Getting Your Financial Ducks In A Row Rotating Header Image

Charitable Contributions From Your IRA – 2012 and Beyond

Jan 4th, 2012
by jblankenship.
4 comments
K S Hegde Charitable hospital
Image via Wikipedia

At the end of December, 2011, the provision for Qualified Charitable Distributions (QCD) expired.  That provision allowed the taxpayer age 70½ or older to make direct distributions from an IRA account to a qualified charity, bypassing recognition of the distribution as income.  For more information on the expired provision, see the original article about charitable distributions from your IRA.

With the expiration of this provision, you can still make charitable contributions of money distributed from your IRA.  The difference is that these contributions are no different from a contribution that you’ve made from your savings account or regular income.  In order to achieve a tax advantage from the contribution, you will itemize the charitable contribution on your tax return.  Of course, in addition to this, if the money is from your IRA you’ll also have to recognize the distribution as income.

Let’s look at both ways to fully understand what’s different now.

The old way

Under the expired provision if you qualified, you could make a direct distribution from your IRA account to the qualified charity of your choice.  Then when you were ready to file your tax return for the year, you wouldn’t include the amount of the direct distribution to the charity as income.  This could also include your Required Minimum Distribution (RMD) for the year, as well.

By doing this, you didn’t have to recognize this income at all – which doesn’t seem so important until you see how it works in the new way.

The new way

Now that the QCD provision has expired, you can still make charitable contributions from your IRA, but it’s not as advantageous as the old way.  Under this method (which can be enacted by anyone over age 59½ without penalty) you take a distribution from the IRA, and then send it to the charity of your choice.

(In actuality, the distribution doesn’t have to be from an IRA, but we’re doing a compare and contrast against the expired QCD arrangement, so that’s what we’ll use for the examples.)

When you get around to filing your tax return for the year now, you’ll have to recognize the distribution from your IRA as income.  Later on the return, you can include the charitable contribution as an itemized deduction, eventually lowering your taxable income by the same amount.  However, since you have to include the distribution as income, this will increase your overall income (unless you have Net Operating Losses from your business to offset the income), and will therefore also increase your Adjusted Gross Income (the bottom line of your Form 1040).  The significance to this is that many tax provisions depend upon the Adjusted Gross Income (AGI) figure.

An example is deductible medical expenses – these are only deductible to the extent that they are in excess of 7.5% of your AGI.  Miscellaneous Itemized expenses are subject to a similar “floor”: they must be greater than 2% of your AGI in order to be deductible.  In addition, certain phase-outs are impacted by AGI level as well.

So you can see that increasing your income can have a significant impact on your overall tax return.  Here’s a quick example of how this could impact a taxpayer.

Example

Taxpayer is single, age 73, and is subject to RMDs from his IRA.  He wishes to make a charitable contribution of $50,000 from his IRA funds to his church.  If this were 2011, he could make his distribution directly from the IRA to the church. Here’s how his tax return worked out:

Income (pension and IRA, plus his $10,000 additional distribution)

$50,000
Adjusted Gross Income

$50,000
Medical Expenses

$10,000
Deductible Medical Expenses (above 7.5% of AGI)

$6,250
Charitable Contributions

$10,000
Exemption

$3,700
Taxable Income

$39,050
Tax

$5,888

Under the 2012 method, Taxpayer takes the distribution from his IRA and then sends it to his church.  Here’s how the tax return works out now:

Income (pension and IRA, plus his $10,000 additional distribution)

$60,000
Adjusted Gross Income

$60,000
Medical Expenses

$10,000
Deductible Medical Expenses (above 7.5% of AGI)

$5,500
Charitable Contributions

$11,000
Exemption

$3,800
Taxable Income

$39,700
Tax

$5,955

Under the new method in our example, the tax cost was increased by $67.  This doesn’t seem like a lot, but if the circumstances were a bit different this could become sizeable – and who likes to pay extra taxes of any amount?

