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New IRS Site for Taxpayer Information

toolsQuick, how do you find out what your balance is at the IRS? Call somebody? Wait for a paper notice? Who knows??

The bureaucracy that is the Internal Revenue Service just got a bit easier, and it’s bound to continue improving. The IRS recently launched a new online tool to assist taxpayers with basic account information, starting with balance inquiries. As part of the IRS vision to improve the taxpayer experience, more feature are expected to be added soon.

Below is the text of the actual announcement from the IRS, IR-2016-155:

IRS Launches New Online Tool to Assist Taxpayers with Basic Account Information

The Internal Revenue Service announced today the launch of an online application that will assist taxpayers with straightforward balance inquiries in a safe, easy and convenient way.

This new and secure tool, available on allows taxpayers to view their IRS account balance, which will include the amount they owe for tax, penalties and interest. Taxpayers may also continue to take advantage of the various online payment options available by accessing any of the payment features including: direct pay, pay by card and Online Payment Agreement. As part of the IRS vision for the future taxpayer experience, the IRS anticipates that other capabilities will continue to be added to this platform as they are developed and tested.

“This new tool is part of the IRS’s commitment to improve and expand taxpayer services by providing additional online taxpayer options,” said IRS Commissioner John Koskinen. “The new ‘balance due’ feature, paired with the existing online payment options, will increase the availability of self-service interactions with the IRS. This will give taxpayers another way to take care of their tax obligations in a fast and secure manner.”

Before accessing the tool, taxpayers must authenticate their identities through the rigorous Secure Access process. This is a two-step authentication process, which means returning users must have their credentials (username and password) plus a security code sent as a text to their mobile phones.

Taxpayers who have registered using Secure Access for Get Transcript Online or Get an IP PIN may use their same username and password. To register for the first time, taxpayers must have an email address, a text-enabled mobile phone in the user’s name and specific financial information, such as a credit card number or specific loan numbers. Taxpayers may review the Secure Access process prior to starting registration.

As part of the security process to authenticate taxpayers, the IRS will send verification, activation or security codes via email and text. The IRS warns taxpayers that it will not initiate contact via text or email asking for log-in information or personal data. The IRS texts and emails will only contain one-time codes.

In addition to this new functionality, the IRS continues to provide several self-service tools and helpful resources available on for individuals, businesses and tax professionals.

Penalties for Changing SOSEPP

broken-bambooSo – you’ve begun your Series of Substantially Equal Periodic Payments (SOSEPP) from your IRA to satisfy your §72(t) requirement.  Allofasudden, something happens that causes you to make a change to your payment – either purposely or through unforeseen circumstances.  What happens? You were supposed to keep the same payment for the longer of 5 years or until age 59½. What do you do now?

.Well – first of all, we must understand the timeline associated with an SOSEPP:  once begun (notwithstanding the “one-time change” exception which you can read about here), you have to continue those periodic payments without change for the longer of five years or until you reach age 59½.

If you make a change to your periodic payments (other than the one-time change), §72(t)(4) indicates that ALL of your payments, beginning with your first payment under the SOSEPP, will be subject to 1) ordinary income tax (should have already been assessed); 2) the 10% non-qualified withdrawal penalty; and 3) interest on any unpaid tax or penalty, calculated from the date(s) of the disbursal(s) forward to the date you “broke” the SOSEPP.

This Code section should strike fear in the hearts of folks who are considering a SOSEPP.  If you think about it, the possibilities for error are numerous. Your brokerage can fail to execute a disbursement the way you directed; you forget to take your withdrawal; you mistakenly take more (or less) than your SOSEPP prescribes… And if it’s been in place for several years, you’ll owe penalties back to the beginning of the plan, plus interest.

It doesn’t take much imagination to envision a scenario where you could be in pretty deep with such an error on your plan.  The IRS has no sense of humor when dealing with these cases – not many are overturned.


Earlier W2 Filing Requirement in 2017

One of the new wrinkles forearlier-w2-filing tax filing requirements for 2017 is that employers must adhere to an earlier W2 filing date than in years’ past. For 2017,all W2 and W3 (employer records) must be filed with the Social Security Administration by January 31.

The previous deadline was the last day of February if the W2 and W3 forms are filed on paper; by the end of March if filed electronically.

Many employers will be caught off-guard by the earlier W2 filing requirement. I wouldn’t think it would be a problem to meet this requirement. The deadline of January 31 for distribution of employee Form W2’s has been the rule for quite a while now. The primary problem is if there are any corrections necessary. This will just cause the employer to have to amend his forms W2/W3 filings with SSA after the fact.

This earlier W2 filing requirement should not have an impact either way for most employees. Tax preparers preparing employer payroll tax forms may be a bit overwhelmed in January. This portion of W2/W3 filing is often delayed until after the employee copies of Form W2 have been distributed. Filings must now be complete by the end of January. This compresses the timeline for distribution to employees and submission to Social Security.

The IRS recently published a Reminder about this change, which was passed into law in December 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act. The reminder is IR-2016-143. As part of this Reminder, IRS also notes that these changes (from the PATH Act, specifically if claiming Earned Income Tax Credit or Additional Child Tax Credit) may delay some tax refunds until after February 15, 2017.

Delayed Retirement Credits – When are These Applied?

delayed retirement credits are like marching in the snowIf you delay filing for your Social Security benefit, for each month that you delay you will earn delayed retirement credits. The increase for each month of delayed retirement credit is 2/3% (0.667%) for every month. This equates to 8% in delayed retirement credits for every year of delay. But when are these credits applied to your benefit?

As with so many Social Security-related calculations, timing is everything. With delayed retirement credits, the key is exactly when you stop delaying and start collecting benefits.

