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

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

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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

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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.

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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

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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.

Posted in: contribution limit, IRA, ira account, ira contribution limits, ira funds, ira money, iras, Roth IRA, roth ira, roth ira account, roth ira contribution, roth ira contributions.

Adoption Credit for Tax Year 2012 and beyond

Mar 18th, 2013

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As you probably already know if you’re in the position to seek the adoption credit, this credit has undergone some changes for the 2012 filing season.

In the past, for tax years 2010 and 2011, the adoption credit was a refundable credit – meaning that you could receive the entire credit regardless of the amount of tax you have to pay. For example, if you had $10,000 of adoption credit and your tax return otherwise indicates that your tax is $6,000, you were able to claim the entire credit and $4,000 would be refunded to you. This was in addition to any overpayment you may have made on your withholding.

However, for 2012 (and beyond, unless the rules change again) the adoption credit is back to being non-refundable. Now, in the situation described above, the maximum amount of credit that you could claim is equal to your tax, or $6,000.

The limit for adoption expenses for 2012 is $12,650 per child. A portion of these expenses could have been incurred in a prior year, and the credit claimed for that tax year. The total of all credits for the adoption of that child (including prior years’ credit) cannot exceed $12,650 if the adoption was finalized in 2012. Any excess credit cannot be carried over to future years.

There is also an income limit for the credit: if your Modified Adjusted Gross Income is less than $189,710 for 2012, the credit is not limited. If your income is above that level but less than $229,710, the maximum credit is reduced pro rata from $12,650. Above a MAGI of $229,710, the credit is eliminated.

It’s important to note that there is also an income exclusion limit for employer-provided adoption benefits – which is also equal to $12,650 per child for 2012. This exclusion has the same MAGI limits as the credit. Credit and exclusion can be taken for the same adoption, but not for the same expenses.

For example, if you had a adoption expenses of $18,000 for tax year 2012 and your employer provided you with adoption assistance of $10,000 for the year, you would only be able to take the credit for $8,000 (the remaining expenses).

Lastly, the adoption credit is claimed on Form 8839, Qualified Adoption Expenses. When using this form to claim adoption credit, you are not allowed to efile your return, it must be printed and filed by mail. However, you do not have to send along the supporting documents and adoption decree (as you did in 2010 and 2011), since the credit is no longer refundable.

Posted on Mar 18th, 2013

by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, 2013 tax year, income tax, income tax credit, tax credits.
Tagged: adoption · income tax · tax credit

Restricted Application is Available via the Online Application

Mar 15th, 2013

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I learn something new almost every day.

Today (well, not today but recently), I learned something about the online application for Social Security that I didn’t know: the restricted application for Spousal Benefits is available as a choice when you apply using the online application system! (If you want more information on why a restricted application is important, see this article about Leaving Money on the Table.)

For quite a while now I’ve been telling folks that the best way to apply for the restricted application is to go to your local office. When you get there and explain that you want to submit a restricted application for Spousal Benefits only, the first person that you talk to will likely tell you that you can’t do this, because your own retirement benefit is greater than half of your spouse’s PIA, or something like that. Then my advice has been to ask for a supervisor and explain it again, and keep insisting that you’re eligible to do this (make sure that you are, first of course!), until you get the right person to agree with you.

As it turns out, for some time now you’ve been able to select this option via that online application. See below – this is a screenshot of the application system (sorry it’s not very legible). The last part in bold says:

If you are eligible for both retirement benefits and spouse’s benefits, do you want to delay receipt of retirement benefits?

It’s clear that this option gives you the ability to delay the receipt of your retirement benefit and only receive the spouse’s benefit, assuming that you’re at least at Full Retirement Age and your spouse has applied for his or her benefit.

This is great news – since now you won’t have to go through the hassle described above in order to submit a restricted application for spousal benefits.

An additional, likely unintended positive to this development is that you could use this blog to show the first person you talk to (if you still opt to visit the local office) in order to help prove your eligibility for this option.

Posted on Mar 15th, 2013

by author: jblankenship.

Posted in: #noTOP, restricted application, Social Security, social security administration, social security benefits, Social Security spousal benefit, Spousal Benefit.
Tagged: restricted application · Social Security · social security benefits · spousal benefit

Your Employer’s Retirement Plan

Mar 13th, 2013

by sraskie.

