assets (savings and possessions) minus your liabilities (loans and other debts) equals your net worth.  The key to financial success is to make moves that will have a positive impact on your net worth.

Students who don’t have any debt accumulated should focus first on the emergency fund, and then on retirement savings.  In some cases it makes good sense here to put the money into a Roth IRA, since money in a Roth IRA won’t be counted on your financial aid forms, since it’s a retirement account.

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Doing My Own Taxes Cost Me $10,000

Businessman juggling fruit

3 Lessons I Learned from My DIY Mistake

This article was provided by Devin Carroll, a financial advisor colleague who practices in Texarkana, TX at his firm Carroll Investment Management.

Doing my own taxes cost me $10,000 last year. It still stings and it has been on my mind a lot lately as tax season approaches.

I was reminded of this the other day while I was shopping with my wife at our local wholesale store. When I passed by the big display of tax software, I thought about the ad that’s been playing over the last few weeks. This ad is a humorous take on just how easy it is to do your own taxes. It’s so easy that everyone in the ad is just using their phones to file! At the conclusion of the ad, the text comes up: “You don’t have to be a genius to do your own taxes.”

Well, I’ve never considered myself a genius, but I can figure things out pretty well. When my accountant retired a few years ago, I decided to give the do-it-yourself tax software a try. The idea was pretty simple: “I’m a smart guy,” I thought. “With today’s technology, there’s no reason why I can’t do my own taxes.”

Doing My Own Taxes

At first, I only had my 1099 and my wife’s W-2. Then I became a half-owner of an insurance agency which added yet another tax form. Still, that wasn’t too bad, so I simply adjusted the version of the tax software I purchased to handle the partnership. In the next year, we bought an investment property and made an entity change for my financial planning practice. Over the next couple of years there were a few other changes that resulted in even more tax forms.

I suppose I didn’t realize just how complex my situation was getting. So, in early 2015, I made my annual pilgrimage to the wholesale store to purchase my tax software. Just like every other year, I set a Saturday aside to do my taxes. I plugged in all of the various income forms and then started working on the deductions.

My tax software showed a big counter at the top of the screen that revealed my current federal tax liability – as I would enter data, the dollar figure would update. When I started getting close to the end of my deductions spreadsheet, the number was still really big. It was so big that my heart rate increased and I was starting to feel a little sick.

A few hours later I was finished. There was nothing left to deduct and I still had an enormous tax bill! In a state of panic I called an accountant friend to get a second opinion. We set a meeting and a few days later we sat down with my nearly complete tax return to discuss options. He told me, “Devin, if you’d made a couple of simple changes at the first of the year, you could’ve saved about $10,000 in taxes.” I was dumbfounded – and really angry at myself.

The Valuable Lessons I Learned

Now, almost a year later, I can look back on this experience and remember the lessons I learned. Here are three takeaways from my do-it-yourself mistake . . . .

  1. I don’t know everything.

As much as anything, this was a lesson in humility. Before this, I didn’t think that tax advisers had anything to offer me. In fact, I’d even mentally dubbed them with titles such as “document processors.”

I should’ve already learned to be more humble and hire professionals. I can’t tell you how many projects I’ve looked at and thought, “Why would I hire someone when I can do that?” The results in many of those projects have had similar results, too. One that immediately comes to mind was my attempt to save $50 by moving my own cable line in the attic. Yep . . . I fell through the attic, ended up in the emergency room, and had to pay several hundred dollars to get the massive hole in my ceiling fixed.

In our information-rich world, you can find a how-to for everything. It’s really tempting to read about a topic for a few minutes and think we understand all the nuances. That’s not the case with the federal tax code. Consider this for a moment . . . . In 1984 the tax code was 26,300 pages. Today, it’s a monstrous 75,000 pages. That’s just too much information to fully comprehend along with everything you need to know for your “real” job.

  1. Sometimes it pays to hire early.

I can’t tell you how much I wished I would have hired a tax adviser before I thought I needed one. I was so caught up in what they would charge, I let a $10,000 surprise smack me in the face.

The same could be said about many of my prospective retirement planning clients that request information. They hear that I charge an hourly fee and simply turn to the internet for advice that’s much cheaper. The result is often a missed opportunity, missed filing deadline, or some other mistake that has consequences for the rest of their retirement.

If you think you may need someone in a few years, hire them today!

  1. Hiring a professional reduces anxiety.

When I was doing my own taxes, I was constantly worried about getting a letter from the IRS. Not because I was intentionally doing something wrong, but I was always scared that I’d missed something important that would come back to haunt me.

Today, I no longer have that fear. I feel the likelihood of getting that dreaded letter from the IRS has tremendously declined. It may not have, but I sure sleep better.

This tax season, do yourself a favor and hire a tax professional.

Like all professionals, not all tax advisers are created equal. Some are coaches and some are not. Some will help you and some will just let their assistant screen your calls. If you start looking for an accountant who meets your expectations, start before tax season. It’s just too crazy once it gets to mid-February.

As an additional resource, here’s a great article from Kelly Phillips Erb on hiring a tax preparer.

What are your thoughts? Do you plan to hire someone this year?

Devin Carroll is a financial advisor who practices in Texarkana, TX at his firm Carroll Investment Management. He writes about Social Security and retirement related issues on his blog at

Everything You Need to Know About File & Suspend and the April 30 Deadline

suspended balloonsBy now if you’re of a certain age, you have probably heard about the end of the file & suspend option for Social Security benefits. If not, click on this link to learn more about this option and the April 30 deadline due to changes made by the Bipartisan Budget Act of 2015.

However, as my email inbox indicates, you have lots of questions about file & suspend.  This article is my effort to cover all the bases with regard to everything you need to know about file & suspend and the April 30 deadline.

For starters, if you and your spouse were born after April 30, 1950, this article does not apply to you, so you can stop reading. If one of you was born before April 30, 1950, the file & suspend option only applies to that individual, not to both of you. Of course, if both of you were born before April 30, 1950, then file & suspend could apply to either of you – but only one of you would actually file & suspend.

Ground rules

The ground rules for file & suspend are as follows:

  1. You must be at least at Full Retirement Age (66) in order to file & suspend.
  2. There is an April 30 deadline to enact this option (April 30, 2016, and never after that date).
  3. You would only file & suspend if you wish to delay filing your own benefit (or stop receiving your benefit) until some age later than FRA, and one of the following (and perhaps both):
    • You wish to enable someone else (spouse or child) to receive benefits based on your record.
    • You wish to preserve the opportunity to file for a lump sum retroactive benefit at some later age, before you reach age 70.
  4. While your benefits are suspended, you will not receive benefits based on your own record, and you will not be eligible for spousal benefits via restricted application or otherwise (*see below for a technical exception).

