Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

Posted in: Annual limits, Earnings Limits, file and suspend, Social Security, Social Security spousal benefit.
Tagged: earnings test · Social Security · social security benefits

Family Maximum and File & Suspend

Jun 7th, 2013

2 comments

Radio Maximum logo (Photo credit: Wikipedia)

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

I recently received the following email from a reader:

I am 66 and my wife is 45, and our son is 12. I intend to delay my filing for Social Security benefits until age 70 in order to provide the highest survivor benefit for my wife since I’m so much older than her. But I also realize that my wife and son may be eligible for benefits now if I file and suspend. According to my SSA statement my benefit now at age 66 is $2,576. Since my wife and young son are eligible for 50% of my benefit (after I file and suspend), each should receive $1,288, right? When I talked to the SSA office, they told me that their benefits would be limited by the family maximum benefit, which is $4,323, and they would only receive $873.70 each. I can’t make the numbers work out, are they telling me wrong?

Unfortunately for the above situation, SSA was correct in the calculations – because of how the family maximum benefit and file & suspend work together.

Recall that the family maximum benefit limits all other dependent benefits paid on an individual’s record after the individual’s own PIA is subtracted from the family max figure. Regardless of whether the worker is currently receiving his or her own benefit, the PIA is subtracted from the family maximum benefit amount before calculating all other benefits on that record.

So in the case of the reader who emailed me, when his PIA of $2,576 is subtracted from his family maximum benefit of $4,323, there is a remainder of $1,747. This is all that’s left for dependent benefits, and it’s split evenly among the wife caring for the child under age 16, and the child who is under age 18. In this case, when the child reaches age 16, his mother’s benefit will go away, and he will be eligible for the full $1,288 (adjusted for COLAs and any changes to the father’s PIA from additional work on his record). The child will receive that benefit until he reaches age 18.

It’s important to note that if the father passes away before the child reaches age 18, the family maximum benefit will still apply, but there will be changes to the benefits received. First of all, if the father died before the child reached age 16, the mother and child would each be eligible for a 75% benefit based on the father’s projected benefit at his attained age as of his death. This benefit would be subject to family maximum benefit rules, but since there are only two of them, their combined benefit is still less than the max, so there is no limit and each would receive $1,932 (adjusted for COLAs and delay credits).

After the son reaches age 16, again his mom’s benefit would be eliminated and he would continue to receive the full 75% benefit.

If the original emailer from above had an ex-spouse who would be eligible for benefits (either spousal or survivor’s, depending on the situation) these benefits would NOT reduce the family maximum benefit available to the emailer’s current spouse and child. Plus, the family max calculation does not apply in any way to the ex-spouse’s benefits.

Posted on Jun 7th, 2013

by author: jblankenship.

Posted in: #noTOP, family benefit, family maximum, file and suspend, Social Security.
Tagged: family maximum · file and suspend · Social Security

The Qualified Terminable Interest Property (QTIP) Trust

Jun 5th, 2013

2 comments

Qtip (Photo credit: miggslives)

Often we come up against situations in planning finances for folks where some special tools are necessary. One of those situations, quite common these days, is when one or both members of a couple has children by a prior marriage. The situation brings about some interesting questions when considering how the marital assets will be divided when one member of the couple has passed on.

Daryl has three children by a prior marriage, and his wife Toni also has three children by a prior marriage. Both Daryl and Toni have considerable assets from before their marriage – each has a investments and retirement accounts in their own name: Toni’s accounts are worth $350,000, and Daryl’s accounts are worth $300,000. Given their lifestyle, they will not be needing much of their accounts early in retirement – but it’s quite likely that later in life they may need the accounts for medical care and potentially for nursing facility care.

Under common circumstances, when Daryl passes away, he will leave his assets to Toni, so that she can continue to live the lifestyle that she’s been accustomed to, as well as to ensure that she can afford adequate medical care later in life. But if he bequeaths his entire estate directly to Toni, what happens when she passes? Again, under common circumstances, she would pass along her estate to her children. The problem is, by doing this, Daryl’s children don’t get a share of the estate at all! How can this be straightened out?

One thing would be for Daryl to designate in his will that his estate would be split among Toni and his children, either equally or in some formula. This gives rise to another problem though: what if the portion that he leaves to Toni isn’t enough to cover her living expenses and medical care? His desire to make sure his kids got their fair share has left his wife possibly in dire straits when there was plenty of money available.

Another way to handle this would be for Toni and Daryl to each specify in their wills that the final estate, whichever of the two it would be, would be split among all six of their combined offspring. The problem with this is that after Toni has passed away, Daryl decides to remarry again – and then when re-doing his will he cuts out Toni’s kids, who he has always had a contentious relationship with.

Enter the QTIP

Investopedia defines a Qualified Terminable Interest Property trust as follows:

A type of trust that enables the grantor to provide for a surviving spouse and also to maintain control of how the trust’s assets are distributed once the surviving spouse has also died. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that he or she is taken care of for the rest of his or her life.

This type of trust does exactly what we’re looking for: after Daryl’s death, his assets become the property of his QTIP trust, which provides for Toni to be able to take income (and principal as necessary) from the assets in order to maintain her lifestyle. Upon Toni’s passing, Daryl has declared that his three children will then receive an inheritance of the remaining assets in the QTIP. Toni set up a QTIP for her estate as well, in the event that she pre-deceased Daryl, so that her children could receive a portion of the remaining estate upon Daryl’s death.

QTIP trusts can hold any type of asset, such as investment accounts, farmland, homes, and collectibles. IRAs can be owned by a QTIP trust, but special care needs to be taken when setting up the trust to ensure that the marital deduction is preserved and that the income can be distributed as appropriate to the surviving spouse. It’s usually simpler to pass an IRA directly to beneficiaries, or use a see-through trust to assist with the distribution process.

An important factor to consider when setting up these QTIP trusts is that a qualified trustee should be appointed to oversee the distribution of the assets. This trustee should be a disinterested third party who would be in a position to make good decisions about when and how much of the trust is distributed to the surviving spouse. Without this type of oversight, the survivor could diminish the QTIP first, before his or her own assets, thereby effectively disinheriting the decedent’s children.

You’d think it’s unlikely that something like this would happen, but as I’ve often said – you never really know someone until you are dividing an estate with them. Once the original owner has died, the interested parties often cease to act like relatives and revert to the basics of the transaction: they’re just people splitting up money (or other assets). It pays to get this right, in order to reduce the possibility of one or more parties taking advantage of others.

Posted on Jun 5th, 2013

by author: jblankenship.

Posted in: estate planning, estate tax, IRA, QTIP.
Tagged: estate planning · IRA

Book Review: How to Retire Happy

Jun 3rd, 2013

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“The 12 most important decisions you must make before you retire”

Author Stan Hinden, who is the former syndicated Washington Post “Retirement Journal” columnist, has just released his Fourth Edition of this book. The book is Hinden’s commentary and advice, as well as a sort of journal, as he and his wife Sara entered into and have been living in retirement over the past 17 years. Hinden retired in 1996 at the age of 69, at which time he began writing the “Retirement Journal” column. He was nominated for a Pulitzer Prize in Commentary in 1998 for his work.