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Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate!

Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that offers the 401(k) through your employer. Generally, you’re going to want to choose funds with low fees and expenses. As of 2013, the maximum amount you can put into your 401(k) is $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

A cousin to the 401(k) is the 403(b). The 403(b) is very similar to the 401(k) in that you’re allowed to allocate a certain amount or percentage of your gross pay to your account, tax-deferred. Where the 403(b) differs is that it’s only allowed for non-profits such as school districts, hospitals, municipalities, and qualified charitable organizations. Another difference is by law the money in your 403(b) can only be invested in mutual funds or annuity contracts. You’re not allowed to own individual stocks or bonds in it. Like the 401(k), you’re allowed to save (as of 2013) $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

Branching out in our retirement plan family tree we come to the 457 plan. 457 plans are reserved for certain non-profits such as hospitals, government entities, school districts and colleges and universities. As you may have guessed, 457 plans are similar to their 401(k) and 403(b) counterparts in that money from your gross pay goes into your account tax-deferred. Like the 403(b) the 457 only allows investments in mutual funds or annuity contracts.

Similar to the 401(k) and 403(b), you’re allowed to save up to $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older (for 2013). Unlike the 401(k) and 403(b) the 457 allows you access to your money at any age, as long as you’re separated from service from your employer. For example, if you were 40 years old and have been saving into a 457 since you were age 25 and you saved $50,000 and you were fired, laid off or resigned, you’d have access to your 457 money without penalty; you’d simply pay ordinary income tax on any withdrawals.

Another key point to make is in regards to the aggregation rule. What this means is that you’re only allowed to invest $17,500 (along with the “catch-up” if you qualify) total between a 401(k) and a 403(b). For example, you work as a professor for nine months of the year and save $14,000 in your college’s 403(b). Over the summer, you work part time for a company that offers a 401(k) plan and you want to save money there. Assuming you’re age 40, you’d only be able to save an additional $3,500 to your summer company’s 401(k) – for a total of $17,500.

There is one exception to the aggregation rule. If you have access to a 401(k) or 403(b) and a 457, you are allowed to contribute the maximum to the 401(k) or 403(b) – for a total of $17,500 and then contribute the maximum to the 457 for an annual total of $35,000. The 457 trumps the aggregation rule. Few people may be able to actually sock away $35,000 per year, but it is available to those that work for employers offering both plans or if you work for two or more employers and they offer one or the other.

SEPs and SIMPLEs work a bit different. Typically these plans are available to smaller employers and SEPs are common for those that are self-employed. Both SEPs and SIMPLEs use IRAs as the funding vehicle to place retirement money, but each has different requirements as to contribution limits and participation requirements.

SEPs (Simplified Employee Pensions) can be funded to a maximum of $51,000 annually (for 2013) or 25% of the employee’s salary – whichever is smaller. There can be corresponding tax deductions involved that may be beneficial for solo businesses or businesses with a small number of employees as there are requirements that all employees must participate.

SIMPLEs (Savings Incentive Match PLan for Employees) are another option for smaller businesses looking to start a retirement plan and looking for a cost effective way to start (a 401(k) can be administratively expensive). Essentially, both employer and employees are allowed to participate and certain rules dictate that the employer must make a matching contribution (hence the Match in the name) to participating employees. As of 2013 you can contribute a maximum of $12,000 annually to a SIMPLE plan with an additional “catch-up” contribution of $2,500 if you’re age 50 or older.

The aggregation rule that applies to the 401(k) and 403(b) also applies to SEPs and SIMPLEs. This means that of the four plans for 2013, you’re still only allowed a total contribution of $17,500 annually ($23,000 if you’re age 50 or over). Having a 457 would be the only way to increase this amount.

Like SEPs and SIMPLEs, some 401(k) and 403(b) plans also have the company match. This means that in addition to your contributions, your employer will also make a contribution or “match” to the amount you’re contributing up to a certain percent. Consider taking full advantage of this. It’s free money! There are several reasons why an employer would do this ranging from plan compliance to helping ensure employee satisfaction and loyalty.