Practical Application

If you were born after April 30, 1950, file & suspend (under the old rules) is not for you, so you can stop reading.

Further, if you have already filed for your own benefit and you want to continue receiving your benefit, you would not want to file & suspend.

Once you have filed and suspended, your spouse can file for spousal benefits (or your eligible child can file for child’s benefits) as soon as eligible. For example, if your spouse is already (or has just reached) age 62, he or she will be eligible for spousal benefits upon filing for his or her own benefit.

If you have filed and suspended, your spouse born before 1954 will be eligible to file a restricted application for spousal benefits upon reaching FRA – as long as he or she has not already filed for benefits based on his or her own record.

How to Do It

In order to file & suspend, just the same as filing for any other benefit, you have three options for filing:

  1. Online – you file for benefits at as if you wanted to begin receiving the benefits immediately; at the end of the application there is a “Remarks” section – in this section you will enter the following: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  2. Paper application – using form SSA-BK-1 you do just as described in #1 above, filing out the form as if you wish to receive the benefit immediately, then putting the following line in the Remarks section at the end: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  3. On the phone – call 1-800-772-1213 and tell the representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.
  4. In person – visit your local Social Security Administration office and tell your representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.

*Technical Exception to the suspended benefits rule

Earlier in the Ground Rules I mentioned a technical exception to the rule about not being eligible to receive spousal benefits when you have suspended your own benefit. The exception works like this:

Joe has a benefit of $600 available to him if he files at Full Retirement Age. Joe’s wife Barbara, age 67, is already collecting her benefit of $1,500 per month. When Joe reaches Full Retirement Age, he files and suspends his benefit. Joe is still eligible for a restricted application for spousal benefits based upon his wife’s record – but the benefit he will receive is not going to be 50% of Barbara’s benefit. Joe will receive only the excess spousal benefit.

The excess spousal benefit is calculated as 50% of Barbara’s benefit minus Joe’s age 66 benefit – $1,500 / 2 = $750, minus Joe’s benefit of $600 equals $150. So Joe can receive $150 until he decides to unsuspend his benefit, at which point he will be eligible to receive the larger of either the full 50% of Barbara’s benefit or his own benefit, increased by delay credits. If Joe has delayed to age 70, his DRC-enhanced benefit would be $792.

If the above example seems a bit odd, it’s because there are very few plausible situations where this exception might be applied.

Maintaining Confidence in an Uncertain World

confidence wonder womanAll around us, every day, we see signs of an unstable financial world. The stock market has been all over the place, instability continues in the Middle East (like it will ever change?); at home we’re confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the rising cost of “getting by” and there’s little wonder many folks are very concerned  and have little confidence about the future.

What Can You Do?

I don’t suggest hiding under your bed – this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you’ll decide that it’s not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 30+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial confidence. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2009 – and just lately short-term rates went up a bit, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news – but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn’t add value to check your portfolio’s value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a “big winner” mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he’s beating the indexes over that period), he’s one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old “losers”, you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list (this is known as survivor bias – meaning those funds that survive look better because the losers have dropped out of sight).

Add to this mix the fact that “past performance doesn’t guarantee future results”. In other words, just because a particular fund manager has beaten the average in the past doesn’t mean that he will do so in the future. What I’m driving at is this: There is no point in chasing the “best” managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). Our experience shows that you can find a broad-index portfolio for literally pennies versus the dollar many funds change for internal expenses. You’re much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Advisor to Lean On

This goes for all facets of your life, obviously – and of course it’s a bit self-serving when coming from me. The point is, while it’s human nature to believe we can “do it on our own”, we eventually come to realize that we need some additional expertise to help us plan. And once we’ve made those plans, having someone to help us review and consider options is a must – because simply having a plan isn’t enough, we must execute and review results. Once we’ve seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it’s important to review our results and make sure we’re still on track.

You might think that the work a financial planner does is based primarily in the future, but the present is at least as important – especially when things haven’t gone the way we’d hoped. In other words, while we’re aiming for a particular goal in the future, it is where we are “today” that gives us our starting point. Confucius said “A journey of a thousand miles begins with a single step”. But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you’d likely end up somewhere else.

The Point of All This (FINALLY!)

I know I’ve rambled a bit, but I think you get the gist of my message – Lay out careful plans, don’t allow the “pundits” and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book “In Defense of Food” that provides clarity when making choices there:

“Eat food. Not too much. Mostly plants.”

From this idea, I’ve built the following mantra for confidence in investing and planning:

“Plan ahead. Don’t be distracted. Save lots.”

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool.

Reverse Mortgages Require a Close Look

reverse mortgageFor many folks in their retirement years, home equity can be a substantial part of your overall net worth. According to recent figures, the equity in your home can amount to roughly 30-40 percent of your net worth, if you’re in the majority. If you and your spouse are both at least 62 years of age and have significant equity in your home, a reverse mortgage can turn that equity into tax-free cash without forcing you to move or make a monthly payment.

If it’s right for you, a reverse mortgage can be a worthwhile financial tool. If not, you could cause some serious problems for your financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

  • A lump sum cash payment;
  • A monthly cash payment, like a pension or annuity;
  • A line of credit which you can draw on in varying amounts as you need the funds (this option tends to be the most popular due to its flexibility);
  • Some combination of the above.

When the owner dies or moves away (perhaps to a long-term care facility), the home can be sold and the loan paid off. Any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house: they can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months.

There are three basic types of reverse mortgages:

  • Single-purpose reverse mortgages, which are offered by some state and local government agencies as well as some nonprofit organizations;
  • Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
  • Proprietary reverse mortgages are private loans that cover home values usually over $600,000.

The size of a reverse mortgage is determined by the borrower’s age, the interest rate and the home’s value. The older a borrower, the higher percentage that can be borrowed. The amount of the mortgage is limited to the lesser of the home’s appraised value, sale price, and the federal HECM limit of $625,500.

Reverse mortgages have traditionally been chosen by older Americans who are having a tough time paying for everyday living expenses. Matters such as long-term care premiums, home health care services, home improvements or paying off their current mortgage or credit cards may be greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and even to purchase a second home. Review reverse mortgage options with the help of a financial adviser to determine if there are any unique, “outside the box” options for you.

Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling.

The counselor is required to explain the loan’s costs and financial implications. The counselor also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. You can visit HUD for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services. This fee can be paid from the loan proceeds, and you cannot be turned away if you can’t afford the fee.

