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Who Will Be The Biggest Benefactors of Obamacare?

Insurance

Insurance (Photo credit: Christopher S. Penn)

According to data cited in a recent WSJ article (The Health-Care Overhaul: What You Need to Know), there is a specific demographic that should benefit the most from the up-coming institution of the Affordable Care Act’s changes to the healthcare system.  If you’re wondering why this writing seems a bit smug, it’s because I’m one of these projected benefactors: folks between age 50 and 64.

Why is this group deemed the most likely to benefit?

It has to do with some current realities about our nation’s health and the way that the (current and proposed) health insurance marketplace works.  First of all, folks in this age group who are not covered by an employer plan, or are not covered by Medicaid, must find insurance in the private marketplace. And the reality is that folks who’ve seen half a century of life or more are typically in poorer health than younger people, thus having greater need for health insurance coverage. Plus, if you’re in that age group and you find yourself unemployed, whether by early retirement or layoff, AND you have a pre-existing condition, finding health insurance at all can be nearly impossible.  According to the WSJ article, in 2012 20% of this group had no health insurance at all, and up to 29% had been rejected for insurance (2008 figures).

Under the Affordable Care Act (aka, Obamacare), these folks will have access to health insurance without the possibility of denial due to health or any other reason.

Secondly, given the income caps that have been legislated and the tax credits associated, the insurance is expected to be much more affordable in the brave new world.  Premiums for older adults are to be capped at no more than 3x the rate of younger policyholders.

One way that this might not work out as intended is if the younger folks (not covered by an employer plan or Medicaid) opt out of policies in favor of the tax penalty (which will eventually be the greater of $695/year or 2.5% of income).  If that were to happen, the overall cost of health coverage under “marketplace” plans could skyrocket.  If younger, healthier folks are opting out of insurance coverage, all that would be left in the plans would be young, unhealthy folks and the other non-covered group up to age 64 – and the cost of covering this group could be enormous.

Honestly, I don’t know what will happen, and whether anyone will actually benefit from the implementation of the Affordable Care Act.  I expect that many folks will have health insurance coverage when before they didn’t, but how the costs will work out is up in the air.

What do you think?  Share your thoughts in the comments section below.

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Medicare Part B

English: image edited to hide card's owner nam...

English: image edited to hide card’s owner name. author: Arturo Portilla (Photo credit: Wikipedia)

The next letter in our Medicare alphabet soup is Part B. Part B is essentially medical insurance that covers doctor’s services, outpatient care, home health services, and durable medical equipment. It will also cover some other services as well as well as many preventative services.

As far as what doctors will and will not cover Part B depends on whether or not they have agreed to assignment. Assignment is simply your doctor or another health care provider agreeing to be paid directly by Medicare and be willing to accept the payment amount that Medicare decides is the value of the service. Agreement also means the doctor or health care provider cannot charge you any more than what the deductible and coinsurance amounts are.

The basic cost for Medicare Part B for 2013 is $104.90 monthly. Individuals with higher AGI may end up paying more. The table below, courtesy of Medicare.gov shows the increased amount based on AGI.

If your yearly income in 2011 was You pay (in 2013)
File individual tax return File joint tax return
$85,000 or less $170,000 or less $104.90
above $85,000 up to $107,000 above $170,000 up to $214,000 $146.90
above $107,000 up to $160,000 above $214,000 up to $320,000 $209.80
above $160,000 up to $214,000 above $320,000 up to $428,000 $272.70
above $214,000 above $428,000 $335.70

The standard deductible for Medicare Part B is $147 for 2103. Once the deductible is met, then any covered individual will pay 20% of any covered service. Medicare will pick up the other 80%. This is all that someone will pay out of pocket for services under a doctor or provider who has an agreement with Medicare. A person may end up paying more if their doctor is not in agreement.

Part B does not cover long term care nor does it cover custodial care. Other excluded services include routine dental and eye care, acupuncture, hearing aids and exams, and elective cosmetic surgery.

