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

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Tagged: book review

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

May 13th, 2013

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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.

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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.

Posted in: 2013 tax year, income tax, irs, taxable compensation.
Tagged: income tax · irs · nontaxable income · taxable income

Deducting Medical Expenses from Your Income

Apr 9th, 2013

2 comments

Among the types of expenses that are allowed to be deducted from your income is expenses that you’ve paid for medical insurance, medical care, and certain other expenses. This can get a bit complicated to understand what expenses are deductible, and the IRS recently issued a Tax Tip that will help you to understand how it all works. The complete text of IRS Tax Tip 2013-25 is listed below.

Seven Important Tax Facts about Medical and Dental Expenses

If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance. The IRS wants you to know these seven facts about claiming the medical and dental expense deduction.

You must itemize. You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction*.
Deduction is limited. You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.
Expenses paid in 2012. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.
Qualifying expenses. You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Visit IRS.gov for more details.
Costs to include. You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.
Travel is included. You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.
No double benefit. Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.

You’ll find more information in IRS Publication 502, Medical and Dental Expenses. Also see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. They are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

* jb Note: Even though you may not have enough medical expenses and other itemized deductions to claim them, the Standard Deduction takes the place of those itemized deductions. In other words, with the Standard Deduction you get a deduction from income that is greater than the amount of your itemized deductions. If it wasn’t for the Standard Deduction – if you had to itemize what deductions you have – you would likely have to pay more tax if you had fewer deductions than the Standard.

Posted on Apr 9th, 2013

by author: jblankenship.

Posted in: health savings account, irs, itemized deduction.
Tagged: health savings · itemized deduction

What You Need to Know About the Alternative Minimum Tax (AMT)

Apr 8th, 2013

2 comments

When you have high taxable income and certain deductions and exclusions from income, you may be subject to the Alternative Minimum Tax, or AMT. This is a nearly flat-tax, which excludes a higher amount of income from the regular income tax. For 2012 taxes, the exclusion of income is $50,600 for singles, and $78,750 for married couples. The “nearly flat” tax rate starts at 26% and the upper end rate is 28%.

Under the AMT, no deduction is allowed for the standard deduction, or for personal exemptions. State and local taxes are also not allowed to be deducted from your income. Your other itemized deductions are allowed, at least to a certain extent.

Recently the IRS issued their Tax Tip 2013-17, which lists Five Facts to Know About AMT. The actual text of this Tip is below.

Five Facts to Know about AMT

The Alternative Minimum Tax may apply to you if your income is above a certain amount. Here are five facts the IRS wants you to know about the AMT:

You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.
The 2012 AMT exemption amounts for each filing status are:
- Single and Head of Household = $50,600;
- Married Filing Joint and Qualifying Widow(er) = $78,750; and
- Married Filing Separate = $39,375.
AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.
You should use IRS e-file to prepare and file your tax return. You figure AMT using different rules than those you use to figure your regular income tax. IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for your.
If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

Visit IRS.gov for more information about AMT. You should also check Form 6251, Alternative Minimum Tax – Individuals and its instructions. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 8th, 2013

by author: jblankenship.

Posted in: alternative minimum tax, income tax, irs.
Tagged: alternative minimum tax · income tax · irs

A Few Facts to Know About Retirement Plan Contributions

Apr 5th, 2013

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As we near the tax filing deadline, there are a few things you need to be aware of as you consider your retirement plan contributions for tax year 2012 (or whatever the prior tax year is, if you’re reading this sometime later).

Regular IRA contributions are due by the filing deadline, with no extensions. That means April 15, 2013 for the 2012 tax year. Your contribution for 2012 is considered made “on time” if your payment is postmarked by midnight on April 15, 2013.

Perhaps you wish to make a more substantial contribution to a retirement plan – in 2012, you can contribute up to $50,000 to a Keogh plan. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business. Keogh plan contributions can be made by the extended due date of your return – in most cases this is October 15, 2013 (for tax year 2012). The downside is that you must have established the Keogh plan by December 31, 2012 in order to make contributions for the 2012 tax year. If you have not established your Keogh plan yet, it’s too late for tax year 2012.