Other things to consider

Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can often run between $12,000 and $18,000. The loans are based on anticipated home value appreciation of four percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

There is also the cost of mortgage insurance to consider. You will have an up-front charge for federal mortgage insurance, which will amount to between 0.5% and 2.5%, depending upon the type of disbursement you’ll be receiving. There is also an annual premium for mortgage insurance which will be 1.25% of the outstanding mortgage balance.

Interest rates and costs: As you draw funds from the equity in your home, interest is added to your balance every month. This can result in quite a surprise over time, as the interest costs add up. Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. This interest is not tax deductible while you are drawing funds from the equity.

Your mortgage can be called: The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

Talk to your kids. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, persons considering a reverse mortgage need to talk with their family.

The Top Income Tax Myth That Can Hold You Back

hold backThere are many myths about income taxes that are just plain wrong. But there is one income tax myth that is likely the most hurtful to you financially – and that is the idea that a big refund should be your goal. The actual goal, counterintuitive as it may sound, should be to owe some tax when you file your return.

You may have heard this explanation before: When you have a big refund every year, you’re effectively loaning money to the government throughout the year, and getting nothing for it. And then when you get that big tax refund, what do you do with it? The responsible thing would be to put it in some sort of savings vehicle – but how many folks actually do this? Statistics show that far too few of us think saving first when we have extra money. Too often we use the money to pay off a credit card (which is still a good thing, but perhaps we shouldn’t have built up the credit card balance in the first place) or worse, we use it to treat ourselves.

Let’s examine the situation for a moment. If you have a refund of $2,000 (for example) when you file your tax return, that means every month throughout the year you handed over $166.67 to the US Treasury that should have been in your pocket. The US Treasury is happy to have it: they report the balance to Congress and Congress spends it.

And then, when you get the refund you wind up spending it on something that provides short-term pleasure rather than long-term benefit.

What if, instead of handing it over to the US Treasury, you change your withholding so that you can now receive an additional $166.67 each month? You could put this money into a savings vehicle, an IRA for example. Now, you could actually reduce your taxes even further by deducting the IRA contributions from your income. So if this reduces your overall taxable income from $80,000 to $78,000 (for example), the resulting tax is reduced by $500 (for a single filer, 2015 rates). So not only have you added $2,000 to your savings, you could add a total of $2,500 to your savings (adding another $125 of tax reduction!).

If you did this for 20 years over your working lifetime and earned an average 5% return, you’d have built up an extra $82,000 in an IRA.

Can’t I just do this at the end of the year?

But you may ask – couldn’t I just make the IRA contribution after I get my tax refund, taking the deduction while I’m filling out the return? Of course you could, but how often have you done that in the past?

What I’m suggesting is that you might set up an automatic contribution to an IRA every month. You’ll want to change your W4 on file with your employer so that less tax is being withheld, so that you’ll have the extra money in your take-home pay.

Then by setting up the automatic contribution you don’t have to make the choice to contribute to the IRA at the end of year – you made the choice when you set up the automatic contribution plan. Since you’re already accustomed to living with that same income (the same amount of take home pay), you’re no worse off than you were before, and you will be building up your savings to boot.

So the real goal should be to wind up with a zero tax refund – or possibly even owing some tax at the end of the year. If you owe less than $1,000 when you file your tax return, it’s as if the US Treasury has lent you that money, interest-free, for the year. It’s a reversal of fortunes, all because you realized this is an income tax myth.

If you put that extra $1,000 to work earning 3% (over time), you’ll pick up an extra $375 over the same 20-year period – it’s not a lot, but still money that could be yours instead of going to the government.

Now, there’s the question of how can the US Treasury get by without your loan every year…? I suspect that somehow things will work out just fine, because very few people will do this and the impact will be minimal in the scheme of things.

2016 IRA MAGI Limits – Married Filing Separately

separatedNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar (or 65% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10.

If the amount works out to less than $200, you are allowed to contribute at least $200. If your MAGI is $10,000 or more, you cannot contribute to a Roth IRA.

2016 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

married coupleNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $98,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $98,000 but less than $118,000, you are entitled to a partial deduction, reduced by 27.5% for every dollar over the lower limit (or 32.5% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $118,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $184,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $184,000 but less than $194,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $194,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $184,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $184,000 and $194,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $194,000 or more, you cannot contribute to a Roth IRA.

2016 MAGI Limits – Single or Head of Household

single flowerNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility.

For a Traditional IRA (Filing Status Single or Head of Household):

Note: These limits are unchanged from 2015.

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $61,000 or less, there is also no limitation on your deductible contributions to a traditional IRA. If you are covered by a retirement plan at your job and your MAGI is more than $61,000 but less than $71,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $71,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $117,000, you are eligible to contribute the entire amount to a Roth IRA. If your MAGI is between $117,000 and $132,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $132,000 or more, you cannot contribute to a Roth IRA.

Retirement Income Requirement

road, long and winding

Photo courtesy of Jon Ottosson via

You know how important it is to plan for your retirement, but how do you get started? One of the first steps should be to come up with an estimate of how much income you’ll need in order to fund your retirement. Easy to say, not so easy to do! Retirement planning is not an exact science. Your specific needs will depend on your goals, lifestyle, age, and many other factors. However, by doing a little homework, you’ll be well on your way to planning for a comfortable retirement.

Start With Your Current Income
A rule of thumb suggests that you’ll need about 70 percent of your current annual income in retirement. This can be a good starting point, but will that figure work for you? It really all depends on how close you are to retiring, as well as what you’re planning to do while retired. If you’re young and retirement is light years away, that figure probably won’t be a reliable estimate of your income needs (and let’s face it, over a long period of time it’s not much more than a wild guess!). That’s because many things will change dramatically between now and the time you retire. As you near retirement, the gap between your present needs and your future needs will likely narrow. But remember, you’re only going to use your current income only as a general guideline, even if retirement is well within sight. In order to accurately estimate your retirement income requirement, you’ll have to do some more cipherin’.