Starting Benefits Before Age 70

When you’re delaying benefits past your full retirement age (FRA), you can start receiving benefits at any age after FRA up to age 70. So, for example, if you decided to start your benefits upon the month of your 67th birthday, you’d have 8% in credits earned if your FRA was age 66. For the sake of this example, let’s say your birthday is June 15.

When you file for benefits beginning in the month of your 67th birthday, you would receive a benefit calculated as:

PIA + (PIA * 4%) = Benefit for the remainder of the year

And then, in January of the following year, your benefit will be recalculated as follows:

PIA + (PIA * 8%) = Benefit for this year

(In each year, of course the PIA is assumed to have any COLA already applied before the calculation.)

You are credited with the delayed retirement credits only once a year, in January. So when you applied for your benefit, being mid-year, you had only been credited with 6 months’ worth of delayed retirement credits by that point. Then the following January, the remaining 6 months’ of delayed retirement credits are applied.

Simon, who has a PIA of $1,000 and a date of birth of September 15, 1950, is going to delay his benefit until his age 67 and 6 months (March, 2018). His benefit for the first year (2018) will be calculated as follows:

$1,000 + ($1,000 * 10%) = $1,100

This is because as of January, 2018, he has earned a total of 15 months’ worth of delayed retirement credits. The remaining 3 months are credited to him in January of 2019:

$1,000 + ($1,000 * 12%) = $1,120

Of course, there is an exception to this rule – when you start your benefits at or after age 70.

Starting Benefits at or After Age 70

The exception to the rule is when you start your benefits at or after age 70. In this case, Social Security tosses out this notion of waiting until January to apply delayed retirement credits and applies them immediately.

So, in the case of Simon (from earlier), if he waits until age 70 to file for his benefits (September, 2020), his benefit at that point would be calculated as:

$1,000 + ($1,000 * 32%) = $1,320

And no further increases need to be applied, since all delayed retirement credits are already applied to his record.

Foresight from Experience in Planning

marriage-with-foresightWe can make a difference in our own lives if we make a simple change in our outlook. If we changed from a hindsight to a foresight perspective, many things about our society could improve dramatically. This foresight can help with retirement planning, marriage, and any major event in our lives.

I don’t mean that we should disregard history – of course not. On the contrary, we need to use history to provide us with foresight into the potential outcomes of our choices. The experiences we’ve encountered (and our friends/families/acquaintances have experienced) can help us to predict the outcome of various choices and decisions that we make in the future.

Consider these factors:

  • The divorce rate in the U.S. has been high for a very long time, causing a great deal of heartache and expense, not only for the couple but for family and friends as well. And one of the primary factors that causes a rift for young married couples is money problems.
  • The average cost of a wedding nowadays (according to this article on The Knot) is $31,213. Of course, most weddings cost far less than that, but for many folks the cost of the wedding is a very significant figure nonetheless. Often, paying the cost of a wedding can cause a young couple to go into debt before the knot is even tied.
  • The average college graduate in 2016 could expect to owe around $37,172 in student loans (per Student Loan Hero). If you assume that both members of the newly-married couple are college graduates, that amounts to nearly $75,000 in debt.
  • A “starter home” used to mean a 1 to 2 bedroom, 1 bath home at a price something on the order of one times the take home pay of a young family. Nowadays, the “starter home” has morphed into a 3+ bedroom, 2+ bath home, and the price can be as much as 2.5x to 3x the income of the family. This occurred for two reasons: the size of the average home increased dramatically; and most importantly, the amount of money that could be borrowed (as a percentage of the value of the home) increased significantly over time. Payments on mortgage loan debt have increased to an average of more than 25% of pre-tax income for folks right out of college.
  • Most people have a hard time talking openly about money. Money is one of those “taboo” subjects for most folks; conversations about money are uncomfortable. Because of this, most young couples don’t have serious discussions about finances until they start seeing problems.

Is it any wonder that divorce rates are high? A significant factor in divorces is financial issues, and the average young couple is starting out far in the hole – no wonder there are problems! Most of these young couples facing issues in their marriages can readily point out certain things that they wish they’d done differently in hindsight.

So the outcomes we see are a reaction to the factors. But what if we start using the experience of others to give foresight, to improve our own outcome? What if a young couple used the factors that can be working against the success of their marriage to try to avoid what seems inevitable?

Using Experience as Foresight for Marriage

Below are a few items to consider with your foresight:

Consider whether the wedding must be as expensive as originally planned, or as expensive as your friends’ wedding (or whatever is your gauge). Many, many long-lasting marriages were simple affairs that took place all in one church (reception in the basement). Of course you want to make the event memorable – but it doesn’t have to cost a fortune to make memories.

Make sure that you each understand one another’s debts – including what kinds of debt and how much. Have a plan for dealing with these payments, eliminating them over time. Also have a plan in place for how to keep these current if one of you is unemployed.

Instead of keeping the finances separated and only discussing money when it becomes a problem, talk about money up-front. Probably not on the first date, that might be a bit of a buzzkill, but definitely before marriage.

The accounts can remain separated after marriage if that’s a personal preference, but the couple should share the information with each other. Using this information, the couple can produce a household net worth statement. Don’t get hung up on the terminology, it’s just a report showing your assets (savings and things) minus your debts (loans and credit balances). You’ll need to do this when it comes time to get a mortgage; might as well get a head start on it.

It’s not a one-time thing, either. On a regular basis the couple should share in decision-making. Talk over things such as starting a new subscription or a membership to a fitness club, for example.

Often one member of the couple is responsible for paying the bills. This can be a mistake if the other member doesn’t have knowledge of the state of the month-to-month finances. It often makes sense to either do this together or split the responsibility (every other month, for example). At the very least, each spouse needs to know the household’s position – positive or negative cash flow. More income than expenses is positive, vice versa is negative.