However, you still have another option if you want to make significant retirement plan contributions (above and beyond the $5,000/$6,000 limit on traditional IRAs) – and this is to establish and fund a SEP-IRA. The funding limit for SEP-IRAs is the same as for Keogh plans, but you can establish the SEP-IRA as late as the extended filing date (October 15) and fund it for the prior tax year.

Happy saving!

Posted on Apr 5th, 2013

by author: jblankenship.

Posted in: 2012 tax year, Annual limits, IRA, qrp, retirement accounts.
Tagged: IRA · qrp · retirement accounts

The ABC’s (and D’s) of Medicare

Mar 29th, 2013

by sraskie.

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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.

Posted on Mar 29th, 2013

by author: sraskie.

Posted in: baby boomers, benefit, health insurance, health plans, Medicare, medicare, medicare costs, medicare part b, medicare part b premiums.

How an IRA is Treated When a Beneficiary Dies

Mar 27th, 2013

4 comments

When an IRA owner dies while the IRA still has funds in it, the primary beneficiary(ies) have the opportunity to transfer the account to an inherited IRA and begin taking the Required Minimum Distributions (RMDs) over his or her lifetime. When this primary beneficiary dies, it can be difficult to figure out who the money goes to. This is known as the successor beneficiary.

It’s important to know the difference between a successor beneficiary and a contingent beneficiary. A contingent beneficiary takes the place of the primary beneficiary in the event that the primary beneficiary dies before the original owner does. A successor, on the other hand, takes the place of the primary beneficiary when the primary beneficiary outlives the original owner. So it’s a matter of timing. What we’re interested in is the successor beneficiary.

There are four main ways that a successor beneficiary is determined:

Successor is named by the primary beneficiary. When the inherited IRA is established, the primary beneficiary has the opportunity to name one or more beneficiaries of the inherited IRA, along with contingent beneficiaries if desired.
Successor is the primary beneficiary’s estate. If the primary beneficiary hasn’t designated a beneficiary of the inherited IRA, the primary beneficiary’s estate becomes the successor beneficiary of the IRA.
Custodial documents name a successor beneficiary. Some IRA custodians provide for the designation of a successor beneficiary in the original plan documents. This is relatively rare, and even more rare that a successor is actually named.
Original owner names a successor beneficiary. Sometimes the original owner has had the foresight to utilize a trust document of some variety to control succession among beneficiaries. In a case like this, the trust is the primary beneficiary, and the trust has a primary beneficiary and successor beneficiary(ies).

Below is a flowchart which describes how the ownership of an IRA flows to different beneficiaries. (click on the chart to see a larger view)

Distribution for the Successor Beneficiary

So, having sorted out that we are working with the appropriate successor beneficiary, we need to determine what is the proper distribution period for the successor beneficiary. As we know, if the IRA is an inherited IRA, it is subject to Required Minimum Distributions, over a period determined by the beneficiary’s age at the time of the death of the original owner. This figure is determined from Table I in the first year of distribution (the year after the death of the original owner), and is a set period of time. The factor from Table I is used in the first year, and each subsequent year one is subtracted from the first factor and the IRA is distributed based on that amount.

So, for example, if the beneficiary is 71 years of age in the first year of distribution, according to Table I the factor is 16.3. The IRA value is divided by 16.3 to come up with the RMD for the first year. Each subsequent year 1 is subtracted from the Table I factor, so that the IRA is distributed over 16.3 years. This is known as the Applicable Distribution Period, or ADP.

When a successor beneficiary takes over to receive distributions from the inherited IRA, the original ADP is still in effect, and the IRA must be distributed over that remaining period to the successor beneficiary(ies).

Complications

Several factors can add a considerable degree of complication to the process – such as if there are multiple primary beneficiaries and/or multiple successor beneficiaries.

Each primary beneficiary is treated separately, and the successors for each (unless determined by the original plan as mentioned above) are determined by the individual beneficiary. When there are multiple successors, each one is treated separately and the original ADP for the applicable primary beneficiary applies to all successors pro rata for the successor’s share.

Another complication is when one or more beneficiaries disclaims the inheritance. In a case like that, first it is determined whether the original beneficiary designation had pre-determined the successor for each primary beneficiary (such as “per stirpes”, meaning that the heirs of the original beneficiary are bequeathed the disclaimed share). In the absence of this sort of designation, the other beneficiaries in the primary class take over the disclaimed share.