Project Your Retirement Expenses
As with any budgeting exercise, annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating expenses is a big piece of the retirement planning puzzle. It’s bound to be difficult identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still a ways off. To help you get started, here are some common retirement expenses:

  • Food and clothing
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs. These may change dramatically – often the mortgage is paid off, or you may be looking to move and/or downsize. These changes can increase or decrease the figures needed to cover housing.
  • Utilities: Gas, electric, water, telephone, cable TV
  • Transportation: Car payments, auto insurance, gas, maintenance and repairs. Often in retirement auto expenses decrease dramatically since you’re not driving to the job daily. However, you may be travelling more (to see the grandkids, for example!), so plan accordingly.
  • Insurance: Medical, dental, life, disability, long-term care. Again, these expenses may change dramatically, with the addition of Medicare to the mix, plus the inevitable “new” ailments you may acquire in your later years.
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Taxes: Federal and state income tax, capital gains tax. Keep in mind that many states don’t tax retirement income – this could help you make decisions on relocating in retirement as well.
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal
  • Recreation: Travel, dining out, hobbies, leisure activities. These expenses tend to increase a bit when you have more time on your hands in retirement, but then after a few years begin to level off. Planning for higher outflows earlier in your retirement than later is a wise plan.
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living. This expense can be all over the board, depending on your own family, experience, and location. This also works just the opposite of recreation expenses (above) – less early on, more expense later in life.
  • Miscellaneous: Personal grooming, pets, club memberships

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, are bound to increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional review your estimates to make sure they’re as accurate and realistic as possible. Don’t forget to factor in insurance benefits (especially medical) as your out-of-pocket costs are likely to be much different in retirement than when you’re working.

Decide When You’ll Retire
To determine your total retirement needs, you can’t just estimate how much annual income you need. You also need to figure out how long you’ll be retired. Why? The longer your retirement, the more years of replacement income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65 because there will be many more years’ worth of expenses you’ll need to cover. Plus in your earlier years you’ll likely be more active (spending more money) than you will later in life when you may become more sedentary.

Estimate Your Life Expectancy
The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live. With life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect. To be conservative, you might project out to age 100 (or longer, if longevity is in your genes!).

Don’t Forget to Inflate!
But you can’t just come up with an expense figure and simply multiply it by the number of years you’re planning on living… remember that little factor mentioned earlier: inflation? Not considering the impact of inflation can cause your plan to run off the rails – and soon you’d run out of money altogether. As we sometimes morbidly joke in this business, you may want to increase your bacon intake to match up with your portfolio’s longevity!

It’s a fairly simple matter to project out the future value of your retirement income requirement, using the average inflation rate of 3% (or higher to be more conservative), to give you a pretty good picture of the amount of money you’ll need when you retire. There are many calculators available on the internet to help you with this process – just go to your favorite search site (Yahoo!, Google, etc.) and search for “retirement calculator”. As an alternative, a financial advisor will be happy to work with you to come up with a reasonable figure for your own circumstances.

Identify Your Sources of Income
Once you have an idea of your retirement income requirement, your next step is to determine just how prepared you are to meet those needs. In other words, what sources of income will be available to you in retirement? Your employer may offer a traditional pension that will pay you monthly benefits (although this is becoming increasingly rare, especially in the private sector). In addition, you can likely count on Social Security to provide a portion of your retirement income, although many younger folks are making their plans without factoring in Social Security, just in case it’s not there in the long run. You can get an estimate of your Social Security benefits by visiting the Social Security Administration website ( to download a copy of your statement.

Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and additional investments. The amount of income you receive from those sources is dependent upon the amount you invest, the rate of return on your investments, the internal costs of the investments, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Shortfall
If you’ve been diligent about saving, or are fortunate enough to have a funded traditional pension plan, your expected income sources may well be more than enough to fund even a lengthy retirement. But what if it looks like you’re going to come up short? Don’t run screaming down a hallway (it doesn’t help) – there are always steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses (in your working years) so you’ll have more money to save for retirement. This will have the added benefit of teaching you to get by on a little less both now and in the future, as well. Think of it as a “practice” retirement.
  • Shift your asset allocation to increase the potential returns on your portfolio (always keeping in mind that a portfolio that offers higher potential returns most likely involves greater risk of loss).
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, instead maybe you’ll plan to buy a Buick Riviera to drive to the rental beach house once a year!)
  • Work part-time during retirement for extra income. Many folks are doing this nowadays, as the “kick back and relax” style of retirement is not their cup of tea. Staying active tends to maintain your health as you age, both physically and mentally.
  • Consider delaying your retirement for a few years. Instead of a big fat “I QUIT” at your planned age, consider shifting gears and pursuing a different career, something that you’re passionate about that you always dreamed of doing.

I hope the above discussion helps you to be better prepared as you plan toward your retirement. Too often, I talk to folks about their goals for retirement, and they’ve never considered the income side – the primary aim they have in mind is a particular age. By focusing on the retirement income requirement, you can be much better prepared for a long, happy, restful vacation from “work”.

2016 IRS Mileage Rates

autoThe IRS recently announce the standard rates for business mileage deductions, along with the rates for moving, medical travel and charitable travel.

There were reductions in the primary categories, as you will see in the list below. This is reflective of the reduction in fuel costs over the past year, and is part of a study done annually to determine the fixed and variable costs of operating an automobile.

As of January 1, 2016, the following standard rates apply for operating a car, pickup, van, or panel truck, for the various categories:

  • 54¢ per mile for business (was 57.5¢ per mile in 2015)
  • 19¢ per mile for moving purposes (was 23¢ in 2015)
  • 19¢ per mile for medical purposes (also was 23¢ in 2015)
  • 14¢ per mile for charitable purposes (unchanged)

The standard mileage rates are used by anyone who keeps a log of miles for the various categories to be used as deductions against income. The taxpayer always has the option of using actual costs instead of the standard rates.

However, if you use the actual costs method and claim depreciation using an accelerated method of depreciation (including MACRS or Section 179 expensing), you cannot switch back to the standard mileage rate on that particular vehicle later. Plus, you cannot use the business standard mileage rate for more than 4 vehicles simultaneously.

Charitable Contributions from Your IRA

contributed catOnce the PATH Act (Protecting Americans Against Tax Hikes) is signed into law, at long last the ability to make a direct contribution from an IRA to a qualified charity will be permanent.

For background – a Qualified Charitable Distribution (QCD) is when an individual (age 70 1/2 or older and subject to Required Minimum Distributions from his or her IRA) makes a distribution from his IRA directly to a qualified charity. This distribution can be used to satisfy the Required Minimum Distribution for the year. The distribution is limited to $100,000 for each year per individual.

The real advantage of this option is that the owner of the IRA doesn’t have to claim the distribution as taxable income on his or her tax return. Any other distribution of pre-tax dollars typically must be claimed as ordinary income, increasing taxes because of the additional income.