The wedding example above is but one of many that illustrates the benefit of foresight. Review any major purchase, job change, retirement, or change in family similarly. Look at the potential pitfalls and use that information as foresight to guide your decisions.

I know many folks already use past experience as a guide – and kudos to those that do. But many more of us can use this change in perspective to improve our financial futures.

2017 Retirement Plan Contribution Limits

even-turtle-riders-have-limitsThe IRS recently published the new contribution limits for various retirement plans for 2017.  These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year for the third year in a row we saw virtually no increases contribution amounts, and the income limits increased for slightly as they did for 2016.


The annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2017 (third year without an increase).  The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000.

The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Modified Adjusted Gross Income (MAGI) must be less than $62,000 for a full deduction; phased deduction is allowed up to a MAGI of $72,000.  This is an increase of $1,000 over the limits for 2016.  For married folks filing jointly who are covered by a retirement plan by his or her employer, the MAGI limit is increased to $99,000, phased out at $119,000, also up $1,000 versus last year’s limits.  For married folks filing jointly who are not covered by a workplace retirement plan but are married to someone who is covered, the MAGI limit for deduction is $186,000, phased out at $196,000; this is an increase of $2,000 over 2016’s limits.

The income limits for Roth IRA contributions also increased: single folks with a MAGI less than $118,000 can make a full contribution, and this is phased out up to a MAGI of $133,000, an increase of $1,000 at each end of the range.  For married folks filing jointly, the MAGI limits are $186,000 to $196,000 for Roth contributions, up by $2,000 over 2016.

401(k), 403(b), 457 and SARSEP plans

For traditional employer-based retirement plans, the amount of deferred income allowed remains the same as the past two years. For 2016, employees are allowed to defer up to $18,000 with a catch up amount of $6,000 for those over age 50.  If you happen to work for a governmental agency that offers a 457 plan in addition to a 401(k) or 403(b) plan, you can double up and defer as much as $36,000 plus catch-ups, for a total of $48,000 deferred.

The limits for contributions to Roth 401(k) and Roth 403(b) are the same as traditional plans – the limit is for all plans of that type in total.  You are allowed to contribute up to the limit for either a Roth plan or a traditional plan, or a combination of the two.


Savings Incentive Match Plans for Employees (SIMPLE) deferral limit is also unchanged at $12,500 for 2017.  The catch up amount is unchanged as well at $3,000, for folks at or older than age 50.

Saver’s Credit

The income limits for receiving the Saver’s Credit for contributing to a retirement plan increased for 2017.  The MAGI limit for married filing jointly increased from $61,500 to $62,000; for singles the limit is unchanged at $30,750; and for heads of household, the MAGI limit is $46,500, an increase from $46,125.  The saver’s credit rewards low and moderate income taxpayers who are working hard and need more help saving for retirement.  The table below provides more details on how the saver’s credit works:

Filing Status/Adjusted Gross Income for 2017
Amount of Credit Married Filing Jointly Head of Household Single/Others
50% of first $2,000 deferred $0 to $37,000 $0 to $27,750 $0 to $18,500
20% of first $2,000 deferred $37,001 to $40,000 $27,751 to $30,000 $18,501 to $20,000
10% of first $2,000 deferred $40,001 to $62,000 $30,001 to $46,500 $20,001 to $30,750

2016 Retirement Plan Contribution Limits

The IRS recently published the new contribution limits for various retirement plans for 2016.  These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw a few increases for some contribution amounts, and the income limits increased for most types of accounts after virtually no changes to the contribution amounts in 2015.


unusual contribution limitsThe annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2016 (second year without an increase).  The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000.

The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Modified Adjusted Gross Income (MAGI) must be less than $61,000 for a full deduction; phased deduction is allowed up to a MAGI of $71,000.  This is the same as the limits for 2015.  For married folks filing jointly who are covered by a retirement plan by his or her employer, the MAGI limit is increased to $98,000, phased out at $118,000, also unchanged versus last year’s limits.  For married folks filing jointly who are not covered by a workplace retirement plan but are married to someone who is covered, the MAGI limit for deduction is $184,000, phased out at $194,000; this is an increase of $1,000 over 2015’s limits.

The income limits for Roth IRA contributions also increased: single folks with a MAGI less than $117,000 can make a full contribution, and this is phased out up to a MAGI of $132,000, an increase of $1,000 at each end of the range.  For married folks filing jointly, the MAGI limits are $184,000 to $194,000 for Roth contributions, up by $1,000 over 2015.

401(k), 403(b), 457 and SARSEP plans

For traditional employer-based retirement plans, the amount of deferred income allowed remains the same. For 2016, employees are allowed to defer up to $18,000 with a catch up amount of $6,000 for those over age 50.  If you happen to work for a governmental agency that offers a 457 plan in addition to a 401(k) or 403(b) plan, you can double up and defer as much as $36,000 plus catch-ups, for a total of $48,000 deferred.

The limits for contributions to Roth 401(k) and Roth 403(b) are the same as traditional plans – the limit is for all plans of that type in total.  You are allowed to contribute up to the limit for either a Roth plan or a traditional plan, or a combination of the two.


Savings Incentive Match Plans for Employees (SIMPLE) deferral limit is also unchanged at $12,500 for 2016.  The catch up amount is unchanged as well at $3,000, for folks at or older than age 50.