Bear in mind that this provision has expired and subsequently been extended in the past, so it’s possible that it could be extended again at some point in the future.  Stay tuned.

Enhanced by Zemanta
Be Sociable, Share!

Determining Your MAGI

Jan 1st, 2012
by jblankenship.
6 comments
Magi 38 (2008)
Image by Nikola~Chikos via Flickr

There are income limits for contributing to an IRA (traditional and Roth), and below are links by filing status to illustrate the income limits in the situation where you are or are not covered by an employer-provided retirement plan, given your filing status.  This, along with your filing status and your Modified Adjusted Gross Income (MAGI) is an important factor in setting the limits for TIRAs, as there is the issue of deductibility at stake.

In order to fully understand the limitations, you also need to understand what makes up your Modified AGI (MAGI).  The MAGI is calculated as follows:

1.    Start with your Adjusted Gross Income (line 22, Form 1040A, or line 38, Form 1040).
2.    Add back in your IRA deduction amount (line 17 on Form 1040A or line 32 on Form 1040)
3.    Add back in your student loan interest (line 18 on Form 1040A or line 33 on Form 1040)
4. Add back in any tuition and fees deductions from line 34 on Form 1040 (or line 19 on Form 1040A)
5.    Add any domestic production activities from line 35 on Form 1040 (there is no line for this on 1040A)
6.    Add back any foreign earned income exclusions from line 18 of Form 2555EZ or line 45 of Form 2555.
7.    Add back any foreign housing deduction from line 50 of Form 2555
8.    Add back any excluded qualified savings bond interest shown on line 3, Schedule 1, Form 1040A, or line 3, Schedule B, Form 1040 (from line 14, Form 8815)
9.    Add back in any excluded employer-provided adoption benefits shown on line 30, Form 8839.

The total of these nine items listed above make up your Modified Adjusted Gross Income, or MAGI.

For the IRA MAGI limitations where your income tax filing status is Single or Head of Household, click here. Note: if a taxpayer files Married Filing Separately and did not live with his or her spouse during the tax year, for the purposes of IRA eligibility that taxpayer is considered Single and would use this table. (click here for 2011 limits)

If your income tax filing status is Married Filing Jointly or Qualifying Widow(er), click here for the IRA MAGI limitations. (click here for 2011 limits)

For a tax filing status of Married Filing Separately, and you have lived with your spouse at any time during the tax year, click here for IRA MAGI limitations. (click here for 2011 limits)

Enhanced by Zemanta
Be Sociable, Share!

2012 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

Jan 1st, 2012
by jblankenship.
2 comments
Pension Herzog
Image by versal.at via Flickr

Note: 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 $92,000 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 $92,000 but less than $112,000, you are entitled to a partial deduction, reduced by 25% for every dollar over the lower limit (or 30% 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 $112,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. 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 $173,000, 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 $173,000 but less than $183,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% 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 $183,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. 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 $173,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $173,000 and $183,000, 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 $183,000 or more, you cannot contribute to a Roth IRA.

Enhanced by Zemanta
Be Sociable, Share!

2012 MAGI Limits – Single or Head of Household

Jan 1st, 2012
by jblankenship.
1 comment
synchronized swim team
Image by Getty Images via @daylife

Note: 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):

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 $58,000 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 $58,000 but less than $68,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% 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 $68,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. 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 $110,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $110,000 and $125,000, 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 $125,000 or more, you cannot contribute to a Roth IRA.

Enhanced by Zemanta
Be Sociable, Share!

2012 IRA MAGI Limits – Married Filing Separately

Jan 1st, 2012
by jblankenship.
2 comments
if there was ever a doubt
Image by drcw via Flickr

Note: 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 50% for every dollar (or 60% 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 2012.  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 50% for every dollar over the lower limit (or 60% 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 2012.  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 can not contribute to a Roth IRA.

Enhanced by Zemanta
Be Sociable, Share!