This book is an excellent read for folks who are planning toward retirement or have recently retired. Hinden has organized the process into 12 decisions, some of which include: “Am I Ready to Retire?”, “What Should I Do with the Money in My Company Savings Plan?”, and “Where Do I Want to Live When I Retire?”. Mr. Hinden then walks through each of the 12 decisions with his own personal insights and choices, as well as with expert recommendations and commentary on the subjects.

The book is a fairly quick read at 250 pages, and the writing style is simple and conversational. The decision-points that Mr. Hinden discusses are thought-provoking, and he has been diligent to provide sources for additional review at the end of each Decision/Chapter. Topics covered include income taxes, pensions, retirement accounts, Social Security, Medicare, long-term care insurance, and many other categories pertinent to retirees.

The author’s wife, Sara, became afflicted by Alzheimer’s Disease in 2007, which has resulted her needing to be placed in a residential nursing facility as the disease has progressed. This was a particularly difficult section for me as I very much empathized with Mr. Hinden as he was faced with the difficult decisions associated with his wife’s condition. In a similar fashion, the author discusses the issues that he faced with his own health after learning that he needed a four-way heart bypass shortly after his retirement. These insights that are brought forth are very helpful though, as we all must consider that such decisions may likely be a big part of our own lives.

I will recommend this book to any and all folks who are looking for insights as they approach retirement. It will definitely give you additional insight as you take on this next step in your life – what Hinden mentions is likely the “final quarter” of your life. He points out though, that this final quarter needn’t “sound grim. In any football game, the last quarter is often the most exciting. The same can be true of retirement. It is one more chance to add points on the scoreboard of your life.”

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Jun 3rd, 2013

by author: jblankenship.

Posted in: Book review, IRA, Medicare, Social Security.
Tagged: book review · IRA · Social Security

The Crystal Ball

May 31st, 2013

by sraskie.

2 comments

Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer.

Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn.

Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead.

So why do we invest? Why do we save for retirement? Why do we plan for the future? The reason is this: while we can’t predict the future, we can certainly have a great idea of where we are going and where we want to be. We understand that over the long run, it’s likely that our nest egg and the contributions to it over the years will grow, so that when it comes time to retire and actually live the future that we planned for; it’s livable and enjoyable. This is why we plan ahead and this is why people seek out financial planners.

Of course, there are always the worriers and naysayers that say, “What if the market crashes?” “I don’t want to lose all of my money.” “What happens if the market dips next week?” To which the answer is, “Well…what if it does? So what?” A good planner would never put immediate or near-term money at substantial risk.

An appropriate plan and an appropriate planner will take the time to discuss your strategy, goals and based on your aptitude for risk – will properly allocate your investment assets so that fluctuations won’t wipe out your savings.

We can tell you that the market will tank, and the market will recover. And that’s why based on an individual’s plan we allocate and manage accordingly. So, technically we can predict the future (as could anyone in this case), we just can’t tell you the exact dates crashes and recoveries happen (if that were the case, there’d be no need for financial planners).

Another way to think about it is this: your doctor may tell you to eat right, exercise, don’t smoke or abuse alcohol to preserve longevity. The plan is for you to live longer. That being said, you’re still going to get a cold or the flu (analogous to small market dips) or you may get seriously injured in an accident (analogous to a market crash – pun intended). But you (and the market) will recover. We can’t predict when you’ll get a cold or be in an accident or how long recovery will take, but we can plan accordingly.

In an absolute worst case scenario, you could die prematurely (analogous to the financial markets collapsing like a dying star). But overall, we take our doctor’s advice because we’re planning to live a long and happy life. The same is true with professional financial advice. Anything can happen, but we plan for the future.

Posted on May 31st, 2013

by author: sraskie.

Posted in: fiduciary, financial planning, goals, investing, reader questions, retirement, retirement accounts, retirement plan, retirement plans, retirement savings, saving, stock.
Tagged: fiduciary · financial planning · investment · retirement plan · retirement plans · retirement savings

Exceptions to the 10% Early Withdrawal Penalty from IRAs and 401(k)s

May 29th, 2013

33 comments

English: A clock made in Revolutionary France, showing the 10-hour metric clock. (Photo credit: Wikipedia)

When you take money out of your IRA or 401(k) plan (or other qualified retirement plan, such as a 403(b) plan), if you’re under age 59½ in most cases your withdrawal will be subject to a penalty of 10%, in addition to any taxes owed on the distribution. There are many exceptions to this rule though, and the exceptions are not the same for all types of plans. IRAs have one set of rules, and 401(k)s have another set of rules.

The exceptions are always related to the purpose for which the money was withdrawn. The exact same dollars withdrawn do not have to be used for the excepted purpose, just that the excepted expense was incurred.

IRA Exceptions

It is important to know that all distributions from your traditional IRA are subject to ordinary income tax, but some distributions are not subject to the early withdrawal penalty. The list of exceptions for early withdrawals from IRAs is as follows:

Death of the owner of the IRA – if the owner of the IRA dies, the beneficiaries of the IRA can (in fact, must) take withdrawals from the plan without paying the 10% penalty.

Total and permanent disability of the owner of the IRA – if the owner of the IRA is deemed to be totally and permanently disabled. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

SOSEPP – With a Series of Substantially Equal Periodic Payments, lasting at least five years or until age 59½ (whichever is longer), there is no 10% penalty applied.

Medical Expenses – if you have medical expenses greater than 7.5% of your Adjusted Gross Income, a distribution from your IRA to cover these expenses (the excess above 7.5% of AGI) will not be subject to the penalty. Any amounts paid by insurance toward the medical expenses reduces the overall expense counted toward the excepted expenses.

Health Insurance Premiums – if you’re unemployed, you can take a distribution from your IRA to cover your health insurance premiums without paying the penalty.

Qualified higher education expenses – amounts withdrawn from your IRA to pay for tuition, fees, books, supplies, and equipment needed for enrollment or attendance of a student at an eligible higher education institution are not subjected to the penalty. In addition, if the student is at least a half-time student, room and board expenses paid for with an IRA distribution would not be subject to the penalty. The amount of education expenses is reduced by any scholarships, grants, and qualified 529 plan distributions; any amount applied to an IRA penalty exception is also not eligible to be used toward education credits, such as the American Opportunity Credit or the Lifetime Learning Credit.

First-time home purchase – amounts withdrawn from your IRA up to $10,000 that are used toward a qualified first-time home purchase are an exception to the penalty.

Qualified reservist distributions – if a reservist who is called to active duty after September 11, 2001 for a period of 179 days or more takes a distribution from an IRA (after the start of active duty and before the end of active duty) the distribution will not be subject to the 10% penalty.

Rollovers – both direct, trustee-to-trustee transfers and 60-day indirect transfers are exempted from the penalty.