Saver’s Credit

The income limits for receiving the Saver’s Credit for contributing to a retirement plan increased for 2016.  The MAGI limit for married filing jointly increased from $61,000 to $61,500; for singles the new limit is $30,750 (up from $30,500); and for heads of household, the MAGI limit is $46,125, an increase from $45,750.  The saver’s credit rewards low and moderate income taxpayers who are working hard and need more help saving for retirement.  The table below provides more details on how the saver’s credit works:

Filing Status/Adjusted Gross Income for 2016
Amount of Credit Married Filing Jointly Head of Household Single/Others
50% of first $2,000 deferred $0 to $37,000 $0 to $27,750 $0 to $18,500
20% of first $2,000 deferred $37,001 to $40,000 $27,751 to $30,000 $18,501 to $20,000
10% of first $2,000 deferred $40,001 to $61,500 $30,001 to $46,125 $20,001 to $30,750

Roth 401k – Is It Right for You?

up-to-5-people-wonder-about-roth-401k-a-dayMany employers are now offering a Roth 401k option in addition to the traditional 401k option. And with this new choice comes many questions: What is the benefit? Is a Roth 401k a good idea for me? How can I choose between the traditional 401k and the Roth?

Benefits of Roth 401k

Much like a Roth IRA, the Roth 401k can provide you with tax-free income when you retire. This benefit comes to you in exchange for no tax deduction when you contribute your funds to the Roth account.

Contributing money to a traditional 401k account results in a reduction from your income for the year. Then when you withdraw money from the account in your retirement, you will have to pay tax on the money withdrawn. This is the primary difference between the traditional 401k and the Roth.

Another benefit of the Roth 401k is that when you retire (or leave the job) you can rollover the money directly to a Roth IRA – this will eliminate RMDs from ever being required on the account, once the account has been held for 5 years.

Making the Choice Between Traditional and Roth 401k

So, knowing the benefits of a Roth 401k you may wonder if a Roth 401k is right for your situation. This is not a simple answer, as with many investing and savings activities. It all depends on two primary factors: your applicable tax rate now, and the tax rate in the future.

Your applicable tax rate now is important because if you choose a Roth 401k you’ll be paying taxes on the income you are deferring into the account. On the other hand, if this same money was going into a traditional 401k account you would avoid tax on the money deferred.

So if your current applicable tax rate is high, there is much value in deferring tax on some of your income. With a lower (or zero) applicable tax rate then the benefit of deferring tax on contributions is reduced or eliminated.

Looking into the future, if you anticipate that your tax rate in retirement is going to be lower than your tax rate today, then the traditional 401k is likely your best option. This is because you are deferring income at one rate and then paying tax another lower rate in the future.

On the other hand, if you anticipate higher taxes in the future (and who doesn’t?) then the Roth 401k might make more sense. This is due to the fact that, by using the Roth 401k you can pay taxes today at your lower rate and then later withdraw those funds at a zero tax rate.

Tax-Loss Harvesting: It’s Never Too Late

Tax-loss harvesting is a tax move that can help with your income tax burden when you’ve experienced a loss with your investments.  Briefly, this is where you have a taxable account, holding stocks, bonds, or mutual funds and the market declines leaving your holdings in a loss situation.  Once you sell the holding, you have realized the loss, which enables you to take advantage of the tax laws and deduct those losses, first against any gains in your account(s), and then at a rate of $3,000 per year against ordinary income.

This is similar to the famous move that Mr. Trump (and I would be shocked if Mrs. Clinton never took a loss against future taxes) used to avoid future income taxes. This was recently discovered in Trump’s tax records and made out to be a fatcat loophole – at least by the media – when actually anyone can take advantage of it. In fact, it’s likely that if you have non-IRA investments you’ve probably taken advantage of this rule yourself.

As an example, say you purchased a mutual fund for $10,000 last year.  Over the course of this year, your mutual fund’s value reduced to $5,000.  If you sold the holding, you would have a loss of $5,000.  Using the tax law to your benefit, you are able to reduce your ordinary income by $3,000 for the current year and carry over the remaining $2,000 for writing off against the following year’s income.

It is important to note that the loss is first used to offset any capital gains you may have realized before you can use it to reduce ordinary income. Continuing the example, if you also sold investments in the current year that had capital gains of $2,600, your net capital loss for the year would be $2,400 ($5,000 minus $2,600). This would allow you to take the capital gains with zero taxes (just like Donald!) and also reduce your ordinary (wage) income by the remaining $2,400 of net capital loss.

Tax-loss harvesting is the action of realizing a loss in order to utilize the loss as a reduction against your other gains and ordinary income. You may not have chosen to sell the losing investment at that particular time for any other reason, but the benefit of tax-loss harvesting caused you to take the action.

taxes-by-x_jamesmorrisThe good news is that you can sell any loss positions (and let’s face it, who doesn’t have a loss position?) that you currently hold and then take this reduction of up to $3,000 in ordinary income for your current year’s taxes, which you’ll file next April.  It’ll be a nice surprise for you (if you’ve forgotten about it) when you get ready to file.

Not available to an IRA

This is one of the many benefits of holding at least a portion of your investments in non-qualified or non-IRA accounts.  Because in your IRA or 401(k) plan, losses you sustain are of no tax consequence.  Likewise, gains that you experience, along with the funds that you “hid” from taxes in earlier years, will be taxed at ordinary income tax rates – which are presently higher than the capital gains rates assessed against your taxable account gains.  And I don’t expect that the ordinary income tax rates are set to decline appreciably at any time in the near future, given the deficit spending being introduced at an alarming pace these days.

SOSEPP & How a QDRO Affects It

In addition to the 72(t) exception available for folks with a QDRO (see this post), there is also the question of how a QDRO impacts an established Series of Substantially Equal Periodic Payments (SOSEPP) – which, as we know, once established can only be changed one time.

separati-en-casa-near-divorce-by-mirko-macariAlthough not definitive, below are summaries of three Private Letter Rulings (PLRs) that seem to suggest first of all that making the distribution is not subject to the 10% penalty when a QDRO or divorce decree is involved, pursuant to the regulation in Code section 72(t)(4)(A)(ii).