In addition, having the increased income can cause other tax credits and deductions to be reduced (since the Adjusted Gross Income is greater). Medical expense deductions, limited to the amount above 10% of your AGI, is one such deduction that is impacted this way. For example, if you had deductible medical expenses in the amount of $10,000 for the year and your AGI is $75,000, you are allowed to itemize $2,500 in medical expenses ($10,000 minus $7,500, 10% of your AGI). If you took a distribution from your IRA to satisfy RMD in the amount of $10,000, your AGI would increase to $85,000 and therefore reduce your deductible medical expenses to $1,500 ($10,000 minus $8,500, 10% of your AGI). Because of this differential, since the QCD is not counted as income at all, this is much preferred to taking a distribution, counting it as income and then making the deductible contribution.

This QCD has been available for several years, but has always been limited to a year or two and renewable by Congress (it has always been renewed, sometimes retroactively). Most recently the provision expired at the end of 2014 and has not been available in 2015 (until the law is signed). Because of this late extension of the provision, often taxpayers don’t know whether the provision will be allowed until very late in the year, and have often already taken their RMD earlier. The PATH Act takes the action of making this option permanent. Now you can plan and make the QCD at any time in the year and know that it’s going to be available.

If you already took your RMD for the 2015 tax year there is no way to undo this fact, but you could still make another distribution directly to a qualified charity if you like. Or you could donate your RMD in cash to the qualified charity, increasing your income by the distribution and then taking the charitable contribution deduction on your tax return.

6 Strategies for Social Security Benefits That Are Still Available

leftoversEarlier this fall the Bipartisan Budget Act of 2015 was passed. This was important to folks looking to maximize Social Security benefits because two of the primary strategies for maximization were eliminated with the passage of this legislation. You may be wondering if there are any strategies left to help maximize benefits – and as it turns out, there are still a few things you can do. Four of these strategies apply to anyone, while the last two only apply to married couples. (Note: if you were born in 1953 or before, you have more options available to you as a result of the grandfathering of some rules. See The Death of File & Suspend and Restricted Application for more details.)


Delaying benefits beyond age 62 or your full retirement age (FRA) continues to provide a strategy for increasing your benefits.  In fact, this strategy alone is likely the most beneficial of all strategies dealing with maximizing benefits. The chart below represents the increase in benefits that you can expect by delaying from one age to the next.

Age Increase Year-over-Year
FRA=66 FRA=67
63 6.67% 7.14%
64 8.34% 6.67%
65 7.68% 8.34%
66 7.15% 7.68%
67 8.00% 7.15%
68 7.41% 8.00%
69 6.90% 7.41%
70 6.45% 6.90%

You may be wondering why the increase is less than 8% in the years following Full Retirement Age. This is because when you earn the 8% per year delay credit, that credit is applied to your Full Retirement Age amount. If you compare the amount you’d receive at 66 with the amount you would receive at age 70, the increase is 32% – 8% per year for four years. But each year-over-year increase is being compared to the prior year, not the FRA year.


Another option that has undergone a change over the years is the “do-over”. This is where you file for Social Security benefits and then change your mind and withdraw your application. In order to do you, you must pay back all benefits received to-date, and you can only do this within the first 12 months of receiving benefits. You also are limited to enacting this strategy only once in your lifetime.

Even with the limits, the do-over might be useful. For example, if you are delaying your benefits to age 70, and you have reached age 69. If you wanted to, you could apply for Social Security benefits now, and receive benefits for just less than a full year, having the money available to you to do as you wish during that time. Then, assuming nothing has changed about your life (health outlook is still good, no reason to believe you wouldn’t live a long, full life), you could pay back the money that you’ve been receiving for the past 11 months and withdraw your earlier application. Then you could re-apply for benefits as of your 70th birthday, with an increased amount.

On the other hand, if something happened during the intervening year and you decided you wanted to keep the benefits you’ve received for the year, just keep them and continue receiving benefits at the same level.

The example uses the ages of 69 and 70, but you could enact this strategy at any age from 62 onward. For example, you could file at age 65, wait 11 months, then withdraw your application and pay back the benefits. Then you could re-apply immediately, wait a year, two years, or four more years to re-apply.

Earning More Than the Limits

When you are receiving Social Security benefits and you are younger than your Full Retirement Age, earning more than certain limits can result in Social Security’s withholding some benefits – potentially even eliminating the current benefits you’re receiving. But the other thing that happens when these benefits are withheld is that you will eventually receive credit for those withheld months. This means that your filing date will be reset when you reach Full Retirement Age – increasing your available benefits. This strategy only applies while you are younger than FRA. After FRA you can earn as much as you like and no benefits will be withheld.

For example, if you started receiving Social Security benefits at age 62 and earned enough during the four years prior to reaching FRA to have four months’ worth of benefits withheld each year, a total of 16 months’ benefits were withheld. When you reach FRA, your filing date will be re-set from your age 62 to age 63 and 4 months (16 months later). This would have the effect of increasing your benefit by 9.49% from the age 62 amount. So if you were receiving $750 per month, the increase would bring your benefit to $821.

If your own benefit is being withheld due to over-earning, any other benefits paid on your record (such as spousal or other dependent’s benefits) will also be withheld. Unfortunately those withheld benefits are not credited back to your dependents later – they are gone for good.


Although the Bipartisan Budget Act of 2015 (BBA15) made major changes to the “suspend” option, it can still be a viable strategy for some folks. In the past, suspend was usually considered a complement to “file” – you only heard of “file and suspend”. But in the new world after BBA15, you might find it advantageous to use a suspend strategy under certain circumstances. This is often referred to as “start-stop-start”.

For example, Steve is about to reach age 62, his wife Janice is 59, and they have an adopted son Joel, age 13, who is in their care. Steve’s PIA is $2,000. Steve can start his Social Security benefits at 62, which will make both Janice and Joel eligible for benefits based on Steve’s record. Janice can receive $762 monthly as a mother’s benefit, Joel can also receive $762 (these are less than 50% due to the family maximum limit). Steve will also receive $1,500 for his own benefit. The household total will be $3,024.

When Joel reaches age 16, Janice’s mother’s benefit will cease, and Joel’s dependent benefit will increase to $1,000. Steve is now age 65. When Joel reaches age 18, his dependent benefit will cease as well. Steve, now at age 67, could suspend his benefit, delaying for 3 years to pick up the delayed retirement credits. If he does this, his benefit at age 70 would have grown to $1,860 (from his reduced $1,500).

At the same time, when Steve suspends his benefit, Janice could start her benefit, providing some additional income during that period of time. The only thing that could not be done at that stage is for Janice to take a Spousal benefit, since Steve’s benefit is suspended.

This way Steve has maximized benefits for his own family circumstance early on, and then increases his benefit for later in life via suspending. As long as Steve isn’t working and earning more than the minimums (see above) this should work out just fine.