Finally, participating in your employer’s plan does not prohibit you from participating in a Traditional or Roth IRA. You are allowed to contribute the maximum allowed by law to both your employer’s plan and your own IRA.

It goes without saying that before you decide to participate, talk with your human resources department (not your cubicle buddy) or a financial professional regarding your options and which option or combination is right for you.

Posted on Mar 13th, 2013

by author: sraskie.

Posted in: 401 k, 401 k 403 b, 401k, 403 b, 457, employer plan, investing, investment, qualified retirement plan, retirement, retirement accounts, retirement benefits, retirement plan, retirement plans, retirement savings, retirement savings plans, SEP IRA, SIMPLE.

Book Review: Currencies After the Crash

Mar 11th, 2013

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You Alone amongst all the Thousands....... m...

This book is a series of nine essays about the state of currency in our global economy after the 2008-2009 economic crisis. The contributor list is impressive: global currency luminaries such as Anoop Singh of the IMF, Robert Johnson of the Global Finance Project, Jörg Asmussen of the European Central Bank, and many others of similar pedigree. The book is edited by Sara Eisen of Bloomberg.

This book doesn’t lend itself well to description, other than that each of the contributors provides a snippet of insight into the global currency situation as it stands today, from his or her professional perspective.

Most of the essays point out that the US dollar is not in the crisis situation that the popular press would have us believe. Yes, the dominance of the dollar has diminished in recent years, but a replacement as dominant currency worldwide is not eminent from either the euro or the yuan, the only two contenders at this point.

That’s not to say that the dollar doesn’t have it’s problems – it’s just that the dominance of the dollar is so huge that it can’t be replaced in the very near term. And during that period the US has the opportunity to right the ship and possibly maintain the dominance of the dollar.

The euro and the European Central Bank have a slew of problems that must be addressed in order to maintain viability as an economy – including the likely paring down of the membership to eliminate some of the problem child nations such as Greece. This will likely keep the euro as a minor player on the world stage, still a major component of the western European marketplace.

The yuan’s position as a leading global currency is improving all the time, but China has to begin to evolve its own economy toward a consumer-centric one in order to get to a point where the yuan can begin to assert global dominance.

Of course the views are not in lockstep with one another, so you’ll want to read this through for yourself if you’re looking for a good overall view of the global currency marketplace.

This book may be a bit heady for many readers, as the concepts of global currencies and banking get pretty complex. I have to admit that I had a difficult time with some of the information presented, as global macroeconomics and banking aren’t really strong areas of interest for me.

If you’re interested in a broad overview of the global currency situation, I highly recommend this book. You’d have to search far and wide to get this many high-level individuals’ opinions otherwise.

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 Mar 11th, 2013

by author: jblankenship.

Posted in: Book review.
Tagged: book review

Social Security Benefits and Taxes

Mar 8th, 2013

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When you’re receiving Social Security benefits, you may be subject to income tax on those benefits. At the end of the year, you’ll receive a form SSA-1099 from the government that details the benefits that you’ve been paid, as well as the amount that has been deducted for Medicare premiums, and any federal income tax that you’ve had withheld from the benefit checks.

When you prepare your tax return for the year, if you’re using a software program (does anyone prepare them by hand any more?), the program will give you a place to enter the figures from your SSA-1099 form. Then after you’ve entered all of your other income information into the system, it will calculate how much of your Social Security benefit is subject to income tax.

But that’s no fun, is it? How do you know how much of your benefit is going to be taxable?

Here’s how it works: there is a figure known as provisional income, which is calculated using all of your other income (including tax-exempt interest) plus half of your Social Security income. Your provisional income is then compared to a base amount, depending upon your filing status.