Private Letter Rulings for SOSEPP

1) The transfer to a taxpayer’s spouse pursuant to a divorce decree of 50% of each of three separate IRAs owned by the taxpayer from which the taxpayer had already begun receiving “substantially equal periodic payments” did not result in a modification where the taxpayer’s spouse was two years younger and would commence receiving similar payments such that the total of periodic payments to the taxpayer and his spouse subsequent to the division would be substantially equal to the periodic payments received by the taxpayer prior to the division. PLR 9739044

2) In PLR 200027060, the IRS rules that a spouse after the divorce, that  received a portion of the client’s IRA accounts that were being used to fund a SEPP,  didn’t need to continue the payments since it was a transfer under Code section 408(d)(6). What about the client – did all the payments have to be continued out of what remained of his accounts?

2a) Later in PLR 200050046 (with similar facts) the IRS ruled in favor of the taxpayer. “The reduction in the annual distribution from IRA 1 to Taxpayer A beginning in calendar year 2001, prior to Taxpayer A’s attaining age 59 1/2 , and assuming Taxpayer A has not died and has not become permanently disabled, will not constitute a subsequent modification in his series of periodic payments, as the term “subsequent modification” is used in Code section 72(t)(4), and will not result in the imposition upon Taxpayer A of the 10 percent additional income tax imposed by Code section 72(t)(1) pursuant to Code section 72(t)(4)(A)(ii).

In other PLRs, it has further been ruled that the IRA owner may reduce the 72(t) payment amount by the same percentage as the reduction in the overall account by distribution to the former spouse.  This is the case for a QDRO granting a division of a qualified plan or a divorce decree granting a division of an IRA when the SOSEPP has already been set up.  In these cases, the former spouse who receives the proceeds from the IRA or qualified plan was not required to continue a 72(t) payment plan – the funds could be rolled over into an IRA, or left in the plan as is.

It is also important to note that the RMD (Required Minimum Distribution) for the year of the transfer is still dependent upon the previous end-of-year balance in the account – and could be adjusted for the following year if a favorable PLR is reached for the case.

Tax Benefits for Job Hunting

5 santasThe IRS recently published their Summertime Tax Tip 2016-24, entitled “Looking for Work May Impact Your Taxes”, with some good tips that you should know as you go about job hunting.  The text of the actual publication from the IRS follows, and at the end of the article I have added a few additional job-related tax breaks that could be useful to you.

Looking for Work May Impact Your Taxes

If you are job hunting in the same line of work, you may be able to deduct some of your job search costs. Here are some key tax facts you should know about when searching for a new job:

  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Time Between Jobs.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You normally deduct your job search expenses on Schedule A, Itemized Deductions. Claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payments of the premium tax credit, it is important that you report changes in circumstances –  such as changes in your income, a change in eligibility for other coverage, or a change of address  –  to your Health Insurance Marketplace.  Advance payments are paid directly to your insurance company and lower the out-of-pocket cost for your health insurance premiums.  Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

For more on job hunting refer to Publication 529, Miscellaneous Deductions. You can get IRS tax forms and publications on at any time.

In addition to all that…

It’s important to know that you have some other job-related tax breaks which you can take advantage of…

Moving Expenses – if you move to a new home for your employment, either a new job or just being transferred in your current job, you might be able to deduct your moving expenses if:

  • the move is closely related to your start of work in the new location
  • your new work location is more than 50 miles farther away from your old home than the distance from your old home to the old work location.  In other words, if your old workplace was 7 miles away from your old home, your new workplace must be at least 57 miles away from your old home.
  • you must continue to work in the new location for at least 39 weeks during the 12 months after the move.  If you’re self-employed you must also work in the new job for 78 weeks during the 24 months following the move. (There are exceptions for disability, layoff, transfers, and other situations.)

You may include the cost of transportation and storage of your household goods for up to 30 days, as well as travel and lodging from the old home to the new home (only one trip per person).

Unreimbursed Employee Business Expenses – certain expenses related to your job that are not reimbursed by your employer can be deducted.  Some examples are:

  • Dues to professional associations and chambers of commerce if work related and entertainment is not one of the main purposes of the organization.  Any part of the dues that is related to lobbying or political activities is not deductible.
  • Educational expenses related to your work.  These expenses must be required to maintain your current job, serving a business purpose of your employer, and not part of a program that will qualify the taxpayer for a new trade or business.
  • Licenses and regulatory fees.
  • Malpractice insurance premiums.
  • Office-in-home expenses (subject to quite a few qualifications)
  • Phone charges for business use (but not the cost of basic service for the first phone in a home)
  • Physical exams required by the employer
  • Protective clothing and safety equipment required for work, as well as tools and supplies required for your job
  • Uniforms required by your employer that are not suitable for ordinary wear
  • Union dues and expenses

This is not an exhaustive list – you can find more information by going to the IRS website at

Photo by Richard Croft

The Third Most Important Factor to Investing Success

out_at_thirdPreviously I wrote about the Most Important Factor and the Second Most Important Factor to Investing Success. Continuing this streak I’ll give you the third most important factor to investing success: Leave it alone.

To recap: The most important factor is to continuously save and add to your nest egg over your career; the second factor is allocation – make sure you’re investing in a diversified allocation that will grow over time.

The third most important factor to investing success: Once you’ve started investing, leave it alone. Resist the temptation to sell off the component of your allocation plan that’s lagging; the reason you have a diversified allocation is so that some pieces will lag while others flourish, and vice-versa.

Reallocate your funds from time to time (once a year at most) to match your allocation plan, but that’s all the fussing you should do with your investments. Leave it alone.

No Loans

In addition to resisting temptation to fiddle with the investments, don’t take out a loan from your account. Even though this may seem like a good alternative to other loan sources, your best option is to disregard the 401k loan as an alternative altogether. Taking a loan puts you behind the eight ball – having to pay back the loan will likely take over your ability to save consistently (Factor #1) and will have a portion of your funds allocated to a loan instead of your growth allocation (Factor #2).