Adding Spousal Benefits Later

Another option that might be helpful for a couple is to time the filings so that one spouse can delay receipt of spousal benefits until later.

Taking the case of Steve and Janice above – when Steve suspends his benefits at age 67, Janice is age 64. Her PIA is $800, and so if she starts her benefit at exactly age 64 she could receive $693, a reduction of just over $100 from her PIA. Then, when Steve reaches age 70 and files for his own benefit again (Janice is now 67), Janice can add the Spousal Benefit to her reduced benefit.

The Spousal Benefit for Janice would be calculated as: 50% of Steve’s PIA ($1,000) minus Janice’s PIA ($800) which equals $200. This is the Spousal Benefit “excess” that will be added to Janice’s reduced benefit of $693, for a total of $893.

Maximizing Survivor Benefits

For a couple with similar PIAs and close ages, it may make sense to take one benefit earlier and the other later. This is to maximize the Survivor Benefit while receiving the most benefits early on in the process.

Take for example Beth, age 62 and Samantha, age 60, married for 3 years. Beth has a PIA of $2,200, and Samantha’s PIA is $1,800. Since their PIAs are fairly close in amount to one another, it is likely that neither would ever receive a spousal benefit based on the other’s record. Therefore we are mostly looking at two separate individuals’ records, with the difference being that one of the benefits will continue on in the event of the death of the first member of the couple.

Since Samantha’s PIA is smaller, it may make sense for her to file for her Social Security benefits at the earliest age, 62. This will result in a reduction of her benefits to approximately $1,300, but she will receive this benefit right away, and will receive it (with annual COLAs applied) until either she or Beth dies.

Beth, on the other hand, having the larger PIA, should delay receipt of benefits as long as possible in order to maximize her own benefit and the amount of benefits available as a Survivor Benefit to Samantha in the case if Beth should die first. Beth would receive approximately $2,904 if she delays to age 70 – and upon her passing, Samantha would receive this amount as well (Samantha’s benefit would cease at that time).

How to Take a Loan from Your 401k

loanYou have this 401k account that you’ve been contributing to over the years, and now you’ve found yourself in need of a bit of extra cash. Maybe you need to cover the cost of a new furnace, or possibly you have some extra medical bills that need attention, and you don’t have the extra cash to cover. Whatever the reason, a loan from your 401k might be just the ticket.

A 401k (or other employer-based plan like a 403b, 457, etc.) is unique from an IRA in that you are allowed to borrow against the account. An IRA can never be borrowed against, any withdrawals are immediately taxable.

Before we go into the specifics of taking a loan from your 401k, since I’m a financial planner I have to put a word of warning out: Borrowing from your 401k should be considered a “last resort” option, when you’ve exhausted all other options. This is because when you take a loan from your 401k you are side-tracking your retirement savings due to the fact that you have to divert income toward paying back the loan. The end result is that instead of growing steadily via your payroll deductions, after the loan is paid back you’ll be pretty much where you were before.

The good news is that taking a loan from your 401k may be one of the most cost-effective loans available, since you’re effectively borrowing from yourself. The downside mentioned above should be factored into the cost, but if you’re really up against the wall and have no other options, you can do much worse than a loan from your 401k.

Taking a loan from your 401k

All 401k (and other qualified retirement plans) have the option of allowing participants to take a loan against the account. (Some administrators restrict the option, so you’ll want to check with the rules of your plan.) The way this works is that you determine the amount you want to borrow (there are limits, see below) and then complete the paperwork to arrange the loan.

At the time of the loan, you also must make arrangements for the payback. Typically this is handled the same way as your normal contributions to the account, via payroll deduction. There will be a particular interest rate applied to the loan, often referred to as tied to a rate index, such as “Prime plus 2%”.

Then your loan repayment period of time is set as well. The longest you can spread out your repayments is five years from the loan origination. You could choose a shorter period of time if you like.

In addition, if you are unable to complete the loan repayment schedule as planned, you may have to recognize the loan withdrawal (or remaining balance) as a distribution of taxable income. Plus, if you’re under age 59 1/2 this could also require a 10% penalty for early withdrawal, unless you meet one of the other early withdrawal criteria.

Loan repayment may be suspended for up to one year in the event of the employee’s taking a leave of absence, but the original loan repayment schedule will remain intact.

If you leave your employer, typically you are required to either pay off the loan completely (immediately). If you are unable to do so, you will have to recognize the outstanding balance as a distribution as described above.

What are the limits?

I mentioned earlier that there are limits to the amount that you can borrow in a loan from your 401k. The maximum amount that can be borrowed at any one time is 50% of your vested account balance, or $50,000. This means that if your 401k balance is $200,000, the most you can borrow at any one time is $50,000. On the other hand, if your account balance is $50,000, you can only borrow $25,000 (50%).

If your 401k balance is less than $20,000, you are permitted to take up to $10,000 or 100% of your vested 401k balance, whichever is less. So if your vested account balance is $7,500, the most you could borrow is 100%, $7,500. If the account balance is $18,000, the most you could borrow would be $10,000.

Social Security Ground Rules

Social Security Owners Manual 4th Edition(In celebration of the release, here is an excerpt with some extras, from A Social Security Owner’s Manual, 4th Edition.)

There are certain rules that will be helpful to fully accept as facts while you learn about your Social Security benefits. If this is your first reading of the list, skim through before moving on. Don’t expect to fully understand these rules on the start – but keep in mind you may need to refer back to this list of Ground Rules from time to time so you can keep things straight.