For filing status of Single, Head of Household, Qualifying Widow(er) with a Dependent Child, or Married Filing Separately (if you did not live with your spouse at any time in the year), the base amount is $25,000
Married Filing Jointly, the base amount is $32,000
Married Filing Separately (if the spouses lived together at any time during the year), the base amount is $0

If your provisional income is above the base amount for your filing status, your Social Security benefit at least a portion of your benefit is going to be taxable. Up to 50% of your benefit may be taxable as ordinary income, until you reach the next base level. If your provisional income is greater than the first base level but less than the next base level, at most 50% of the Social Security benefit will be taxable. The next base levels are:

$34,000 (Single, Head of Household, etc.)
$44,000 (Married Filing Jointly)
$0 (Married Filing Separately)

When your provisional income is greater than the second base level, a portion of your Social Security benefit will become 85% taxable. Upon reaching the second level, a portion of the benefit is 50% taxable and the amounts above the second level are 85% taxable. As your income increases, eventually all of your Social Security benefits become 85% taxable.

If you want more detail on the calculations, you can look at this earlier article which works through the calculations for Social Security benefit taxation. It gets pretty complicated, but it’s useful to know how it all works, in case you can change your income to make a difference in how the benefits are taxed. This is also useful as you plan which types of income to recognize – if you can take Roth-type income versus regular IRA income,it can have a profound effect on the taxation of your Social Security benefits. For more on how this works, see this article on Roth Conversions and Social Security benefits.

Posted on Mar 8th, 2013

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: income tax, IRA, Roth Conversion, Social Security, social security benefits.
Tagged: income tax · IRA · roth conversion · Social Security

Why You Need an Emergency Fund

Mar 6th, 2013

by sraskie.

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You may or may not have heard that it’s wise to have an emergency fund. Even if you’ve heard it, you may not be aware of what it means and why you should have one – and more importantly why you need one. An emergency fund is just that. It’s money set aside for a rainy day, an unexpected bump in the road, or for a real emergency or an expense that you haven’t specifically planned for. Examples of those unexpected expenses (borderline redundant – I know) include a car accident, disability, storm damage to your home, losing a job, being a victim of theft, etc.

So what makes up an emergency fund? Generally, a good place to start is to have a goal of at least 3 to 6 months of non-discretionary living expenses put away in a relatively liquid account such as a savings, checking or money market account. Non-discretionary living expenses are those that do not go away, should you lose your job or the ability to generate income. These expenses would include your mortgage payment, rent, utilities, food, car payment and taxes.

Now comes the easy part.

Simply add up all of your non-discretionary living expenses that you have in a month and multiply by 3 and then multiply by 6. This is the amount you’d need to have set aside. For example, if I have a $1,200 mortgage, $400 in groceries per month, and utilities of $300, I would have a total of $1,900 monthly in expenses. Multiply that number by 3 ($5,700) and again by 6 ($11,400) and it looks like I’d need between $5,700 and $11,400 set aside for my emergency fund.

These amounts are not set in stone. The amount you’ll need will also depend on your job, your income, and how you’re paid. If I’m a tenured college professor making $6,000 monthly, I may only need 3 to 6 months put away. If I’m an executive or CEO of a large company and I make $20,000 monthly, or I’m a commissioned sales person making $10,000 monthly, I may consider having a fund of 9 to 12 months. This would be because there’s a good chance of me not being able to find another job at that income level if I were fired or laid off. And generally, as peoples’ incomes increase, so do their expenses.

Now comes that hard part – actually saving the money.

It’s really not that hard, it just takes a bit of planning and discipline you’ll be well on your way. You can start by putting away a small sum every week or month – depending on what works for you. This could be $50, $100, or even $500 per month until you’ve funded account. If you’re looking for places to find money consider cutting unnecessary expenses until you’ve got your emergency fund at 100%. Reduce your phone bill, cut your cable TV costs, and pack your lunch instead of dining out. Notice a pattern? These are all discretionary expenses – those that can go away if you want them to.

Your emergency fund can also be used in tandem with your insurance deductibles. Let’s say you have low deductibles on your auto insurance and want to save some money. You can simply increase your deductibles and should you need to use your deductible for a claim, you can take from your emergency fund. This is wise especially if you rarely file claims. If you have a disability policy with a 60 day elimination period (time deductible) before benefits start, you can use your emergency fund to help cover the expenses for those 60 days until your benefits begin.