Of course in the real world there are many, many more complications, but this should give you a place to start. Use the comments section below to bring in your more complex situations and we’ll work them out.

Posted on Mar 27th, 2013

by author: jblankenship.

4 comments already - add to the conversation!

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

Capital Gains and Losses on Your Tax Return

Mar 25th, 2013

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When you sell things, including stocks, bonds, real estate, collectibles, and other items, you may either gain money or lose money from the original purchase price. This gain or loss is known as a capital gain or capital loss, and (with some exceptions) you will report these capital gains or losses on your income tax return.

Often the gains are afforded special tax rates and treatment, and the losses provide additional benefits as well. This entire area of tax reporting can be confusing and there are special rules that you need to follow in order to make sure that you report these transactions correctly and pay the appropriate taxes.

The IRS recently published their Tax Tip 2013-28, which details Ten Facts about Capital Gains and Losses. The actual text of the Tip is below:

Ten Facts about Capital Gains and Losses

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.
A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.
You must include all capital gains in your income.
You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.
Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gains or loss is long-term. If you hold it for one year or less, the gain or loss is short-term.
If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain’.
The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.
If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.
If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.
(jb note: In other words, your carried over loss from a prior year is subtracted from your gains or added to the losses in the current year. If the result is a net capital loss, up to $3,000 is deducted from your ordinary income in that year, and the excess amount carried over to the next year. If the result is a net capital gain, this net gain is reported and taxed as a long-term gain on the current return.)
Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you e-file your tax return, the software will do this for you.

For more information about capital gains and losses, see the Schedule D instructions or Publication 550, Investment Income and Expenses. They are both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Mar 25th, 2013

by author: jblankenship.

Posted in: capital gains and losses, capital gains tax rates, income tax.
Tagged: capital gains and losses · capital gains rate · income tax

Computing Your Social Security Monthly Benefit

Mar 22nd, 2013

5 comments

When planning for Social Security retirement benefits, it is important to know how to compute the amount of your benefit at various ages. The amount of your benefit will be different depending upon your age when you begin drawing the benefit, as well as your record of earnings over time.

Below are the factors that are needed in order to determine the amount of your Social Security benefit:

Your Primary Insurance Amount, or PIA
Your Full Retirement Age, or FRA, which is determined by your year of birth
Your age when you will begin drawing benefits
Whether or not the Windfall Elimination Provision (WEP) applies to your benefits

This earlier article has information about the PIA, and you can find your PIA on your Social Security statement. Your FRA, if you were born between 1943 and 1954, is 66. If you were born in 1955 or after, FRA gradually increases up to 67 by birth year of 1960 or later.

So with these first two factors, we can construct the initial part of the monthly benefit equation. If you begin receiving benefits in the month that you reach FRA, your benefit is equal to your PIA (although this could be reduced by WEP if it applies, see below). If you are intending to begin benefits before FRA, there will be a reduction from your PIA. On the other hand, if you begin benefits after FRA, the amount of your benefit will be increased from your PIA.

Prior to FRA

If starting to receive benefits prior to FRA, you need to calculate the number of months prior to FRA that you’ll begin. If it’s less than 36 months prior to FRA, take the number of months times 5/9 of a percent. This will give you the amount of reduction. For example, if you were starting your benefit 24 months before FRA, the calculation is:

24 * 5/9% = 120/9% = 13 3/9%, or 13.333%

If, on the other hand, you are starting your benefit more than 36 months prior to FRA, the calculation becomes more complicated. For every month greater than 36 prior to FRA, you multiply by 5/12 of a percent, and then add 20% (36 * 5/9%) to that figure to come up with the total reduction. So, for example, if you were starting your benefit 43 months before FRA, the calculation goes as follows:

43 minus 36 = 7

7 * 5/12% = 35/12% = 2 11/12%, or 2.9167%

20% plus 2.9167% = 22.9167%

Both of these factors are reductions, so you will subtract the factor from 100%, and multiply this by your PIA to come up with your monthly benefit amount. From the first example, if your PIA was $2,000, the reduced benefit amount would work out to $1,733, since 100% minus 13.333% equals 86.667%. Multiplying $2,000 by 86.667% equals $1,733.

For the second example, again using a $2,000 PIA, your benefit would be calculated as follows: 100% minus 22.9167% equals 77.0833%, times $2,000 equals $1,542.