Review of 2011 Stats

Jan 1st, 2012
by jblankenship.
No comments yet

ducks in a row by dalvenjahEd. Note: As in past years, I’m taking a break from my normal business of posting retirement, tax and other personal financial planning topics to report on the blog itself and the statistics we’ve seen in this, the 8th year of publication for this blog. I’ll be back to regular programming with the next entry. – jb

Over the past year, this blog has seen continued growth. This year has been all about Social Security as much as anything. As you know, in October I released A Social Security Owner’s Manual, and many of you have picked up copies, thank you! Through your comments and email questions I have come to meet literally hundreds and hundreds of you over the years – and we’ve learned a lot together. I’ll take this opportunity to thank you for your tremendous support by reading, asking questions, and making comments on what I have written. I hope these interactions have been as fulfilling for you as they have been for me.

Planned for 2012: more of all the wonderful income tax, IRA, Social Security and other retirement, investment and financial planning articles that you’ve come to expect; completion of the print edition of An IRA Owner’s Manual; guest experts from time to time will contribute posts on areas complimentary to the subjects of this blog (contact me if you’d like to write an article, I’m always looking for more!); book reviews as a part of an arrangement with McGraw-Hill (more on this in the new year); and continuing the pace of approximately 175 to 200 posts throughout the year. Please pass along any suggestions for new topics that you’d like to see written up and discussed.

Listed below are the Getting Your Financial Ducks in a Row end of year statistics and Top Ten lists for 2011. A huge THANK YOU goes out to everyone that has taken part in this blog over the years!

General Statistics for 2011

  • 176 total posts
  • 164 comments & trackbacks
  • 148,842 page views – averaging 408 per day (2010: 75,774 views, 207 per day)
  • 300 RSS subscribers

Top 10 Most-Viewed Posts for 2011

  1. Charitable Contributions From Your IRA in 2010 and 2011
  2. The File and Suspend Tactic for Social Security Benefits
  3. IRS Table I (Single Life Expectency)
  4. Proposed Social Security Wage Base Increases
  5. The IRA Owner’s Manual
  6. Social Security Legislative Bulletin 106-20
  7. Student Loan Interest Deduction Changes in 2011
  8. The Spousal Benefit Option for Social Security Benefits
  9. Earned Income Tax Credit 2011 Style
  10. A Little-Known Social Security Spousal Benefit Option

Top 10 Referrers for 2011

  1. thestreet.com
  2. figuide.com
  3. thefinancebuff.com
  4. forbes.com
  5. news.yahoo.com
  6. stumbleupon.com
  7. facebook.com
  8. twitter.com
  9. rwinvesting.blogspot.com
  10. obliviousinvestor.com

Top 10 Search Engine Terms for 2011

  1. ira charitable contributions
  2. charitable contributions from IRA
  3. social security file and suspend
  4. social security wage base
  5. life expectancy tables
  6. windfall elimination provision
  7. social security spouse options
  8. government pension offset
  9. qualified domestic relations order 401k
  10. social security pia

Top 10 Most Popular Links Clicked in 2011

  1. jct.gov
  2. ssa.gov/legislation/legis_bulletin_022900.html
  3. bfponline.com
  4. socialsecurityownersmanual.com
  5. createspace.com/3657057
  6. blankenshipfinancial.com/forms/Financial Stuff Organizer.zip
  7. iraownersmanual.com
  8. irs.gov
  9. socialsecurity.gov
  10. irs.gov/pub/irs-pdf/f1040es.pdf

That’s it for 2011 – Happy New Year to all, and thanks again for all your support! – jb

Photo by dalvenjah
Be Sociable, Share!

Book Review: Financial Fitness Forever

Dec 26th, 2011
by jblankenship.
1 comment

I have to tell you something about how I treat books: I have a great deal of respect for books.  I have so much respect for books that you will rarely find a book in my possession that has writing in it (other than an author’s signature) or page corners turned down.  I like my books to be pristine, so it’s against my own personal rules of conduct to do things like that to a book.