To enroll in Part B, you can ether choose to enroll or you may have been automatically enrolled. If you’re already receiving Social Security benefits then you’re automatically enrolled in Part A and B unless you decide to opt out of Part B. Possible reasons you may want to delay Part B coverage would be in the case of if you already have benefits through current employment or a union agreement.

Generally, should you choose to enroll in Part B, you’re allowed to do during the open enrollment periods. Usually you have 8 months to sign up for Part B coverage. Failure to sign up within the 8 month window may lead to you paying a penalty to sign up outside of the enrollment period.

Signing up for Part B also allows you and qualifies you to become eligible for a one-time 6 month open enrollment period for getting a Medigap policy. What does this mean? This means that you now have a guaranteed right to purchase a Medigap policy in your state regardless of your health status. We’ll talk about Medigap in a future article.

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The ABC’s (and D’s) of Medicare

 

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With more and more baby boomers retiring, more and more people including the Boomers, and their children and families are going to have questions and concerns about Medicare. Questions can range from what Medicare is, what it does, what it doesn’t do, and the nuances that make up our nation’s health care for retirees.

Medicare was created in 1965 by the Social Security Act and was signed into law by Lyndon Johnson.

Currently, Medicare is funded via taxation and premiums paid by Medicare subscriber. Part A – which we will cover in a future article, is funded by a 2.9% tax on wages. Unlike Social Security tax that has a limit or cap on the amount of income that can be taxed ($110,100 in 2012 and $113,700 in 2013), Medicare has no such wage base. The 2.9% tax is on an unlimited amount of earnings.

Eligibility for Medicare typically starts for those who turn age 65 and are permanent citizens of the US. Persons are automatically enrolled at age 65 if they have yet to start collecting Social Security. Persons electing to receive Social Security benefits before their full retirement age (FRA), must enroll manually in Medicare at age 65. Persons can also be eligible for Medicare based on having a disability covered under Social Security for 24 months, end-stage renal failure (requiring dialysis), and amyotrophic lateral sclerosis (ALS – Lou Gehrig’s Disease). Finally, Medicare is available for covered railroad workers receiving Railroad benefits.

According to Medicare.gov, enrollment is set to hit 78 million people by 2030 – as the majority of baby-boomers will be enrolled.

Medicare is broken down into three parts: A, B and D. Wait a second. Didn’t we skip a letter? Yes. We’ll talk about Part C or Medicare Advantage a little later on. Next time, we’ll talk about Part A.

Long Term Care Insurance – Protecting Your Nest Egg

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Long term care is a topic few people know about and a topic even fewer people are prepared to deal with in the future. As the average life expectancy increases in the US, more and more people – from Baby Boomers to X and Y geners – are going to be confronted with the need for and planning for long term care.

According to the Medicare website, about 9 million men and women over age 65 will need LTC this year – that number expanding to 12 million by 2020. According to the Department of Health and Human Services, people who reach age 65 will have a 40% chance of entering a nursing home and 10% of those will stay there for more than 5 years. This, of course, can get expensive. This is where an LTC policy can make sense.

There are two types of LTC policies that a person may obtain: Tax Qualified and Non-Tax Qualified. Non-Tax Qualified policy coverage starts when a person is stated have a medical necessity by a doctor and corresponding insurance company representative. These “triggers” start the claim period and benefits.

Most individuals will purchase Tax Qualified policies. The premiums for these are deductible for income tax purposes (subject to the 7.5% floor) and the coverage goes into effect when a person is incapable of performing at least two out of six activities of daily living – or ADL’s. These ADL’s or policy “triggers” are bathing, eating, dressing, toileting, transferring from bed to chair and continence. Also, substantial cognitive impairment will also trigger a claim.

Although walking is considered an ADL for non-tax qualified policies, it IS NOT an ADL for a tax-qualified policy.