401(k) & Qualified Domestic Relations Orders (QDRO)

An exception to the 10% penalty on distributions from a qualified plan (but not an IRA, an IRA is split via a transfer incident to a divorce, which is not an automatic exception) Qualified Domestic Relations Order, or QDRO (cue-DRO).  A QDRO is often put into place as part of a divorce settlement, especially when one spouse has a qualified retirement plan that is a significant asset.

qdroWhat happens in the case of a QDRO is that the court determines what amount (usually a percentage, although it could be a specific dollar amount) of the qualified retirement plan’s balance is to be presented to the non-owning spouse.  Once that amount is determined and finalized by the court, a QDRO is drafted and provided to the non-owning spouse. This document allows the non-owning spouse to direct the retirement plan custodian to distribute the funds in the amount specified.

In the case of a QDRO, the owning spouse will not be taxed or penalized on the distribution.  In addition, if the non-owning spouse chooses to roll the distribution into an IRA, there would be no tax or penalty on that distribution to her either.  If the non-owning spouse chooses to use the funds in any fashion other than rolling over into another qualified plan or IRA, there will be tax on the distribution, but no penalty.

Many times it may make sense for the non-owning spouse to leave the account with the qualified plan (rather than rolling into an IRA) if there may be a need for the funds at some point in the future.  This will be dependent upon just how “divorce friendly” the qualified plan custodian will be. Sometimes plan administrators do not look favorably on long-held accounts by non-participants. This may require a rollover of the account, eliminating your QDRO special treatment.

Of course other 72(t) exceptions could apply, but if there was a need that did not fit the exceptions and the distributee did not wish to establish a series of substantially equal payments for five years, the QDRO would still apply to the distribution from the qualified plan (as long as the funds are still in the plan that the QDRO was written to apply to).

As an example, let’s say Lester and Edwina (both age 40) are divorcing, and as a part of the divorce settlement, Edwina’s 401(k) plan is to be shared with Lester, 50/50, with a QDRO enforcing the split.  After a couple of years Lester decides he would like to use some of the funds awarded to him from the divorce to purchase a new fishing boat.  As long as the funds are still held in the 401(k) plan, Lester can request withdrawal and receive the funds without penalty, due to the existence of the QDRO.  However, had Lester rolled over the funds into an IRA (or other qualified plan), the QDRO would no longer be in effect, and he would be unable to access the funds without paying the penalty for early withdrawal.  (It is important to note that, in either case, Lester would be required to pay ordinary income tax on the distribution.)

Social Security Benefits After First Spouse Dies

spouse diesWhen your spouse dies there are a few things that happen to your Social Security benefits that you need to be aware of. These things will affect your benefits significantly if your own benefit is less than that of your late spouse’s benefit (or Primary Insurance Amount). These changes to available benefits could also result in increased benefits if your own benefit is the larger of the two.

These same impacts are apparent for ex-spouses as well. While reading the below, just replace “your spouse” with “ex-spouse” and all provisions are the same.

Spousal Benefits cease

When your spouse dies, the spousal benefits that you may have been receiving will cease. This means that your own benefit is the only retirement benefit that you will receive at this point.

For example, Jane and John, both age 64, have been receiving Social Security benefits for a couple of years. Jane’s PIA (Primary Insurance Amount) is $600 and John’s PIA is $2,000. Since both of them started benefits at age 62, both are receiving reduced benefits.

John is receiving $1,500 (75% of his PIA) and Jane is receiving a combination of her own reduced PIA ($450) and a reduced “excess” spousal benefit in the amount of $280. (For more details on the calculation of reduced spousal benefits, see the following article: Calculating the Reduced Social Security Spousal Benefit.)

When John dies at age 64, Jane’s Social Security benefit is reduced to only her own benefit – $450 per month. The spousal benefit ceases to be paid at all upon John’s death.

But all is not lost – if you were eligible for a spousal benefit, you are also eligible for a survivor’s benefit when your spouse dies.

Survivor Benefits (can) begin

After your spouse dies and the spousal benefits cease, you are eligible for a survivor benefit based on your late spouse’s record.

Using our example from above, where Jane’s total benefit had reduced to $450 upon John’s death – Jane is now eligible for a survivor benefit based on John’s record.

There is a complication to the calculation since John started his own benefit prior to his full retirement age: the minimum “basis” for calculation of the survivor benefit is 82.5% of John’s PIA. John’s benefit upon his death was 75% of his PIA, so the “basis” for the survivor benefit will be increased to 82.5% or $1,650, instead of $1,500.

In this case, Jane has a couple of options:

1) She can begin receiving the survivor benefit immediately upon John’s death. This survivor benefit will be reduced since Jane is under Full Retirement Age (FRA). Since Jane is 64, the reduction is 11.4% from the basis of $1,650 – to a total of $1,461.90.

2) Jane could delay receiving the survivor benefit to her age 66, when there would be no reduction. She would receive her own reduced benefit of $450 per month for the coming two years, and then at age 66 she’d start receiving the unreduced survivor benefit in the amount of $1,650.

There is no point in delaying the survivor benefit past Jane’s FRA – the survivor benefit will not increase beyond that unreduced basis that we described earlier.

There is no impact to the survivor benefit due to Jane’s early filing for her own benefit. So if she had not filed for her own benefit prior when her spouse dies, Jane could start her own benefits immediately upon John’s death. This would allow her a benefit in the amount of $520, having filed for the benefit at age 64 (no spousal benefit “excess” is available since John is deceased). Later upon reaching FRA she would be eligible for the survivor benefit at the unreduced amount, $1,650.