Occasionally though, I run across a book so important and useful that I am compelled to break these rules, in spite of myself.  This particular book is just such a book.  What I found so useful about this book is not the subject matter or the topic, as there are many, many books on the topic of how to be financially secure throughout your life, with most being far less impactful than this book.

I found that author Paul Merriman has such unique ways to explain the topic, I was immediately compelled to turn down page corners so that I can go back and reference them later. Mr. Merriman has captured some very useful explanatory methods that literally anyone can gain benefit from reading, and I expect I’ll come back to this book again and again.

Mr. Merriman’s many years of experience in the financial industry has provided him with an amazing wealth of knowledge about what works to help you become successful as a saver and investor.  What’s unique is that he also explains what the average person faces in terms of distractions from the successful track (such as listening to your neighbors or Jim Cramer) and why those things can work against you.  This kind of explanation is rare in this industry, but it’s critical to understand these things and avoid the distractions in order to ultimately be successful.

In addition, Mr. Merriman takes great pains to explain the process of investment portfolio construction – a topic that many folks spend far too little time on, but a concept that can literally have millions of dollars of impact.

If you’ve never read such a “how to be successful as a saver and investor” sort of book and you’re looking for answers, this is your book.  If you’ve read other books in this category and haven’t found the formula that you need – you should read this book.

If you’re already fine with your investing strategy and are in good shape, there are still some great nuggets of information here.  For one thing, Mr. Merriman includes as an appendix 20 pages of description of the top 50 401(k) plans in the industry… including sample recommended allocations for an aggressive, moderate, and conservative allocation within each of the 50 plans.  This reference alone is worth the cost of the book.  When you add in the fact that the same types of portfolios are listed in detail for six top mutual fund families plus a portfolio of ETFs, you’ve got a great value here.

If you’re saving and investing and have any questions at all about portfolio construction (or anything else about how to be successful at investing in general), you owe it to yourself to read this book.  And go for it – turn down the pages, it’s really that important!

Be Sociable, Share!

One More File and Suspend Option

Dec 23rd, 2011
by jblankenship.
No comments yet
Spider's egg sac
Image via Wikipedia

We’ve discussed the file and suspend option in multiple articles, but did you know that there is one more option for file and suspend. This is one that provides you with the opportunity to earn delayed retirement credits (DRCs) on your Social Security benefits, even if you started receiving benefits early.

File and suspend is generally an option that is used by a married couple – providing a method by which one of the two can receive Spousal Benefits while the other delays receiving benefits until later, earning DRCs.  (For more on this, see this article on Spousal Benefits.)

This additional option is available at Full Retirement Age (FRA), just like otherwise.  But what’s different about this is that the suspend option is used when you’ve already been receiving benefits, most likely early at a reduced rate, and by suspending at FRA you make yourself eligible to earn Delayed Retirement Credits (DRCs) on your present benefit.

Here’s how it works: Say you started receiving your benefit early, at age 62.  By doing so you permanently reduced your benefit.  If you’d waited until Full Retirement Age (FRA), you could have received a benefit of $2,000, but by taking the benefit early you are now receiving a reduced amount, $1,500.  And ever since that time, you have been kicking yourself because you had plenty of money to keep you going, and you wished you had waited and delayed your benefit.

Without overcomplicating this with Cost-of-Living Adjustments (COLAs), let’s say you’ve now reached Full Retirement Age (FRA).  Having reached FRA, you now have the option to enact the file and suspend option.  This means that you can now suspend receiving your benefit and begin earning Delayed Retirement Credits of 8% per year, between now and your 70th birthday.  This means that your overall benefit could be increased by as much as 32%, to a total of $1,980.  This could be a way to bump up your future benefits, as well as your surviving spouse’s Survivor Benefit.