Now that you know what an emergency fund is, it’s important to know what it’s not. It is not a slush fund to buy toys like a new car, boat, TV, etc. It’s not money to play with, gamble with or dip into because “It’s only a couple bucks, it can’t hurt anything.” Those couple of bucks can add up to thousands in no time. Don’t steal from yourself. Resist the temptation to spend it. If you feel you may be the type of person to be tempted, consider putting the money in an account that’s not easy to get to – such as a money market account outside of your city or state. You may also consider having check writing privileges but only on amounts above a certain amount like $250. This can help resist the urge to spend on little things help put a time buffer on when you think you want the money, and when you can actually get it.

One final note is to make sure your emergency fund is not your 401(k), 403(b), traditional or Roth IRA. These are retirement accounts and should stay as such. A properly funded emergency fund will reduce if not eliminate any reliance on premature retirement account distributions.

Now, sit back, relax, and pray you don’t need to use it!

Posted on Mar 6th, 2013

by author: sraskie.

Posted in: budgeting, credit cards, financial planning, goals, Insurance, IRA, mortgage, mortgage debt, principal residence, retirement savings, saving.

Knowing which tax form to file

Mar 4th, 2013

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When filing your own tax returns, it can be confusing to figure our which form you should use. If you are using tax preparation software, most often this choice is made for you, but if you’re doing it the old-fashioned way, you need to know which form to file.

The IRS recently issued Tax Tip 2013-04, which helps you to choose the correct form to file. The actual text of the Tip follows (I’ve cleaned up a few formatting issues):

Choosing Which Form to File

IRS e-file makes it easy for taxpayers to choose which tax form to file. Tax software automatically chooses the best form for your particular situation. Most people e-file these days, but if you prefer taking pen to paper, the IRS has some tips to help you choose the right form.

Taxpayers who choose to file a paper tax return should know that the IRS no longer mails paper tax packages. The quickest way to get forms and instructions is by visiting the IRS website at IRS.gov. You can also order forms and have them mailed to you by calling the RIS forms line at 1-800-TAX-FORM (829-3676). You may also pick up tax forms from a local IRS office, and some libraries and post offices carry tax forms.

Here are some tips that will help paper tax return filers choose the best tax form for their situation:

You can generally use the 1040EZ if:

Your taxable income is below $100,000;
Your filing status is single or married filing jointly; and
You are not claiming any dependents.

If you can’t use Form 1040EZ, you may qualify to use the 1040A if:

Your taxable income is below $100,000;
You have capital gain distributions;
You claim certain tax credits; and

You claim adjustments to income for IRA contributions and student loan interest.

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. The reasons you must use the 1040 include:

Your taxable income is $100,000 or more;
You claim itemized deductions; and
You are reporting self-employment income.

IRS Publication 17, Your Federal Income Tax, provides helpful information about which form is best for you.

Access to IRS forms and instructions or information about e-filing, including IRS Free File, is available 24 hours a day, seven days a week on IRS.gov. Tax products often appear online well before they are available on paper. You’ll find downloadable tax products on IRS.gov by clicking on the “Forms and Pubs” link on the Home Page.

Posted on Mar 4th, 2013

by author: jblankenship.

Posted in: income tax, tax preparers.
Tagged: income tax · irs · tax preparers

Notify Social Security of Major Changes in Your Life

Mar 1st, 2013

1 comment

You know how, after you’ve put your kids through college and they go off on their own, sometimes you don’t hear from them as often as you’d like? Major things occur in your kids’ lives and you don’t know about them until after the fact, possibly long after. So you get onto them about it, and ask the kids to call more often (or you call them more often) so that you can keep up with what’s going on…

It’s kinda like that with the Social Security. They want to know when major changes occur in your life, as soon as possible. This is primarily due to the fact that, quite often, these changes will result in adjustment to your Social Security benefits.

The first one that comes to mind is the death of a Social Security recipient. Naturally you need to notify the Social Security Administration as soon as possible upon the death of a recipient. The benefit that the deceased recipient was receiving might transfer to his or her spouse if the rules allow. Otherwise, the benefit will cease for that recipient, and other benefits may begin for dependents of the recently deceased.

If you are receiving Social Security benefits and you get married (or re-marry, either after the death of a spouse or after a divorce), it’s important to let the SSA know about your change of marital status. This is because your marital status may have an impact on any benefits that you are receiving that are based on a former spouse’s record. In addition, a new marriage could result in new dependents for you, and so your new dependents could be eligible for benefits based on your record.