Excess contributions – if you have contributed too much to your IRA, you can take out the excess contribution without penalty. However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

401(k) Exceptions

As with the IRA, most withdrawals from a 401(k) or other qualified retirement plan are subject to taxation. Early withdrawals before age 59½ are also subject to a 10% penalty, with some exceptions. The exceptions are as follows:

Death of the participant – this is the same as the exception for an IRA above.

Total and permanent disability of the participant – same as with an IRA.

SOSEPP – same as with an IRA.

Medical Expenses – same as with an IRA.

Qualified reservist distributions – same as with an IRA.

Rollovers – same as with an IRA. However, an indirect 60-day rollover (not a trustee-to-trustee transfer) is subject to mandatory 20% withholding. If the withheld 20% is not transferred within 60 days, this amount may be subject to both taxation and the 20% early withdrawal penalty.

Corrective distributions – just like with an IRA, if you have contributed too much to your 401(k), you can take out the excess contribution without penalty. However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

Separation from service after age 55 – if you leave employment after the age of 55, you are eligible to take distributions from your 401(k) or other QRP without penalty. This is only valid while the funds are still in the 401(k) – if you rollover the funds to an IRA, this option is no longer available. If the participant is a public safety employee (police, fire, or emergency medical technicians), the age is 50 or older.

Qualified Domestic Relations Order (QDRO) – in the event of a divorce, if the 401(k) is to be divided or distributed to the ex-spouse of the participant, withdrawals from the plan by the ex-spouse are not subject to the 10% penalty.

Posted on May 29th, 2013

by author: jblankenship.

33 comments already - add to the conversation!

Posted in: 401 k, 401 k 403 b, Early Distribution, eligible rollover distribution, inherited IRA, IRA, qrp, qualified retirement plan.
Tagged: early retirement · IRA · qrp · rollover

Avoid Awkwardness in the Afterlife–Confirm Your Beneficiary Designations

May 24th, 2013

1 comment

This is a topic that I cover with all clients, and one that I recommend you for everyone with retirement plans and other accounts with beneficiary designations. Too often we think we have the beneficiary designation form filled out just the way we want it, and then (once it’s too late) it is discovered that the form hadn’t been updated recently – and the designation is not what we hoped for.

I made this recommendation to a client not long ago. He assured me that he had all of his designations set up just the way he wanted. His wife, sitting next to him in our meeting, asked him to make sure – talk to the IRA custodian and get a copy of the designation as it stands today. A bit miffed about it all, he agreed to do so, and did the next day. Guess what he found – as it stood on that day, his IRA beneficiary designation form indicated 100% of his IRA would pass to his ex-wife from 15 years ago! Plus, he had no secondary beneficiaries named, which meant that if the ex predeceased him, HER heirs would be the primaries. Thankfully he had checked on this to avoid this awkward and possibly devastating situation.

Know what was fixed pretty much immediately?

Take the time

You owe it to yourself and your heirs to take the time to review your beneficiary designations and keep copies of them in your “dead file”. This includes IRAs, Roth IRAs, 401(k)/403(b)/457 plans, and other pensions or retirement plans. You also may have POD or TOD (Pay on Death or Transfer on Death) designations on non-retirement accounts – confirm these and keep copies as well.

For your standard retirement accounts, such as IRAs, 401(k)s and the like, you typically have the option of naming a primary beneficiary (or beneficiaries) and a secondary or contingent beneficiary or beneficiaries. It makes a huge difference on these accounts that you name a specific person (or persons) as the primary beneficiary, and a specific person (or persons) as the contingent beneficiary. With IRAs, if you leave the designation blank, you may be taking away important options for your heirs.

If you leave the primary beneficiary designation blank you are leaving the transfer of your IRA up to the custodian’s default designation. Quick! What’s your IRA custodian’s default beneficiary designation?? I didn’t think you’d know.

Often this default is your spouse first, and then your “issue” – meaning your children and other descendants. Other times, the default beneficiary is your estate. In the event that the estate is the default beneficiary, any beneficiaries of the estate will receive the IRA, but they will not be able to utilize the “stretch” option of receiving payout of the account over their remaining lifetimes. This is because the IRS rules state that a “named beneficiary” must be in place in order to use the stretch provision. If no “named beneficiary” exists, the stretch option is not allowed. If the default is your spouse and your issue, these can be treated as “named beneficiary” if they are alive.

Discuss with your heirs

At face value, even though you think your intent for your beneficiary designations is clear, it might not be clear to your heirs. For example, you may have chosen to pass along half of your IRA to your youngest child and only a quarter to the older two children because you believe the youngest child can use the money more than the other two. Or maybe you decided to leave the entire IRA to your oldest daughter, and you want to designate your three sons to split up the farmland – which you believe is an equitable division.

Whatever you’ve decided, especially if there are perceived inequities in your division plan, you should take the time to review your plan with your heirs. If that makes you uncomfortable, there are a couple of things to consider: First, if you’re uncomfortable discussing it with them, imagine how uncomfortable your heirs may be when the time comes to distribute your estate. Maybe it’s not such a good idea after all if it could cause contention among your heirs. Second, if you still believe your split is the right way to go, you should explain your plan to someone – your designated executor would be a good choice. And the designated executor should be a disinterested separate party, someone who isn’t receiving benefit from your estate plan, in order to keep the process “clean”. Otherwise, if one of the heirs is your executor and the executor is perceived to receive preferential treatment, again you’ll have some contention among your heirs.

If there are complex instructions involved, consider making an addendum to your will. Instructions in your will would have no impact on the beneficiary designations on your IRAs and other plans (these pass outside of your estate as long as you’ve made specific designations) but other asset divisions aside from retirement accounts may require explanation for your heirs to understand your intent. Don’t expect that everyone will understand or agree with your thought process when you’re gone. Explaining your thought process in advance will likely help to ensure that your division plan doesn’t result in a family rift.

Take the time to review your beneficiary designations. Make sure that you have the primary beneficiary or beneficiaries that you want, and the percentages that you’d like each to have. Also make sure that you have named contingent beneficiary or beneficiaries in the event that your primaries have predeceased you. Lastly, make sure that you note how division is done after the death of the beneficiaries: per stirpes or per capita.

Posted on May 24th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: 401 k, 403 b, 457, beneficiary, IRA, qrp, qualified retirement plan.
Tagged: 401 k · IRA · qrp · qualified retirement plan

Per Stirpes / Per Capita–What Does it Mean?

May 22nd, 2013

4 comments

Example of per stirpes inheritance (Photo credit: Wikipedia)

When working with your estate planning (even if you don’t realize you are) you may run across the terms per stirpes and per capita. Choose one type over the other and you could have a significant impact on who eventually receives your estate. So what do these two terms mean?

Dictionary.com defines the two terms as follows:

per stirpes – noun; pertaining to or noting a method of dividing an estate in which the descendants of a deceased person share as a group in the portion of the estate to which the deceased would have been entitled.

per capita – noun; noting or pertaining to a method of dividing an estate by which all those equally related to the decedent take equal shares individually without regard to the number of lines of descent.