Basic Social Security Rules

  • The earliest age you can receive retirement benefits is 62.
  • The earliest age you can receive Survivor Benefits is 60 (50 if you are disabled).
  • Filing for any benefit before Full Retirement Age will result in a reduction to the benefits.
  • Your spouse must have filed for his or her retirement benefit in order to enable you to file for Spousal Benefits. This benefit may be suspended if the “suspend” is or was done prior to April 30, 2016.
  • File & Suspend and filing a Restricted Application are two distinctly different things. *Both of these options were curtailed significantly with the passage of the Bipartisan Budget Act of 2015 (BBA15).
    • File and suspend to allow another person (spouse or dependents) to receive benefits based on your record is only allowed by April 30, 2016.
    • Restricted Application is only available if you were born before 1954.
    • See The Death of File & Suspend and Restricted Application for more details on each of these.
  • The earliest age you can File & Suspend is your Full Retirement Age. This applies whether you are suspending under the new rules (after BBA15) or the old rules.
  • The earliest age you can file a Restricted Application is your Full Retirement Age. *This option is only available if you were born before 1954. See the article referenced above for more details.
  • You cannot File & Suspend and file a Restricted Application at the same time. For some reason, many folks I hear from believe that in order to file a Restricted Application they must first File & Suspend. This is not true, if you File & Suspend you will not be eligible to file a Restricted Application. Read on for more details.
  • While technically allowed, there is very little accomplished if both spouses File & Suspend. Typically one spouse will File & Suspend and the other will file for Spousal Benefits based upon the first spouse’s record.
  • Only one member of a married couple can file a Restricted Application. The exception to this rule is for divorced spouses who remain unmarried – and are both over Full Retirement Age.
  • If you have filed for your own benefit prior to Full Retirement Age and are therefore receiving a reduced benefit by filing early, when you file for a Spousal Benefit you will never receive the full 50% of your spouse’s Primary Insurance Amount. This is due to the fact that the reduction to your own benefit from filing early continues to apply to your total benefit when the Spousal increase is added.
  • For every month after Full Retirement Age you delay filing for your own retirement benefit, you will accrue Delayed Retirement Credits, increasing your future retirement benefit when you file for it.
  • There is no increase to Spousal Benefits if the spouse delays filing for Spousal Benefits beyond his or her Full Retirement Age.
  • There is no increase to Survivor Benefits if the surviving spouse delays filing for the Survivor Benefit beyond his or her Full Retirement Age.

Our Investment Philosophy

investingOne of the most important parts of your overall financial plan is the investment plan. The investment plan is made up of three distinct parts: present value, projection of future inflows and outflows, and allocation. It is allocation that we’re most interested in with this article.

Allocation is the process of determining the “mix” of your investment assets: stocks, bonds, real estate, etc. as well as domestic and international categories. Allocation is determined by the philosophy that you choose to follow with regard to investment management. Our philosophy is summed up as follows:

  • Diversify
  • Reduce Costs
  • Pay Attention to Economic Signals
  • Maintain Discipline – Stick To Your Plan

Now, there are three primary schools of thought that are often relied upon to develop an Investment Philosophy: technical analysis, fundamental analysis, efficient markets hypothesis.

Technical Analysis is the review of charts of stocks and funds, with the belief that patterns within the action of a stock can provide insight into the future actions that the stock will experience. The theory is that investor behavior can be predicted based upon volume and stock price fluctuations, and given the prediction of this behavior, Technical Analysts purportedly take advantage of “knowing” what the future will bring. I’ve always likened Technical Analysis to palm reading…

Fundamental Analysis is where the data about a stock – the price-earnings ratio, expected growth rates, earnings projections, etc. – is studied in order to determine the “correct” price intrinsic within the stock. This intrinsic value is then compared to the trading value (present price) of the stock, and if the intrinsic value is higher than the trading value, this represents a buying situation; a selling opportunity exists if the intrinsic value is lower than the current price.

The third school of thought, Efficient Markets Hypothesis (EMH), explains away the benefits supposed by the Fundamental Analysis theory. With EMH, as the name implies, it is assumed that the market itself is very efficient with regard to the dissemination of information. In other words, when a piece of new information is made available about a stock, that information is quickly and efficiently spread to all interested parties, allowing for little, if any, opportunity for arbitrage. In today’s connected world, this spreading of information occurs at the speed of light.

For example, let’s say that Acme Motor Company is coming out with a new model of car, widely expected to be the savior for the company. As a result, Acme stock is highly valued, compared to recent history, in anticipation of this new model. During the testing of this new model, it has been determined that there are serious flaws in the design – turns out using aluminum foil for the engine block wasn’t such a good idea – and now the new model will not only be drastically delayed, it may be canceled altogether. If this new information were known only to a select few (outside the company), then those folks could take advantage of the situation, and short-sell the stock in anticipation of it’s expected fall in value. The Efficient Markets Hypothesis takes the stance that this kind of information is spread SO quickly that the opportunity for arbitrage is effectively wiped out.

So that explains how EMH addresses Fundamental Analysis – how does this help build our investing philosophy? How does the investor take advantage of the marketplace to their benefit? To answer these questions, we first need to take a walk – a Random Walk, specifically. “A Random Walk Down Wall Street”, by Burton Malkiel, first published in 1973 and now in its Ninth Edition, describes the activity of the stock market as a “Random Walk”. This is due to the observation that short-run changes in stock prices cannot be predicted, but rather are quite random.

Let me say that again: Short-run changes in stock prices cannot be predicted, but rather are quite random. It is for this reason that I often don’t pay much attention to the day-to-day fluctuations in the Dow or the S&P 500 – what I’m more interested in is the long-run direction of the market, which is illustrated by some very sound statistics. Specifically, I pay attention to the broad views of the domestic and world economies, including manufacturing, GDP, and jobs information; interest rates and inflation; as well as money supply and market valuations (for example, the forward view of price-earnings ratios of the broad indexes), among other things.

Against this backdrop of factors, the present momentum of the markets is also considered, since it is more likely that the market will continue in the direction that it has maintained over the previous 18 to 24 months than not.

So, how does all of this fit together? Let’s look at the four points of our investment philosophy again:

  • Diversify – by utilizing broad market indexes, covering all points of the marketplace both domestic and international as well as fixed income and equities, we are automatically diversifying across market capitalization, company, industry, and country. It just doesn’t make sense to choose a narrow band of investments when you can take part in the success of the overall economy – the global economy.
  • Reduce Costs – index mutual funds are the most cost-efficient investment vehicle in the industry. Expense ratios are well below 0.5% for most of these investments and often is less than 0.1%. In addition, Exchange Traded Funds (ETFs) are also the most tax-efficient investment options available that invest in the unrestricted equity and bond markets.
  • Pay Attention to Economic Signals – when viewing forward-looking economic conditions, it is necessary to context the various signals together, considering the impact on your present investment elections. As indicated previously, short-run trends are difficult if not impossible to predict, but longer-run trends tend to have certain signals that indicate they’re on the horizon. Paying close attention to these signals can help with long-term decision making with regard to your investments.
  • Maintain Discipline – Stick to Your Plan – this goes hand-in-hand with the view that short-run trends cannot be predicted. In addition, short-run trends typically have little impact on the overall investment plan, provided that you maintain discipline and do not stray from the plan. The worst thing you could do is panic in a short-run market action and abandon your plan. The whole point of having a plan is to help you to get through those panicky times with confidence.


Inter-Family Loan Topics

familyOften, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal – but they don’t want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic – the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they’re in a “helping” position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?
Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there’s no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there’s always the chance that he or she won’t be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

  • Don’t lend money you can’t afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn’t paid back, will the financial effect be negligible or substantial?
  • Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it’s convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
  • Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn’t paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don’t feel guilty if you decide to turn down your family member’s loan request. It’s hard to say no, but it’s still easier than repairing a damaged relationship if things don’t work out.