In addition to death and marriage, SSA also wants to know if you are earning more than the allowable limits if you’re less than Full Retirement Age. This is because a portion of your benefit will be withheld due to the additional earnings. You can’t escape it, they’ll eventually figure this out and possibly ask for repayment. Plus, if you’re receiving a pension from a non-SS covered job, you need to let SSA know about it so that your benefit is adjusted for WEP or GPO if either of those factors apply to your situation.

Obviously you need to let SSA know if your name or address changes and if your direct deposit account changes – you need to make sure that you will continue to receive your benefits and that important notices make them to you in the mail.

If your change of address includes an extended stay outside of the United States, you need to let SSA know about it. You should also know that there are some countries that Social Security can’t send payments to – Cambodia, Cuba, North Korea and Vietnam. Otherwise, you can have payments sent to you if you’re living in another country, but you’ll need to arrange this with Social Security.

Posted on Mar 1st, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: Social Security, social security administration, social security benefits.
Tagged: Social Security · social security administration

Don’t Forget to Pay Tax on Your 2010 Roth Conversion

Feb 27th, 2013

2 comments

Remember back in those heady days in 2010, when you finally had carte blanche eligibility to convert your IRA funds to a Roth IRA regardless of your income? And then there was a special provision that the IRS made available: you could convert money to your Roth IRA in 2010, and delay recognizing the income and paying the tax over the next two years… remember that? That was so cool.

However.

(Ever notice how there’s always a “however” in life?)

Here we are, two years later, and NOW you have to pay tax on the Roth conversion that happened way back then. You might have forgotten it altogether, but you can bet the IRS hasn’t forgotten.

Hopefully you didn’t forget this on your 2011 tax return that you filed in 2012 as well. At that time, you should have recognized half of the deferred Roth IRA conversion from 2010 on your 2011 return, and paid tax on that half. Now, in 2012, you’re up to the point where you can finish this off. On your 2012 return you will recognize the remaining half of the 2010 conversion, and pay the tax on it.

The good news is that the tax rates haven’t gone wild like a lot of folks projected – as long as your income didn’t dramatically increase your rates should be roughly the same as they were in 2010. In addition, if you decided to do your Roth Conversion as soon as possible in 2010 and you invested in the S&P 500 (for example), you would have experienced an increase of more than 33.3% to this writing (February, 2013). That should help take the sting out of the tax cost.

Just don’t forget to finish paying the taxes on your conversion this year. The penalties and interest on the unpaid tax could take all of the benefit out of your conversion/delay strategy.

Posted on Feb 27th, 2013

by author: jblankenship.

Posted in: #noTOP, 2012 tax year, income tax, IRA, qrp, Roth Conversion, Roth IRA.
Tagged: income tax · IRA · roth conversion · roth ira

Know Your Options When Talking to Social Security

Feb 22nd, 2013

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Cardpunch operations at U.S. Social Security Administration

When you get ready to file for your retirement benefits, it’s important to understand what options are available to you before you talk to the Social Security Administration. There are many ways to get a good understanding of your options, including working with your financial advisor, reading up on the subject (this blog is a good place to start!), and talking to friends and relatives who have already gone through the process.

The reason it’s important to know your options is because the Social Security Administration staff that you may encounter are not trained to help you maximize your lifetime benefits – they are trained to help you maximize the benefit that you have available to you today. Often the options that the SSA staff present to you are not the best options for you in the long run. In addition, SSA staff are absolutely overwhelmed by the volume of folks that they are in contact with. As I understand it, disability claims are backlogged by as much as three years in some cases – so you can imagine how difficult it is for the staff to handle new, unusual cases.

Listed below are a few examples that I’ve heard recently where folks have gotten erroneous or incomplete responses to basic questions presented to SSA staff. This is not intended to be an exhaustive list, just a few things I’ve heard about recently.

Restricted Application

An husband, age 66, wishes to delay his filing to age 70. At the same time, his wife, age 62, is filing for her own benefit today. The husband wishes to file a restricted application for spousal benefits only – which would allow him to receive a benefit equal to half of his wife’s PIA (not her reduced benefit) while he continues to delay his own benefit to age 70. SSA staff told him that since his own benefit would be greater than half of his wife’s PIA, he would not be able to do this.