This probably seems like just so much gunk to you, so let’s look at an example.

Joe has four children, Anna, Benny, Björn, and Agnetha. Anna and Benny have no children. Björn has three boys: Neil, Alex and Geddy; while Agnetha has two boys: Peter and Eric. Joe is planning his estate and he wants to split his assets evenly among his four kids when he dies, and if the any of the kids dies before he does, he wants the grandkids to receive the share of the child that died.

Joe designates each child as an equal beneficiary of his estate, identifying each by name. He then indicates that he wishes for the grandchildren to receive a share in the event that their parent dies before Joe. He’s stuck deciding whether or not to choose per stirpes or per capita for the distribution. Typically the verbiage would be “I leave my assets to my then living descendants, per capita” or “I leave my assets to my then living descendants, per stirpes”.

Let’s look at what will happen if he chooses one type of distribution over the other.

If Joe Chooses Per Stirpes…

… and Anna (with no children) dies before Joe, then Benny, Björn and Agnetha will each receive 1/3 of the estate, and a share would not be created for Anna. The same would be true if Benny dies before Joe – in fact, if both Anna and Benny predecease Joe, Björn and Agnetha will receive 50% shares in the estate, and no shares would be created for Anna or Benny.

On the other hand, if Björn died before Joe, then Anna, Benny and Agnetha would each receive a 25% share, and Björn’s children, Neil, Alex and Geddy would rush to receive 8 1/3% of the estate, or Björn’s 25% share divided into thirds.

If Agnetha died before Joe, her children Peter and Eric could humbly and blindly accept 12 1/2% each, which is Agnetha’s 25% share split in two.

If any of the children of Agnetha or Björn had also predeceased Joe, the division would only be among the living grandchildren, with no provision for the deceased child. That is, unless the deceased child had children of his own, which would be Joe’s great-grandchildren, in which case the great-grandchildren would receive the share of the deceased grandchild. This would continue for all living heirs until the estate is completely distributed.

If Joe Chooses Per Capita…

… and all of the children and grandchildren survive him, each of them would receive 1/9 share. This is because per capita designates that all living descendants, by headcount, split the estate equally.

If any (or several) of the descendants of Joe have predeceased him, the shares would adjust for the remaining number of heirs. For example, if Björn died before Joe, then Anna, Benny, Agnetha, Neil, Alex, Geddy, Peter and Eric would each receive 12 1/2% of the estate. The shares would adjust for any others that predeceased Joe, or for any additional grandchildren or great-grandchildren that may have been born prior to Joe’s death.

Common usage

As you can see, per stirpes results in what most folks consider to be the most fair distribution among heirs. The inequity that comes up when these designations are used is when an heir predeceases the decedent in question (Joe from our example above), he or she would receive no share of the decedent’s estate, not even via his or her own estate. This can be rectified by naming the primary beneficiaries (Anna, Benny, Björn and Agnetha in our example), and then indicating that contingent shares could be designated to their estates if no living heirs, or to their living heirs, per stirpes.

Per capita is not used often, and it can cause some problems. Notwithstanding the fact that your children are penalized if they don’t happen to reproduce while their siblings did, when assets are transferred more than one generation away from the decedent, there can be an additional generation skipping transfer tax (GSTT) applied to the distribution. Sometimes per capita is used by generation, which can result in an even distribution among a particular generation, if that’s your intent.

Posted on May 22nd, 2013

by author: jblankenship.

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Posted in: beneficiary, estate tax.
Tagged: estate planning

Book Review: Born to Blog

May 20th, 2013

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Taking a departure from my regular topics of taxes, retirement accounts, and Social Security, today I’m reviewing a book dedicated to the topic of blogging. This is another of the books that McGraw-Hill has provided for me to review (see note below).

This book, by Mark W. Schaefer and Stanford A. Smith, provides a quick-read overview of the activity of writing a blog successfully. As with any venture, it’s important at the start to have a goal for the activity, and for many folks it’s simply to get a message out there about a product or service. For others, the goal is to be a source of information; others yet look to showcase collections of graphics, photos, audio and/or video. And many hope to gain an audience that will somehow pay off for them – either from sales of products, services or subscriptions, or from ad revenue from third-parties who pay the owner of the blog to advertise on the site.

Schaefer and Smith take you through this entire process, step-by-step. The perspective of an independent blogger is discussed as well as that of a corporate marketing effort. With the tools discussed in this text, virtually anyone can start up a successful blog, on virtually any topic.

I particularly liked the early sections on the types of bloggers based on how they produce content – and there are several. Storytellers write about their own or others’ experiences; dreamers write about things they’d like to change or see changed; persuaders attempt to get the reader to undertake their point of view (often politically, economically, or religiously); teachers provide lessons on topics that are of interest to their readers; and curators collect things – quotes, photos, audio, video, etc..

If you are just starting out on your mission to produce a blog, an excellent place to start is to pick up this little book. It’s a short read (165 pages, good for a long flight or an afternoon or two on the beach), and the writing is straightforward, understandable and complete. I would recommend this book to anyone starting off with a blog, or anyone who has already been blogging and is beginning to have difficulties getting the results you’d hoped for.

Posted on May 20th, 2013

by author: jblankenship.

Posted in: blogger action, Book review.
Tagged: book review

Book Review: Think, Act, and Invest Like Warren Buffett

May 13th, 2013

1 comment

This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest?

Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are. Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review.

Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them. For example, regarding market timing: “Our favorite holding period is forever.” Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact that the only time most individual investors want to sell is at exactly the wrong time, when markets are tanking. After developing a sound investment strategy, using low-cost index mutual funds as the foundation, it’s best to stick to your strategy through thick and thin.

Another example is offered in these words of wisdom from Buffett: “The most important quality for an investor is temperament, not intellect.” This comment is particularly useful when considering whether or not you should pay attention to the likes of CNBC, Investor’s Business Daily, or other “noise” going on in the media. Instead, having a sound investment policy that you stick to, maintaining your temperament (don’t let your emotions drive your decisions, in other words), is the way to success in investing.

Throughout the book, Mr. Swedroe provides additional tools and insights that can easily be put into play immediately. There is an example of a personal Investment Policy Statement (the guide you’ll need to help you through the “tough times”), as well as a basic strategy for developing an investment allocation plan that is diversified, low-cost, and will provide you with stable investment returns throughout your life. In addition, Mr. Swedroe covers the topic of how and why you might choose to hire a financial advisor, along with advice on the type of advisor you should choose (and here’s a clue, Dave Ramsey fans: it’s not commissioned advisors, it’s fee-only advisors) because it’s not always about finding the lowest up-front cost, it’s more about finding someone who will work in your best interests.