This is your monthly benefit amount if you start benefits before FRA and the WEP doesn’t apply. If the WEP applies to you, skip down to the section on the Windfall Elimination Provision.

After FRA

Much like the calculation for starting benefits before FRA, the calculation for starting benefits after FRA is based upon the number of months relative to FRA. So you need to figure out how many months after FRA you are intending to begin your benefit. For each month after FRA to the start of your benefits, up to age 70, your benefit is increased by 2/3 of a percent from your PIA. (This factor has been different in past years, but for now this is the applicable figure.)

If you wait until two and a half years after FRA to begin your benefits, this is equal to 30 months. So the calculation for the increase is as follows:

30 * 2/3% = 60/3% = 20%

Since this is an increase over PIA, add the factor to 100%, and multiply by your PIA to come up with the monthly benefit amount. From our example earlier, your PIA is $2,000, and you have delayed 30 months (2 1/2 years) after FRA to begin your benefit. Multiply $2,000 by 120%, and you come up with a benefit amount of $2,400.

This is your monthly benefit amount if you have delayed receiving your benefit after FRA, unless the Windfall Elimination Provision (WEP) applies. Keep reading for how the WEP can impact your benefit.

Windfall Elimination Provision (WEP)

If you are (or will be) receiving a pension from a job that was not covered by Social Security (e.g., a government job or a job overseas), the Windfall Elimination Provision, or WEP, will further reduce your monthly benefit amount. See the article at the link for how the Windfall Elimination Provision is calculated.

What is important to know is that the maximum amount that the WEP can reduce your benefit (for 2013) is $395. So if the WEP impacts you to the maximum extent, your monthly benefit amount that we calculated earlier will be reduced by $395 in 2013 – and this figure is adjusted annually by the normal Cost-of-Living Adjustments (COLAs) that are applied each year. See this article (at the link) for information on how the WEP can be reduced or eliminated.

So that’s it – follow the above steps and you have a good idea of what your monthly benefit amount will be. Happy calculating!

Posted on Mar 22nd, 2013

by author: jblankenship.

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Posted in: primary insurance amount, Social Security, social security benefits.
Tagged: PIA · primary insurance amount · Social Security

The Roth IRA

Mar 20th, 2013

by sraskie.

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Once you’ve established your emergency fund, it’s time to continue to pay yourself first but for a sunny day in the future – your retirement. For most people (this includes you) the Roth IRA is going to be a great option to save money for retirement and have a tax-free source of income once they hit their golden years. The Roth IRA was named after its namesake, Senator William Roth of Delaware. The IRA part simply means Individual Retirement Arrangement.

Roth IRAs work like this: You save money into your Roth IRA on an after-tax basis. What this means is that when you get paid from your job and you’ve already paid Uncle Sam his share in taxes – you get what’s left over. Of those leftovers (couldn’t help the food reference) you can take some of that money and put it into a Roth IRA. This money then goes into an account of your choosing. This could be into mutual funds, stocks, bonds, ETFs, or even a simple savings account at your bank. There are a few things that are not allowed in IRAs such as life insurance and collectibles like art and antiques.

Over time your contributions, depending on how they’re invested, will grow tax-deferred into a nice little nest egg ready for you to hatch at retirement. The magic of the Roth IRA really begins here. Remember when I said that after-tax money was going into the account? Well, since you’ve gone through the pain of having been taxed on that money already, any qualified withdrawals from your Roth IRA are now…wait for it…TAX FREE! Imagine an income source in retirement that cannot be taxed.

There are some great calculators online that can be used to show you how much you can have saved in 10, 20 or 30 years. I’ve included some websites you can visit at the end of the book.

As of this writing in 2013 you are allowed to contribute $5,500 annually to your Roth IRA and if you’re age 50 or older, another $1,000 as a “catch-up” contribution. These numbers will generally increase periodically as inflation increases and as time goes on.

To see if a Roth IRA is an option for you to consider, talk with your financial professional and explore your options. Some good rules of thumb when looking at your options for funding a Roth IRA are to avoid mutual funds with high fees and expenses, insurance products (annuities) with high fees and surrender charges and complex products that are difficult for you (and your advisor) to understand and explain.

Posted on Mar 20th, 2013

by author: sraskie.