Is it a good idea to cosign a loan?
At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it’s noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won’t affect their own finances, but unfortunately, that’s not the case.

When you cosign a loan, you’re guaranteeing the debt. The lender requests a cosigner because they want more than the primary borrower to be responsible for the payments – so a cosigner becomes responsible in the event the primary borrower doesn’t pay. Legally speaking, this means that you’re equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you’re not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.

Social Security Bend Points for 2016

very bendyWhen the Social Security Administration recently announced that the maximum wage base and the Cost-of-Living Adjustment (COLA) would remain unchanged for 2016, they also announced the bend points that are used to calculate both the Primary Insurance Amount (PIA) for Social Security benefits. In addition, the Family Maximum Benefit (FMax) bend points for 2016 were also announced.

Wait a second! You may be wondering just why the bend points are changing when there was no increase to the COLA? Excellent question, as it shows you’ve been paying attention. This is because the bend points are based upon the Average Wage Index, which adjusts annually regardless of whether the numbers go up or down, whereas the COLA and the maximum wage base only goes up. Bend points can go down from one year to the next – it’s only happened once, in 2009, but it could happen again. For more on how the bend points are determined, you can read this article: Social Security Bend Points Explained.

Primary Insurance Amount Bend Points

The bend points for calculating individuals’ Primary Insurance Amounts (PIA) for 2016 will be $856 and $5,157.  These are used to calculate your PIA from your Average Indexed Monthly Earnings (AIME). The SSA indexes your lifetime earnings and takes the top 35 years, dividing by 420 (the number of months in 35 years). The bend points are then applied to determine your PIA. An example would be – if your AIME calculates to $5,500, then

The first $856 is multiplied by 90% = $770.40
The difference between $5,157 and $856 is multiplied by 32% = $1,376.32
The excess above $5,157 is multiplied by 15% = $51.45

The Primary Insurance Amount (PIA) is the sum of these three – $770.40 + $1,376.32 +$ 51.45 = $2,198.13, rounded to $2,198.10.

Family Maximum Benefit Bend Points

When calculating the FMax benefit amount, the bend points for 2016 are now set as well. These points are $1,093, $1,578, and $2,058. These bend points are also applied to your PIA to determine the maximum amount of benefits that can be paid based upon one individual’s record – such as Spousal Benefits, Survivor Benefits, and other dependents’ benefits. Continuing with our example from above, where we calculated the PIA for this individual to be $2,198.10,

The first $1,093 is multiplied by 150% = $1,639.50
The difference between $1,578 and $1,093 is multiplied by 272% = $1,319.20
The difference between $2,058 and $1,578 is multiplied by 134% = $643.20
The excess above $2,058 is multiplied by 175% = $245.18

The results are summed up ($1,639.50 + $1,319.20 + $643.20 + $245.18 = $3,847.08 rounded down to $3,847.00) to produce the FMax benefit amount. For the individual with the PIA of $2,198.10, the maximum amount that can be paid based upon this record is $3,847.00.

WEP Maximum Impact

From the first bend point we also determine the maximum impact that the Windfall Elimination Provision (WEP) can have for an individual reaching age 62 in 2016. Since the maximum WEP impact is 50% of the first bend point, if you will be 62 in 2016 the maximum dollar amount of WEP impact for reducing your PIA is $428 (50% of $856).

No Social Security COLA for 2016; Wage Base Unchanged as Well

no colaRecently the Social Security Administration announced that there would be no Cost of Living Adjustment (COLA) to recipients’ benefits for 2016.  This is the third time in 7 years that there has been no adjustment.  In 2010 and 2011 we saw the first ever zero COLA years since the automatic adjustment was first put in place in 1972. That dark period of time actually resulted in two years in a row with zero COLAs, after 38 years of increasing adjustments.


The Cost of Living Adjustment (COLA) is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  If this factor increases year-over-year, then a COLA can be applied to Social Security benefits. This is an automatic adjustment, no action is required of Congress to produce the increase when there is one.  See How Social Security COLAs Are Calculated for details on the calculations.

When the COLA was being calculated for 2016 benefits, the CPI-W average for the third quarter of 2015 (233.278) actually decreased versus the third quarter 2014 average (234.242), a reduction of -0.41%.  So by definition there can be no increase for the coming year.  Depending upon how the average goes in the third quarter of 2016, there may or may not be a COLA increase for 2017. If the increase (assuming there is an increase) to the CPI-W is less than the decrease we saw for 2015, there will again be no COLA increase. If the increase is anything more than the 2015 decrease, there will be an automatic COLA increase for 2016.

Since the calculations (begun in 1972) thankfully did not provide for a reduction in benefits when the change in CPI-W was negative, any negative change must be overridden by increases before additional COLA increases will be factored in.  This is what happened in 2011 – even though we had an increase in the CPI-W from 2009 to 2010, the CPI-W was still a net negative from 2008 to 2010, and therefore there was no COLA for 2011.

Medicare Part B Impact

Medicare Part B premiums also increase regularly, albeit by a different scale.  The Part B increase is based on the cost of healthcare, which is different from the CPI-W.  As you may have read elsewhere, since there is no COLA increase for 2016 most (70%) of all folks paying this premium will not have to pay the increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by most beneficiaries will not be decreased.

If you are not paying for your Medicare Part B premiums via withholding from your Social Security check, you will see an increase in your Medicare Part B premium – from $104.90 to $123.70 – which was a positive outcome from the BBA2015. Instead of the 52% increase originally calculated, this increase was limited to an increase of “only” 17.9% for 2016. Also, if you start Medicare in 2016, you’ll get to pay the brand-new increased Part B premium.

Wage Base and Earnings Limits Remain Unchanged as Well

In addition to the lack of an increase to benefits, the reduction in the CPI-W also resulted in a freeze of the Social Security taxable wage base. This is the amount of W2 or self employment income that is subject to Social Security taxation for the calendar year. In both 2015 and 2016 this wage base is $118,500. The last time this changed was from 2014 to 2015, when the wage base increased from $117,000 to the current $118,500.

A substantial earnings year (for the purpose of eliminating WEP) will also remain at the same level as 2015 – $22,050 for 2016.

Lastly, the Earnings Test limits for Social Security will also remain the same in 2016 as they have been for 2015. For folks who are receiving Social Security benefits that are younger than Full Retirement Age, the Earnings Test limit is $15,720, and $41,880 if you will reach age 66 in 2016.