In addition to investing, Mr. Swedroe takes time to point out that the “activity” of investing should not be a focus for the individual investor – that the time spent on researching, managing, and monitoring any type of investment aside from the index-type of investments that he recommends, is lost time. Think about it: if you spent two hours a day on these investment activities (which is nowhere near enough time, in my opinion) in addition to your “regular” job, that’s 730 hours a year that you could be coaching your kid’s soccer team, re-connecting with your spouse, or spending time with your aging parents. Implementing the simple strategies in this book will cut down your time involved in investing activities to something like an hour a quarter – yes, only four hours a year!

The last section of the book provides Mr. Swedroe’s “30 Rules of Prudent Investing” – which, on its own provides a fantastic foundation of insight for the individual investor to follow for success. I highly recommend this book for anyone who has searched high and low for the “silver bullet” to investing success. As you may know, there’s no such thing as a real “get rich quick” scheme in the investing world – the real “silver bullet” is this simple, boring, use of index funds and dogged sticktoitiveness. Do yourself a favor and read this book, shut off CNBC, and get back to enjoying life. You’ll do wonders for yourself and your life.

Posted on May 13th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: Book review, investing, investment.
Tagged: book review · investment

State Income Tax and Retirement Income

May 8th, 2013

by sraskie.

3 comments

On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation.

Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income.

If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the federal and state level. So in this case the money going into the Roth IRA has been “hit twice” with federal and state taxes.

One possible way to avoid this double whammy (going by current Illinois law) is to contribute to your employer’s plan and then at retirement or whenever you leave your job, convert that money to a Roth IRA. In this case the money from your paycheck is already deferred from state taxation and then when it’s converted to a Roth IRA, avoids state income taxation again – since it’s income from a retirement plan and considered retirement income – which Illinois does not tax. This is evidenced by the 1099-R you’ll receive at the time of conversion.

Another way to avoid this is if your employer’s plan allows, convert your 401(k) to a Roth 401(k) while you’re still employed. Again, you’ll pay federal income tax but avoid the state taxation if your state excludes retirement income for tax purposes. If you’re in a higher tax bracket, you may consider staging your conversions up to the point where you maintain low tax costs (converting small amounts over many years). Or you may just want to wait to convert the whole amount when you know you’ll be in a lower tax bracket.

Posted on May 8th, 2013

by author: sraskie.

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Posted in: 2012 tax year, 2013 tax year, 401 k, 401 k 403 b, 401k, 403 b, 457, conversion, conversions, income tax, IRA, retirement accounts, roth 401 k, Roth 401(k), roth conversion, Roth Conversion, Roth conversion, roth ira, Roth IRA, roth ira account, roth ira contribution, roth ira contributions, roth ira conversion, state income tax, tax, tax deferral, taxable compensation.
Tagged: 401 k · 401k · IRA · retirement accounts · retirement plan · retirement savings · roth conversion · roth ira · roth ira conversion · tax

Fixing an IRA With the “Wrong” Beneficiary

May 1st, 2013

2 comments

Quite often, for many different reasons (often known only to the deceased original owner), the original owner of an IRA designates a beneficiary that the survivors don’t necessarily agree with. It might be that only one of several children is designated, or perhaps additional beneficiaries are designated along with a spouse. In cases like these, there are ways to make changes to the outcome of the inheritance. In this article we specifically deal with the case where only one of four children was designated as the primary beneficiary of the IRA.

To resolve the situation, let’s consider the following IRA: John, the decedent, designated April (his daughter) as the primary beneficiary of his IRA. It isn’t known why John only designated April as the beneficiary, as he has three other children – Bill, Chuck, and Dale – and John had only his IRA as an asset to pass along to the children. April could choose to take the entire IRA as her own and receive payments over her lifetime using the stretch rules, but she sees the inherent lack of fairness in the situation, so she wants to make the IRA available to her brothers as well.

One way to accomplish this would be for April to withdraw 75% of the IRA and split that amount with her brothers. She would then be able to stretch out the payments on the remaining 25% over her lifetime. Mission accomplished, right?

The problem with this option is that April would have to pay tax on the 75% distribution – and since the IRA is sizeable, this is a significant cost. Naturally she could just pass along this tax cost to her brothers in the form of a reduced payment, but this isn’t a very efficient way to distribute the money.

On the other hand, April could maintain the account in her name and stretch out payments over her lifetime, splitting each payment (after tax) among herself and her brothers. Again, this accomplishes what she had set out to do, but she’s still paying tax on the entire amount and since our tax system works on a graduated scale, the tax on 100% received by one person is likely to be much higher than the tax would be for four persons each receiving 25% from the account. In addition, the three brothers would be required to wait until April decides to take a distribution before they would have access to the account. Bill for example, would prefer to withdraw a large sum right away as he’s building a home and could use the funds for the construction. This would be very inefficient (tax-wise) if April had to make the withdrawal for him and pay the tax at her higher rate.

So – what else could be done? It would be great if there was a way for April to re-write the beneficiary designation so that all four children were considered to be the beneficiaries, but that’s not possible. What is possible is to re-direct a portion of the inheritance, by way of a method called disclaiming.

It’s important to know how to properly disclaim the inheritance of an IRA. The person disclaiming all or a portion of an IRA must not be an eventual beneficiary as a result of the disclaimer. Plus, the person disclaiming must not be in a position to direct who are the new beneficiaries; the natural course of the law must be followed. If either of these rules is broken, the disclaimer is considered to be nonqualified, and any distribution would be considered to have been done by April. Any amount transferred to her brothers would be considered a gift, subject to gift taxes.

So, if April disclaims the entire IRA, the new beneficiary would be John’s estate. Since John’s will dictates that the four children will split all of his assets equally, this would accomplish the desired result, right? No, not really.

The problem is that, when April disclaims the entire IRA, she is still an eventual beneficiary of the IRA since the estate becomes the de facto beneficiary, breaking the first rule above. In addition, since the estate isn’t a “person”, the stretch rules can’t be used for this IRA at all. When there is no real person as a beneficiary of an IRA, the entire account must be paid out within five years, rather than stretched out over a beneficiary’s lifetime.

What April should do is to disclaim 75% of the IRA, and also disclaim rights to the IRA portion of the estate that results from her first disclaimer. This gives her 25% of the original IRA with the stretch benefits still intact. In addition, since she’s disclaimed her right to the estate portion of the IRA asset, her brothers each have right to 25% of the IRA – 1/3 each of the 75% that April disclaimed. This portion passes through the estate to the brothers.

The brothers will not be allowed to stretch out their payments from the account for more than five years – this is one unfortunate circumstance that can’t be avoided. But otherwise, the eventual distribution is much more “fair” – even if it’s not what John had planned. And each brother has control over his portion of the funds, at least for distribution purposes. Bill can take the large distribution right away, and Chuck and Dale can delay up to five years before taking a distribution. And each of the four siblings will only pay tax on the distribution that he or she takes.

Posted on May 1st, 2013

by author: jblankenship.