In the event that you try to put this one into action, expect for some opposition from Social Security staff.  Even in the most-accepted of circumstances, Social Security staff often claim to know nothing of the file and suspend option.  So one way to help yourself in talking to the representatives is to refer to the webpage at http://www.socialsecurity.gov/retire2/suspend.htm.  I’ve copied the text below for your reference:

Voluntary Suspension of Retirement Benefits

If you have reached full retirement age, but are not yet age 70, you can ask us to suspend retirement benefit payments.

  • If you apply for benefits and we have not yet made a determination that you are entitled, you may voluntarily suspend benefits for any month for which you have not received a payment. Your request to suspend benefits may include any retroactive benefits that might be due.
  • If you are already entitled to benefits, you may voluntarily suspend current or future retirement benefit payments up to age 70 beginning the month after the month when you made the request.Reminder: We pay Social Security benefits the month after they are due. If you contact us in June and request that we suspend benefits, you will still receive your June benefit payment in July.

You do not have to sign your request to suspend benefit payments. You may ask us orally or in writing.

Note: If you started receiving Social Security benefits less than 12 months ago and you changed your mind about when they should start, you may be able to withdraw your Social Security claim and re-apply at a future date. If your request is approved, you must repay all the benefits you and your family received based on your retirement application.

 

Before you make your decision

There are some things you need to know about what will happen if you suspend your retirement benefits.

  • If you are enrolled in Medicare Part B (Supplementary Medical Insurance), you will be billed by the Centers for Medicare & Medicaid Services (CMS) for future Part B premiums.These premiums cannot be deducted from your suspended retirement benefits. If you do not pay the premiums timely, you may lose your Part B Medicare coverage. (You will have the option of automatically paying the bill from an account at your bank or financial institution.)

    Exception: If you also receive benefits as a spouse or ex-spouse, we can deduct your Part B premium from that benefit payment.

  • If you also receive Supplemental Security Income (SSI) benefits, suspending your retirement benefits will make you ineligible for SSI.
Enhanced by Zemanta
Be Sociable, Share!

Using An IRA Rollover to Eliminate Federal Spousal Rights

Dec 14th, 2011
by jblankenship.
No comments yet
Marriage
Image by Lel4nd via Flickr

Qualified Retirement Plans (QRPs), which include 401(k), 403(b) and many other employer-based plans, are governed by federal law under ERISA.  One of the tenets of ERISA is that there are certain rights for the spouse of the employee-participant in the plan.  One of those rights is that the spouse must consent to any distribution from that plan that is in the form of anything other than a Qualified Joint and Survivor Annuity (QJSA).

Depending upon your circumstances, this might not be the way you would like for things to work out.  For example, if you’re planning to get married and you want to ensure that your future spouse doesn’t control distributions from your retirement plan, you could rollover your QRP to an IRA before your marriage – because an IRA isn’t covered by ERISA like the QRP is.  A prenuptial agreement could be used to limit a spouse’s rights to an IRA, but it cannot usurp the ERISA rules.

If you’re already married and you have a reason to consider this option, hopefully it’s not because there are storm-clouds on the horizon for your marriage.  If this is the case, you will likely have some difficulty in enacting this rollover.  The problem, as mentioned before, is that the spousal rights provision requires that your spouse signs off on any distribution other than the QJSA.

If you’re going through a divorce, it’s possible that you’d need to have your ex-spouse sign off on a distribution from your QRP if the QRP isn’t part of the assets to be split.  If the QRP isn’t being split for the divorce, you’ll want to make sure that you have a statement in the decree that ensures that the QRP is positively identified as belonging solely to you. Otherwise, your ex could make a claim against a portion of your QRP later, under ERISA.

Bear in mind that the spousal distribution rights from the QRP also apply to death benefits from the plan, in addition to lifetime benefits.

One other thing to keep in mind is that your own state’s law may provide rights to your IRA to your spouse anyhow.  If that is the case, the rollover to the IRA would not have the effect you expected.

Enhanced by Zemanta
Be Sociable, Share!
← Earlier Posts Newer Posts →