Benefits can range from custodial care, skilled nursing care, home care, hospice care and comprehensive care depending on the type of policy purchased. Premiums will be adjusted accordingly depending on the type, nature and scope of the coverage. Policies will also have different elimination periods (time deductibles) of 30, 60, 90 and 180 days. A longer elimination period will mean lower premiums, but will also mean more time to wait until benefits begin. Here is where an emergency fund can be very useful. 3-6 months of living expenses can help offset a long elimination period.

It should also be noted that Medicare DOES NOT cover custodial care – it is specifically excluded.

From a planning standpoint, not having LTC can quickly erode a lifetime of savings, investing and legacy planning. It can be a useful hedge to help keep a retirement portfolio in place, but can also (if not most importantly) keep undue stress off of a family that may feel obligated to care for a loved-one, if a LTC plan is not in place. It also goes without saying that it is impossible to get an LTC policy once cognitive impairment or an ADL has appeared.

Generally, the optimal time to consider LTC is after the age of 50. However, people may want to consider it earlier if they have a family history of mental illnesses (Alzheimer’s and or dementia) or if family members want to get together and “pool” the premium payments among siblings for their parents. This can assure less stress in the future by not having to feel obligated to take care of a loved one, and can also purchase the best care you’d like to see a loved-one have. It can also mitigate responsibilities of family members who live closer to aging relatives, while others live further away.

If you’re considering LTC, it’s important to ask your questions and do your due diligence. How much does the policy cost, what does it cover, what is the daily benefit, etc., are all excellent questions. You may also consider the financial stability of the company offering the policy and length of coverage as well. Don’t be afraid to ask questions. A competent LTC advisor will be happy to help answer your questions and do the best for your needs.

In the end, you can sleep a little better knowing that you’ve just hedged and protected your future, your legacy and your retirement, while lowering your stress.

 

Financial Planning Pyramid: Foundations

Insurance

You can’t build a house from the top down, right? Like most solid structures, they start with solid base, a firm foundation. Some of the biggest skyscrapers are started below ground level, well beyond what’s in our view when we look at the behemoths of structures. Can you imagine a skyscraper built on just a foundation of concrete? The first strong wind or tremor would send it toppling. The same process can be applied to financial planning. You have to have a solid base, a firm foundation before you can think about building a portfolio, estate planning, etc.

Generally, the financial planning pyramid starts with the base known as risk management. This includes such risks as auto and home insurance, an emergency fund, life and disability insurance, and a will. Having this solid base protects you from many risks in life, but also protects your plan and your money that you’ve worked so hard to earn and invest. For example, let’s say you’re at fault in an auto accident and are liable for $500,000 in damages. Proper auto insurance liability limits will take care of this amount. If you don’t carry enough coverage or choose to not have insurance, then you are essentially choosing to self-insure – meaning you’ll pay the damages out of pocket. Very few people I know can afford to do this; which is why we transfer that risk to the auto insurance company. This scenario can be made analogous to home insurance, pre-mature death (life insurance), an emergency fund (unexpected expenses from job loss or to pay high deductibles in an insurance policy), and so on. It’s this risk management base that protects our wealth and future wealth and plans, so we don’t have to dip into our IRA, 401(k), etc., and having our financial future being upended.

Another time, I’ll dive into and explore the middle of the pyramid – wealth accumulation and management.

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What Obamacare Will Do to Your Taxes

President Barack Obama's signature

So, now that the Patient Protection and Affordable Care Act (PPACA, aka “Obamacare”) has been upheld by the Supreme Court, we need to face up to the tax changes that are inherent in this piece of law.  Like it or not, the IRS is going to have a large role in enforcing the provisions of this law.  Listed below are some of the major impacts that we as taxpayers will experience.

Healthcare Deduction Limit

Before PPACA, through the end of tax year 2012, healthcare expenses are deductible to the extent that they are greater than 7.5% of your Adjusted Gross Income (AGI).  AGI is the bottom line on the first page or the first line on the second page of your Form 1040.