Posted in: disclaim, inherited IRA, IRA.
Tagged: inherited IRA · IRA

Book Review: Strategic Capitalism – The New Economic Strategy for Winning the Capitalist Cold War

Apr 29th, 2013

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Author Richard A. D’Aveni has written a very compelling book with Strategic Capitalism, a book that provides some very important information for Americans to review and consider due to the coming economic cold war between the United States and China. Mr. D’Aveni asserts that the United States’ traditional version of capitalism must be adapted in order to compete with China’s conglomeration of various types of capitalism.

The beginning of the book details the many different pure types of capitalism – Laissez-Faire, social-market, managed, and philanthropic – and how these have been used over the years in many different economies. Mr. D’Aveni points out that rarely is a single pure type of capitalism ever the only type of capitalism in use in an economic system, but rather that many different forms of capitalism are blended together to work in the economic and political interests of the country or union in question.

The US has primarily used laissez-faire capitalism with specific components of managed capitalism to meet certain needs of the era. China (of late) has been using managed capitalism aggressively to both protect and promote the mostly state-run companies there, as they seek to dominate across the globe. This protection and promotion has not followed the same rules that the US has established and most western businesses adhere to. Due to the fact that the type of capitalism used by China is thwarting the “old rules” of business, in order to continue to compete in this new world, the US must adapt the form(s) of capitalism that are used.

The second part of the book goes into great detail about the types of changes that the US must make – and admittedly, D’Aveni points out that these are mere suggestions intended to start the dialog. Among the radical changes that the author suggests are: dropping out of the World Trade Organization (China is thwarting the rules and there is no mechanism to force compliance), dropping out of NATO (not enough economic or military support from most members to make up for the cost to the US), and dropping out of the United Nations (similar reason to NATO).

At the same time, the US should consider creating several new alliances that can be used to control the economic sphere that the US is to dominate, while at the same time limiting the areas that China can control. D’Aveni also advocates using tactics of Sun Tzu (how apropos!) to eliminate China’s advantages indirectly rather than directly. But first, the US needs to get its national economy in order, another topic that the author covers as well.

One area that can be resolved somewhat readily is with our extensive social programs, specifically Social Security, Medicare and the coming Obama-care. True means testing could be put into place for all programs, as benefits are being wasted on folks who don’t really need them, where the programs were designed to provide a safety net for the truly needy. Social Security taxation could be applied to all income levels as well, just like Medicare tax. Health and retirement benefits could be handled in large part by causing compulsive savings programs to be put into place for all workers. Health benefits would then be mostly covered (except for catastrophic costs) by the individuals’ own savings plans, which would likely reduce the over-use of the system and cause folks to make better health-care decisions, since the cost is borne by the individual, rather than “magically” by a faceless insurance company.

In terms of a very good primer on the capitalism environment in the world today, Mr. D’Aveni has written an excellent book. In addition, the suggestions he has made are very well-developed, and even though it’s not likely that his suggestions would be implemented completely, they provide a good basis for discussion. This book should be required reading by all policy makers in the western world, as I believe (at least in the US) that too many of our economic policies are designed for short-term solutions to situations that will garner votes, rather than longer-term solutions to our global economic position.

Posted on Apr 29th, 2013

by author: jblankenship.

Posted in: Book review, economic update, education, globalization.
Tagged: book review · global economy

A Money Back Guarantee

Apr 24th, 2013

by sraskie.

2 comments

You’ve heard the saying before that there are a few guarantees in life: death and taxes. I’d also like to add another: guaranteeing yourself a rate of return. I get asked this question frequently, usually by someone who’s a conservative investor or someone looking for a “sure thing”. This is what I tell them and I am telling you. Call this your money back guarantee. For the majority of readers, this will come into play as most of you have debt in some form or another. Whether it’s your mortgage, automobile, boat, credit cards, college, many Americans have different amounts of debt all at different interest rates. Typically, your consumer debt (credit cards) is going to have the highest interest rates.

Here’s how to guarantee yourself a rate of return: PAY DOWN YOUR DEBT. By paying down your debt you will be guaranteeing yourself the rate of return equal to the interest rate you’re paying on the debt. For example, let’s say you have credit card debt of 15% on a balance of $10,000. Want to guarantee yourself a rate of return of 15%? Pay off your credit card. And fast. Do me a favor. Go on the Internet and search for a minimum payment calculator for credit cards. Many cards are now showing this in the fine print on their statements. For my example, I put in $10,000 debt at 15% interest and a minimum payment of $200. After 30 years, yes 30 years, the total payments made on that $10,000 of debt are $25,573 – and I still owe! An easy way to look at this is let’s say you paid off the card right away with $10,000. Right off the bat, you’ll have saved over $15,000 by not making minimum payments.

If you’re starting anew and this whole paying off debt thing is alien to you, try upping your payments (baby steps) or even getting rid of “luxury” items you don’t need until your debt is paid off, like cable TV, dining out, etc. and put that monthly cable TV, dining out money, etc., toward the debt you owe.

My suggestion would be to start on the highest interest rate debt you have first and then pay down from there. Once you’ve paid down that debt, move to the next highest interest rate and so on. Some people are in favor of starting on the smallest amount of debt first and going from there. The reasoning being that you can build momentum by getting at least something paid off quickly. From a strictly monetary standpoint, you’ll save more money paying down higher debt first, but feel free to use whichever method you prefer. Just do something!

Another idea when you start paying down your debt is to tack on an additional 10% or more on what you’re currently paying and keep increasing that percentage monthly or annually until you can pay it off in full. It’s exactly the same as the 10% toward saving more money, just used to pay down debt quicker.

One debt that you can consider just paying the regular monthly payments on is your mortgage. Nothing wrong with paying it down early – do it if you can. Given today’s interest rates being at historic lows (as of January of 2013) it’s not as big of a deal as 15% in credit card interest rates is. Plus, you can deduct the interest on your mortgage. In addition, with mortgage rates so low, a better investment return may be achieved elsewhere in the market, however, that extra return is not guaranteed. That being said over 15 years or 30 years as most mortgages are, you’re there’s a high likelihood of better returns.

One final caveat to consider is this: once you’d paid off a debt, act as though you still have to make the payment only this time (you guess it) pay yourself first. Continue to pay that “bill” only now direct it to your savings, IRA, college fund, etc.

Posted on Apr 24th, 2013

by author: sraskie.

Posted in: budgeting, credit cards, financial planning, interest rate, investment, saving.
Tagged: investment · retirement savings

Your State Income Tax Refund Card?

Apr 22nd, 2013

by sraskie.

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As of this writing there are about 7 states that have left issuing paper income tax refund checks in favor of plastic debit card. Those states include Georgia, South Carolina, Oklahoma, Virginia, Connecticut, Louisiana, and New York (New York still offers the choice of paper or plastic).

The main reasoning behind this new refund system has been to eliminate the costs associated with issuing paper checks, with the cost of printing and issuing cards now passed to the credit and debit card companies.

But the costs saved by the state may end up costing those issued the debit cards. Here’s how:

Most cards will allow a one-time withdrawal of cash free of charge. Those that want their entire refund in cash simply need to go to a participating bank (one that works with one of the major card companies) and request the withdrawal. After the one-time freebie, then fees can be from $2 to $10 per withdrawal.