On the other hand, there is also no impact to your own benefit if you start the survivor benefit early. If the example changed and Jane dies before John, if John has not filed for his own benefit by Jane’s death, he could receive the survivor benefit based on Jane’s record until he files for his own benefit. Granted, at his age 64 this would work out to a maximum of $531.60, but it’s better than nothing at all. Later, John could file for his own benefit, either at FRA or later, to receive an increased benefit.

Survivor benefit basis updates

As we reviewed above, in the original case where John starts his benefit prior to his Full Retirement Age, the basis against which Jane’s survivor benefit is calculated can increase to the minimum of 82.5% of John’s PIA.

On the other hand, imagine if John had not started his benefits by the time of his death.  The basis against which Jane’s survivor benefit is calculated will increase to John’s full, unreduced PIA. In this case Jane, being 64 at John’s death, is eligible for John’s PIA reduced by 11.4%, or a total of $1,772. If Jane waits until her FRA she is eligible for a survivor benefit of $2,000.

On the third hand, consider if John was older than Jane. John is older than his Full Retirement Age (FRA) at his death and still has not filed for his own benefit. The resulting survivor benefit for Jane is updated differently. In this case, the delay credits (8% per year) are applied to John’s PIA to determine the basis for the survivor benefit. So if (for example) John was 67 at his death, the basis for the survivor benefit would be $2,160, and at age 64 Jane could receive $1,913. Waiting until her FRA would garner her $2,160 in survivor benefits.

WEP impact eliminated

The fourth thing that occurs when a spouse dies is that Windfall Elimination Provision (WEP) impact to the decedent spouse’s benefits is eliminated.

Considering John’s benefits, if he was subject to full WEP because of a government pension, his benefits are reduced to $1,179 (versus $1,500 without WEP). Upon John’s death, his WEP impact is eliminated, restoring his PIA to the full $2,000. Since John started benefits early, the basis for the survivor benefit reduces as above.

So regardless of the previous WEP impact to John’s benefits, Jane would still be eligible for a survivor benefit with a basis of $1,650.

Key Takeaways

Since the spousal benefit ceases when the first spouse dies, it’s important to know that total benefits will likely reduce for the surviving spouse until survivor benefits begin. This can cause significant hardship as demonstrated in the example above. Jane’s household income from Social Security reduced from $2,230 (John’s $1,500 and Jane’s total of $730) to only $450 upon John’s death. The survivor benefit will replace some of this but not all, of course.

In addition, determining when to start survivor benefits can be critical as well. Jane could start survivor benefits at this point in the amount of $1,463, or she could wait until age 66 to receive $1,650. If she waits she will receive her $450 benefit in the interim.

Timing of the higher benefit is important as well. Using our examples from above, John’s filing date has a significant impact on Jane’s potential survivor benefit. The potential increase could make a huge difference for Jane. This is why so many experts recommend delaying the filing for the larger of a couple’s two benefits as long as possible – it will impact the other spouse’s survivor benefit if she lives longer.

The last key takeaway is that you need to keep the WEP elimination in mind when planning for survivor benefits. This can make a significant difference for the surviving spouse – up to $428 a month from our example.

Missed Rollover Automatic Waivers

missed rolloverWhen you rollover funds from one retirement plan to another, a missed rollover occurs if you can’t complete the rollover within 60 days. A missed rollover results in a taxable distribution. However, there have always been certain specific situations that provide for exceptions to this rule, but any reasons outside that limited list required the taxpayer to request a Private Letter Ruling (PLR) from the IRS. The PLR request process could result in some significant costs for lawyers and fees.

Rev Proc 2016-47: Missed Rollover Waivers

Recently the IRS published a new procedure for handling an expanded list of exceptions for a missed rollover. This procedure, Rev. Proc. 2016-47, outlines eleven possible exceptions to the missed rollover rule. The eleven exceptions are:

  1. an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
  2. the distribution, having been made in the form of a check, was misplaced and never cashed;
  3. the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
  4. the taxpayer’s principal residence was severely damaged;
  5. a member of the taxpayer’s family died;
  6. the taxpayer or a member of the taxpayer’s family was seriously ill;
  7. the taxpayer was incarcerated;
  8. restrictions were imposed by a foreign country;
  9. a postal error occurred;
  10. the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
  11. the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

There are some more rules that apply – such as, you must not have requested an exception in the past and that exception was denied – but otherwise it’s a self-certification. The IRS has even provided a sample letter that the taxpayer will use to provide this self-certification. The sample letter is provided at the bottom of the procedure notice: Rev. Proc. 2016-47.

Investing Your 401k – a 2-step plan

two-stepsIf you’re like most folks, when you look at a 401k plan’s options you’re completely overwhelmed. Where to start? Of course, the starting point is to sign up to participate – begin sending a bit of your paycheck over to the 401k plan. A good place to start on that is at least enough to get your employer’s matching funds, however much that might be. In this article though, we’re looking at investing your 401k money. It’s not as tough as you think. In fact, it can be done in just two steps – taking no more than 30-45 minutes of your time.

Step 1 – Look at your options

When you’ve signed up for the 401k plan, review your options for investing your 401k. Look at the list of investments available – and from here you can take a shortcut if you like.

If your plan has a “target date” investment option that coincides closely with your hoped-for retirement date, start with that fund as your investment choice. This is an excellent place to start, especially when you have a relatively small amount of money in the plan. Choose this and you’re done – skip down to the “Follow up” section below.

If you’ve been participating for a while and have built up some money while investing your 401k, look at your options more closely. Among your options should be a large-cap stock fund (such as an S&P 500 index). In addition, there should be a broad-based bond fund as an option as well.

If there are multiple choices that fit those two categories, look a bit closer. Somewhere in your documentation should be information about the expense ratios of the funds. Choose the large-cap stock and bond fund with the lowest expense ratio when there is a difference.