The change coming for tax year 2013 is that the limit is now going to be 10% of your AGI.  So, if you have an AGI of $80,000 and deductible healthcare expenses of $10,000 – in 2012 this would result in a healthcare deduction of $4,000 ($10,000 minus $6,000 – where $6,000 is 7.5% of $80,000).  In 2013, this deduction for the same expenses would be reduced to $2,000 ($10,000 minus $8,000 – where $8,000 is 10% of $80,000).

This is likely the tax change that will impact the most people – of nearly all tax brackets.  For 2013 this change will only impact filers under age 65 – those folks will experience the new limit beginning in 2017.

Medicare Wage Surtax

For single filers with incomes above $200,000, a new payroll tax will be applied to income above $200,000.  The same applies for couples with joint income above $250,000.  This payroll tax is equal to 0.9% of the income in excess of the $200,000 or $250,000 level.

Medicare Unearned Income Surtax

With the same levels as above ($200,000 and $250,000) applied to Modified Adjusted Gross Income (AGI), there will be an additional 3.8% Medicare surtax.  This is applied to the lesser of the taxpayer’s net investment income or the excess Modified AGI above the limits.

Modified AGI is defined in this case as AGI plus tax free foreign income.  Investment income includes all interest, dividends, capital gains, annuities, royalties and passive rent income, but does not include tax free interest or (very importantly) distributions from retirement plans.

Note: This is the tax that is often referred to as the “tax on the sale of your home”.  See the article Tax On the Sale of Your Home Email Myth for more details on why this is mostly bunk – there are real impacts to this bit of tax law, just not what is described in the email.

Flex-Spending Account Caps

Healthcare Flex-Spending Accounts will be subject to a cap of $2,500 in annual deductions with the new law.  Before there wasn’t a specific cap, but you were also required to use up the deferred amounts within 3 months of the end of the year.  The jury is still out on whether or not the “use it or lose it” provision will be removed with the new cap – recommendations have been put forth to allow taxpayers to carry over unused amounts, but none have made it to law as of yet.

Penalty for Uninsured

In addition to all of the above, folks who choose to remain uninsured will be subjected to a penalty of the larger of $95 or 1% of income above the threshold that requires the individual (or couple) to file an income tax return.  For a family in 2013, this penalty is capped at $285.  The cap for the penalty will increase gradually (albeit steeply) over the next few years to a maximum of $2,085 in 2016.

Folks in the lower strata of incomes (generally less than household income of around $96,000) will receive tax credits to help them pay for insurance coverage.  The way this credit works too complicated to go into here, but an example would be for a family of four with an income of $48,000 would receive a credit of roughly $11,000 toward healthcare insurance coverage.

Penalty for Companies Not Providing Insurance to Employees

If a company with 50 or more employees provides no insurance to its employees or the insurance provided is substandard or too costly, there is an additional penalty to the company.  The penalty is stiff: $2,000 times the number of employees, with a 30-employee offset.  This penalty will apply if even one employee goes outside of the company-offered plan to an insurance exchange for coverage.

Excise Tax on Medical Devices

Many medical devices, such as wheelchairs and prosthetics (an official list is forthcoming from FDA), will be subject to a new excise tax of 2.3%.  This will not be applied to items that are typically sold in a retail setting, such as eyeglasses, contact lenses, and hearing aids.

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How a 401(k) Contribution Affects Your Paycheck

K-Line

As you begin a new job, or if you are a longer-term employee who is just starting to make contributions to a 401(k) plan, you are confronted with a question:  How does a contribution to the 401(k) plan impact the final take home pay on my paycheck? Believe it or not, you could actually increase your bottom line assets by reducing your income through a 401(k) contribution.

Let’s work through an example so that we can more completely understand what happens.

Your New Job

So, you’ve started a new job, with an annual pay of $30,000.  We won’t go into all of the details behind a W4 at this point, but for the sake of the example, we’ll say you filed your W4 to exactly match your tax expected of $2,603 for the year (and you started in January).  In addition to this, you have opted to take advantage of your employer’s health insurance plan, which costs $50 per month.  You are paid on an every-other-week schedule, for 26 pay periods per year.