There’s also a fee should you not use your card for a while. Go 6 months without using it and it could cost you $3 per month. Need a replacement card? That’ll be $10-$15 please.

Admittedly, these cards can be convenient for those that intend on spending the money, but should you want to save or resist the temptation, you can always make the free, one-time withdrawal, or simply set up a checking or savings account at your local bank and have your refund direct deposited. Another option is to consider having your refund issued in US Savings Bonds.

In my opinion, the issuing of cards could end up hurting the people who don’t have savings or checking accounts and are the ones that need them the most, and would be most adversely affected by the fees involved with the debit cards.

Posted on Apr 22nd, 2013

by author: sraskie.

Posted in: #noTOP.

How Financial Advisers Get Paid

Apr 19th, 2013

by sraskie.

1 comment

As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser. There are generally three ways in which financial advisers and planners get paid.

Commission: An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 in commissions. Other commissioned products include load mutual funds that charge a load or commission on the initial purchase (i.e. a $1,000 investment with a 5% load means your net investment is $950), annuity products and individual stocks and bonds purchased through a broker.

Fee-Based: Fee-based is essentially a combination of commissions and fees. Generally speaking a fee-based adviser will get paid on commissions on certain products, and will get paid a fee on different products. For example, an adviser that sells life insurance and annuities as well as investment management can get paid commissions for the life and annuity products, and can choose to be paid a flat fee or percentage of the assets in the investment management account. Some products are fee-based, but pay the adviser a commission to sell them. For example, you invest in an asset management account where the annual fee is 2% to have your money “professionally managed”. You may only see a 2% charge for your fee, but the adviser that sold you the program, may receive a commission. This is generally seen in proprietary asset management programs of various companies and brokers. In both circumstances, the adviser is compensated by the product sold.

Fee-Only: Fee-only means that your adviser or planner gets paid directly by you. Therefore, fee-only advisers and planners are compensated for their advice, not on a product they sell. Fee-only advisers get paid a few different ways. The first way is strictly on an hourly basis, similar to how an attorney gets paid. Generally they will give you an estimate that will show you a range of what your fee will be such as $500-$950 for a financial plan. Another way that advisers get paid is via a flat fee for any assets (investments) of yours that they manage for you. This can range from .25% to 2% depending on the amounts invested. Some planners have minimums (i.e. you need $50,000 of assets to work with them) and some do not. Most will have a graduated fee schedule where the more money you invest, the lower your fees get based on certain thresholds.

Many fee-only advisers will take you “off the clock” meaning that once you become an AUM client (assets under management); they will no longer charge you by the hour for advice and questions. Be careful of advisers that “double dip” by charging fees for both managing your money and by the hour for other questions and planning. Make sure their advice is worth the extra money.

Finally, fee-only is very transparent, meaning that you see exactly what you’re paying either from your checkbook or from your quarterly statement.

Of the three, fee-only is arguably considered to be the most objective, yet not 100% perfect. Think of it this way, it can become extremely difficult (although not impossible) for a commissioned adviser to be truly objective when they only way they are compensated is if they sell you something. It becomes even more difficult if their job is on the line, they have a quota to meet, or an incentive such as a company trip dangling in front of them. That being said, all three ways have their advantages and disadvantages. It all comes down to what you’re comfortable with, and whom you’re comfortable with. Do your homework, ask lots of questions. Above all, any adviser no matter how they get paid should put your interests first – above all else. Consider an adviser or planner that is a fiduciary. This means that they are legally obligated to put your interests first.

Lastly, an advisers commissions and fees are not inclusive of the expense ratios and fees of the products they put you in. For example, you could pay a 1% fee to a fee-only adviser but they have you in a mutual fund that charges 1.5% in expenses. Or a commissioned adviser could sell you an annuity that had fund fees of 1.5% and policy charges of another 1.25%. This is another 2.75% of charges annually in addition to the commissions paid! Read the fine print and know all of what you’re being charged. Good professionals deserve to get paid, but their goal should be to have more of your money working for you, not the other way around.

Posted on Apr 19th, 2013

by author: sraskie.

1 comment already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning, investing, investment, life insurance, retirement plan, saving.
Tagged: commissions · early retirement · fee-based · fee-only · fiduciary · financial planning · load mutual funds

Last-Minute Tax Tips

Apr 15th, 2013

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Since today is D-Day for income tax filing, I’ve pulled together a few recent tips that the IRS published. These tips cover a few of the areas that you may find interesting, including how to get a six-month extension for your filing (but not for payment of tax), errors to avoid as you complete your tax return, how to make IRA contributions, and tips for the self-employed at tax time. This is a much longer post than I normally write, but I think it has a lot of very good and very timely information that will be useful today.

The actual text of these tips are listed below, with the reference number of each tip.

IRS Newswire IR-2013-38

Can’t File by April 15? Use Free File to Get a Six-Month Extension; E-Pay and Payment Agreement Options Available to People Who Owe Tax

WASHINGTON – The Internal Revenue Service today reminded taxpayers that quick and easy solutions are available if they can’t file their returns on time, and they can even request relief online.

The IRS says don’t panic. Tax-filing extensions are available to taxpayers who need more time to finish their returns. Remember, this is an extension of time to file; not an extension of time to pay. However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief.

Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline. Taxpayers should file, even if they can’t pay the full amount due. Here are further details on the options available.

More Time to File

People who haven’t finished filling out their return can get an automatic six-month extension. The fastest and easiest way to get the extra time is through the Free File link on IRS.gov. In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on form 4868.

Filing this form gives taxpayers until Oct. 15 to file a return. To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.

By properly filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. Of the nearly 10.7 million extension forms received by the IRS last year, almost 5.8 million were filed electronically.

Some taxpayers get more time to file without having to ask for it. These include:

Taxpayers abroad. US citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the US, have until June 17 to file. Tax payments are still due April 15.
Members of the military and others serving in Afghanistan or combat zone localities. Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due. For details, see Extensions of Deadlines in Publication 3, Armed Forces Tax Guide.
People affected by certain tornadoes, severe storms, floods and other recent natural disasters. Currently, parts of Mississippi are covered by a federal disaster declaration, and affected individuals and businesses in these areas have until April 30 to file and pay.

Easy Ways to E-Pay

Taxpayers with a balance due now have several quick and easy ways to electronically pay what they owe. They include:

Electronic Federal Tax Payment System (EFTPS). This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
Electronic funds withdrawal. E-file and e-pay in a single step.
Credit or debit card. Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A Line 23.

Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury”. Write “2012 Form 1040”, name, address, daytime phone number and Social Security number on the front of the check or money order. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.

More Time to Pay

Taxpayers who have finished their returns should file by the regular April 15 deadline, even if they can’t pay the full amount due. In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including the following:

Most people can set up a payment agreement with the IRS on line in a matter of minutes. Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed. Alternatively, taxpayers can request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
Some struggling taxpayers may qualify for an offer-in-compromise. This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay. To help determine eligibility, use the Offer In Compromise Pre-Qualifier, a free online tool available on IRS.gov.