There will likely be other investment options available to you, but for simplicity’s sake, you should just stick with these two for the time being. As you build your experience investing your 401k plan, add other investment choices to the mix.

Note: if you’re still overwhelmed, look at “Follow up” below for information about advisors to help you with the process.

Step 2 – Consider your risk tolerance

Risk tolerance is a fancy term that we financial-types use to describe how much you can stand the ups and downs of the market when investing your 401k funds. If you’re a nervous investor, watching your balance every day or week, you have a low risk tolerance; if you are a “set-it-and-forget-it” type, your risk tolerance is higher. Stocks are (generally) the more risky investment versus bonds, so if you have a lower risk tolerance your stock investment should be a bit lower. Vice versa if you have a higher risk tolerance.

Generally, when choosing between the two options we outlined above (stock and bond funds), you should select a ratio of no less than 25% of either, and the remainder of your selection should be no more than 75%.

A good starting point is 50% in each of the stock fund and the bond fund. If you’re really skittish about investing your 401k, and/or there are only a few years remaining before your retirement date, you might choose to invest a bit less in the stock fund and more in the bond fund. On the other hand, if you’re okay with the market’s up and down movements and recognize that investing your 401k is a long-term activity, investing more in stocks and less in bonds may be the better choice.

If it seems like I’m vague about this part, that’s because this part is personal and can be different for each person. Without knowing your circumstances, I can’t tell you how to invest. However, as a rule, it’s better to put more in stocks than in bonds, as this will give you a better chance of experiencing growth of your 401k plan over time. If you start out skittish and become more comfortable, you can always increase your stock investment later on.

Follow up – investing your 401k

After you’ve had some experience investing your 401k funds, you may become more comfortable with the process. Even if you’re not comfortable with it, it does pay off to review your investment options again over time. Especially if you chose the target date option above, you may want to adjust your investment process over time.

Your employer may offer access to a service to guide you through the process of investing your 401k. Take advantage of this service if you have it available.

In addition, there are plenty of books that can help you with the investment process. You’ll never regret educating yourself on investing. If it’s just not your thing, you can choose to find an advisor to help you with the follow up process. There are many advisors who can help you look over the options for investing your 401k. Many do this for an hourly fee. Even if it costs you $500 to $1000 to get this advice, it’s money very well spent. The advisor will help you understand what’s going on with your 401k.

Two good options to find advisors are the Garrett Planning Network and the National Association of Personal Financial Advisors (NAPFA). Click on the link to go to each website for more information.

If your hobby makes money, read this

hobbyLots of us have a hobby – whether it’s collecting stamps, raising honeybees, restoring old Jeeps, or mounting a wild-cat – and sometimes these hobbies can produce income. If you have a hobby that makes money, you may need to claim this money as income, net of your expenses, on your tax return.

Recently the IRS published their Summertime Tax Tip with Five Tax Tips about Hobbies that Earn Income, providing useful information about income-producing hobbies. The text of the Tip is below:

Five Tax Tips about Hobbies that Earn Income

Millions of people enjoy hobbies. Hobbies can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income from hobbies is different from how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

  1. Business versus Hobby. There are nine factors (below) to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses, to learn more. You can also visit and type “not-for-profit” in the search box.  You generally must consider these nine factors to establish that an activity is a business engaged in making a profit:
    • Whether you carry on the activity in a businesslike manner.
    • Whether the time and effort you put into the activity indicate you intend to make it profitable.
    • Whether you depend on income from the activity for your livelihood.
    • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
    • Whether you change your methods of operation in an attempt to improve profitability.
    • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
    • Whether you were successful in making a profit in similar activities in the past.
    • Whether the activity makes a profit in some years and how much profit it makes.
    • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
  2. Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
  3. Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
  4. How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
  5. Use IRS Free File. Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 17. If you make $62,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through

IRS Tax Tips provide valuable information throughout the year. offers tax help and info on various topics including common tax scams, taxpayer rights and more.

Additional IRS Resources:

Social Security for Ex-Spouses – Swim with Jim Video

In the video cast above I am talking with Jim Ludwick, of Mainstreet Financial Planning, Inc. about benefits from Social Security for ex-spouses. Let me know if you have any questions!

If for some reason the video is not showing up in the article – you can find it on YouTube at

Book Review: Making Social Security Work For You

This book, by my friend and colleague Emily Guy Birken, is a great book for gaining a better understanding of Social Security benefits. I recommend Making Social Security Work for You to anyone looking for answers about Social Security benefits. Birken is also the author of The Five Years Before You Retire, another excellent retirement planning tome.
Birken’s style of writing is easy-to-follow. She has a subtle sense of humor that comes out in her writing. This makes the material enjoyable to read, even for a dry subject like Social Security.

Making Social Security Work for You

I especially like the way author Birken presents the material. Having written a book on the subject, I know full well the challenge she faced when putting this information together. It is difficult to make such a technical subject understandable and engaging. Birken presents the material in a cohesive manner, with a review (Takeaways) at the end of each chapter.

Birken also does an excellent job of explaining the various benefits, timing strategies, and options available to an individual in all sorts of circumstances. There are explanations for the single filer, married couples, and divorced individuals. The information presented includes all of the changes to the rules that came into effect with the Bipartisan Budget Act of 2015. Grandfathered rules are covered as well.

Birken presents excellent examples throughout the text, which help the reader to understand the principles. These are real-world situations that are easily adapted to your own situation as you see fit.

The book rounds out with a list of the Pitfalls and Problems for you to be aware of as you plan your Social Security benefit filing. These are important to know about so that you don’t make mistakes in your filing process.

All in all – I highly recommend Making Social Security Work for You for your education process as you determine the best filing methods for yourself and your family. Emily Guy Birken has done an excellent job with this book, you can learn a lot from it.

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