This means that your take-home pay amounts to approximately $884.82, which is calculated as follows:

Salary ($30,000/26)

$1,153.85

Federal withholding

$100.00

State withholding

$57.69

FICA & SS

$88.27

Health Insurance

$23.07

Net Pay

$884.82

Your 401(k)

So, you now are ready to begin making contributions to your available 401(k) plan.  The company will match your contributions as follows:

100% of the first 2% of contributions

50% of the next 2% of contributions

25% of the next 2% of contributions

If you make a total of 6% in contributions, the company will match that with 3.5% contributed to your account.  Your 6% of $30,000 will amount to $1,800 per year, and the company match will be an additional $1,050, for a total contribution of $2,850.

For each paycheck, you are making a contribution of 6%, which is $69.23, and the company’s match is an additional $40.38 added to your account.  The result in change to your paycheck will work out as follows:

 

Salary ($30,000/26)

$1,153.85

401(k) contribution

$69.23

Federal withholding

$89.71

State withholding

$54.23

FICA & SS

$88.27

Health Insurance

$23.07

Net Pay

$829.34

The difference in your final take-home pay is only $55.48, which is $13.75 less than the amount that you contributed to the 401(k) account.  This is due to the fact that when you make a contribution to the 401(k) account, this amount is no longer subject to income tax for this tax year.

When you consider what your overall economic result from this new paycheck is, you’ll see that making the 401(k) contribution is, indeed, a no-brainer:

Net pay

$829.34

401(k) contribution

$69.23

Company match

$40.38

Total economic increase

$938.95

As you can see, the end result is that you actually have increased your overall money on your balance sheet assets by $54.13, which is a 6.11% increase.  Granted, your 401(k) account and the company match are restricted in access, but your overall situation is a significant increase.

Keep in mind that, while we used 401(k) as the example type of account, the same could apply to a 403(b), or other sort of tax-deferral account.  In addition, keep in mind that your later distributions from the 401(k) will be subject to ordinary income tax.

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Should I Itemize or Use The Standard Deduction?

Taxes
Taxes (Photo credit: Tax Credits)

As you prepare your tax return, you have a decision to make about your tax deductions – you can choose between itemizing and using the standard deduction.  But how do you choose?

The Standard Deduction is just what it sounds like – a standardized deduction that you can choose to utilize by default, and you don’t have to do a lot of recordkeeping through the year in order to use the the standard deduction.  In order to itemize deductions, you need to save receipts from various deductible expenses through the year, and use those to prepare your itemized return.

The IRS recently published their Tax Tip 2012-43, which has some good information to help you with this choice.  Oftentimes it is a foregone conclusion, once you understand the differences between itemizing and the standard deduction.  Below is the text of the Tax Tip.

Standard Deduction vs. Itemizing: Seven Facts to Help You Choose

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions.  The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

  1. Qualifying expenses – Whether to itemize deductions on your tax return depends on how much your spent on certain expenses last year.  If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.
  2. Standard Deduction amounts- Your standard deduction is based on your filing status and is subject to inflation adjustments each year.  For 2011, the amounts are:
    • Single, $5,800
    • Married Filing Jointly, $11,600
    • Head of Household, $5,800
    • Married Filing Separately, $5,800
    • Qualifying Widow(er), $11,600
  3. Some taxpayers have different standard deductions – The standard deduction amount depends upon your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you.  If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.
  4. Limited itemized deductions – Your itemized deductions are no longer limited because of your adjusted gross income. Note from jb: previously, at higher levels of income a taxpayer’s itemized deductions could be limited.  This limitation has been eliminated – but it could come back for future tax years.
  5. Married Filing Separately – When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.
  6. Some taxpayers are not eligible for the standard deduction – They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.
  7. Forms to use – The standard deduction can be take on Forms 1040, 1040A, or 1040EZ.  To itemize your deductions, use Form 1040, US Individual Income Tax Return, and Schedule A, Itemized Deductions.
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