IRS Tax Tip 2013-52

Five Things to Know if You Need More Time to File

The April 15 tax-filing deadline is fast approaching. Some taxpayers may find that they need more time to file their tax returns. If you need extra time, you can get an automatic six-month extension from the IRS.

Here are five important things you need to know about filing an extension:

Extra time fo file is not extra time to pay. You may request an extension of time to file your federal tax return to get an extra six months to file, until Oct. 15. Although an extension will give you an extra six months to get your tax return to the IRS, it does not extend the time you have to pay any tax you owe. You will owe interest on any amount not paid by the April 15 deadline. You may also owe a penalty for failing to pay on time.
File on time even if you can’t pay. If you complete your return but you can’t pay the full amount due, do not request an extension. File your return on time and pay as much as you can. You should pay the balance as soon as possible to minimize penalty and interest charges. If you need more time to pay, you can apply for a payment plan using the Online Payment Agreement tool on IRS.gov. You can also send Form 9465,Installment Agreement Request, with your return. If you are unable to make payments because of a financial hardship, the IRS will work with you. Call the IRS at 800-829-1040 to discuss your options.
Use Free File to request an extension. Everyone can use IRS Free File to e-file their extension request. Free File is available exclusively through the IRS.gov website. You must e-file the request by midnight on April 15. If you e-file your extension request, the IRS will acknowledge receipt of your request.
Use Form 4868 if you file a paper form. You can request an extension of time to file by submitting Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return. You must submit this form to the IRS by April 15. Form 4868 is available on IRS.gov.
Electronic funds withdrawal. If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from a checking or savings account. To do this you will need your bank routing and account numbers.

IRS Tax Tip 2013-51

Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it usually takes the IRS longer to process it. The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.

The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors. In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.

Here are eight common errors to avoid.

Wrong or missing Social Security numbers. Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.
Names wrong or misspelled. Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.
Filing status errors. Choose the right filing status. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction and Filing Information, to help you choose the right one. E-filing your tax return will also help you choose the right filing status.
Math mistakes. If you file a paper tax return, double check the math. If you e-file, the software does the math for you. For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.
Errors in figuring credits, deductions. Take your time and read the instructions in your tax booklet carefully. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction. For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.
Wrong bank account numbers. Direct deposit is the fast, easy and safe way to receive your tax refund. Make sure you enter your bank routing and account numbers correctly.
Forms not signed, dated. An unsigned tax return is like an unsigned check – it’s invalid. Remember both spouses must sign a joint return.
Electronic signature errors. If you e-file your tax return, you will sign the return electronically using a Personal Identification Number. For Security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return. Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return. You may also use last year’s PIN if you e-filed last year and remember your PIN.

IRS Tax Tip 2013-50

Top Ten Tips on Making IRA Contributions

The IRS has 10 important tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.

You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA.
You must have taxable compensation to contribute to an IRA. This includes income from wages, salaries, tips, commissions and bonuses. It also includes net income from self-employment. If you file a joint return, generally only one spouse needs to have taxable compensation.
You can contribute to your traditional IRA at any time during the year. You must make all contributions by the de date for filing your tax return. This due date does not include extensions. For most people this means you must contribute for 2012 by April 15, 2013. If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.
For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000. If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.
Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
You may be able to deduct some or all of your contributions to your traditional IRA.
Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct.
You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit. The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly). Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.
You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.
See Publication 590, Individual Retirement Arrangements, for more about IRA contributions.

IRS Tax Tip 2013-46

Top Six Tax Tips for the Self-Employed

When your are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.
Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.
If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment ax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment tax.
If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.
When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ‘capitalized’. This means you can deduct a portion of the expense each year over a period of years.
You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

For more information, visit the Small Business and Self-Employed Tax Center on the IRS website. There are three IRS publications that will also help you. See Publications 334, Tax Guide for Small Business; 535, Business Expenses and 505, Tax Withholding and Estimated Tax. All tax forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 15th, 2013

by author: jblankenship.

Posted in: 2012 tax year, employer plan, income tax, IRA, irs.
Tagged: income tax · IRA · irs

Estimated Tax Payments

Apr 11th, 2013

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When you have income from sources other than traditional employment, it often becomes necessary to make Estimated Tax payments since you don’t have withholding (as you would from traditional wages). This income may be from self-employment, rents or royalties, or from interest and dividends from your investments. Income of this variety may also be from pensions, Social Security, and IRAs or qualified retirement plans.

Sometimes you can set up the payments from various sources to withhold tax payments and the provider will then send the withheld tax to the IRS on your behalf. These tax payments will be reported to you on your 1099R, SSA-1099, and/or other specific tax documents that you receive at the end of the year. If you don’t have another form of withholding, you may need to make estimated tax payments throughout the year.

The IRS recently issued their Tax Tip 2013-49, which details Six Tips on Making Estimated Tax Payments. The actual text of the Tip is listed below.

Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.
Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.
When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You shold also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimaes as accurate as possible.
You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.
You should use Form 1040-ES, Estimated Tax for individuals, to figure your estimated tax.
You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions. Also, check out the Electronic Payment Options Home Page at IRS.gov. If you mail your payments to the RIS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax. Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

jb Note: Another way to ensure that you have appropriate withholding for the tax year is by taking a distribution from an IRA and having tax withheld from the distribution. This is a little-known option that you can use to avoid having to make quarterly estimated tax payments throughout the year – see the article “IRA Trick – Eliminate Quarterly Estimated Tax Payments” for more details.

Posted on Apr 11th, 2013

by author: jblankenship.

Posted in: 2013 tax year, estimated tax, income tax, irs.
Tagged: estimated tax · income tax · quarterly tax payment

What Income is Taxable?

Apr 10th, 2013

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It may be tough to figure out which parts of your income you’ve received over the year are taxable, and what parts are not taxable. This is because certain kinds of income may seem like they should not be taxed (but they are), while other items of income seem like they should be taxed (but they’re not).

The IRS has published a Tax Tip to help understand which income is taxable and which is not. The complete text of IRS Tax Tip 2013-12 is detailed below.

Taxable and Nontaxable Income

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

Child support payments;
Gifts, bequests and inheritances;
Welfare benefits;
Damage awards for physical injury or sickness;
Cash rebates from a dealer or manufacturer for an item you buy; and
Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G*.

For more information and examples, see Publication 525, Taxable and Nontaxable Income. The booklet is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

* jb Note: If you didn’t itemize your deductions on the previous year’s return and/or if you did not deduct state or local income taxes on the previous year’s return, your refund is likely not taxable income. An example would be if you took the state & local sales tax deduction instead of state & local income taxes (you have to choose between the two) – in this case if you received a refund from the state or local taxing authority, this is usually not taxable in the current year.

Posted on Apr 10th, 2013

by author: jblankenship.