Of course, if you’ve read this blog or my book, you know that this is incorrect. The man called me and asked about it – and I told him to go back to the SSA and make the request again, specifically requesting to file a “restricted application for spousal benefits only”. I then recommended that if he still received a negative response to request to speak to a supervisor about it. Eventually, with this guidance, he was able to get the benefit that he asked for.

“Bonus” Lump Sum

If you are over Full Retirement Age (age 66 these days) and you go to or call the Social Security Administration to file for retirement benefits, you may be presented with an option for a “bonus” lump sum of up to six months’ worth of benefits, to be paid to you when you receive your first check. Don’t fall for it without knowing what’s going on!

What is happening is that the SSA staff is suggesting an option to you that is available – of retroactively applying for benefits six months prior to the actual date. Effectively, if you are (for example) 67 years old when you take this option, you will be filing as if you are 66 years, 6 months of age. This will reduce your Delayed Retirement Credits by that 6 months, or 4%. You’ll end up with a lump sum check for the six months that you hadn’t received up to that point, but your future benefits will be 4% less than they would have been had you filed at your attained age of 67.

If this is what you want, then go for it – but realize that not only is your own future benefit going to be permanently reduced from what it could have been, any survivor benefits that your spouse will receive are also reduced.

Divorcee planning

A divorced person who is qualified to receive benefits based upon her ex’s work record often has difficulty in planning when to receive benefits. This is especially troublesome if you are pretty certain that your Spousal Benefit will be significantly more than your own benefit, and you’d like to maximize that benefit. The trouble is that you may not have access to the complete information about your ex’s benefit (and therefore, any spousal benefit you could receive).

The key to this is to have the correct documentation about your situation when you talk to Social Security. Most often, this is going to require a visit to the local office, although I’ve been told this can be done over the phone. I assume in a case like that there are several calls involved because you’ll have to send your documentation for the SSA to verify.

At any rate, if you have your marriage license and your divorce paperwork, which show that you were married for ten or more years and the divorce occurred more than two years ago, along with your ex’s Social Security number and date of birth, the SSA staff will be able to provide you with information about what benefits you are eligible to receive based on the ex’s record. Without this documentation, you will be denied access to the information.

Posted on Feb 22nd, 2013

by author: jblankenship.

Posted in: Delayed Retirement Credit, divorce, restricted application, Social Security, social security administration, Social Security spousal benefit.
Tagged: divorce · DRC · restricted application · social security administration

Rolling Over a 401(k) into a New Employer’s Plan

Feb 20th, 2013

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missed-rollover When you change jobs you have a choice to make regarding your retirement plan at former employer. If the plan is a 401(k), 403(b), or other qualified plan of that nature, you may have the option to roll the old plan into a plan at your new employer.

The new employer’s plan must allow rollovers into the plan – this isn’t always automatic. Most plans will allow rollover of former employer’s plans, but not all. Once you’ve determined that the plan will accept a rollover, you should review the new plan to understand whether or not it makes sense to roll your old plan into it, or choose another option. Other options may be: rollover the old plan into an IRA, convert the old plan to a Roth IRA, leave the old plan where it is, or take a distribution from the old plan in cash.

In this article we’ll just deal with rolling over the old plan to your new plan.

If the new plan has some compelling features, such as access to very low cost institutional investments or attractive closed investment options, or if the plan has very low overhead and great flexibility, you might want to rollover your old plan into it. Other reasons that might compel you to rollover the old plan might be – to have access to loan features (IRAs don’t have this), access to your funds when leaving your employer after age 55 but before age 59½, and ERISA protection against creditors.

There may be reasons to leave your old plan at the old employer though. The two that come to mind are NUA treatment of stock of the old employer, and if you think you’ll need access to the funds before you leave the new employer (especially if you’ve left that employer after age 55).

So after reviewing the options and features, you’ve decided to rollover the old plan to the new employer’s plan. It’s a relatively straightforward process: you contact the old plan’s administrator and request a rollover distribution form. You should have already contacted the new plan’s administrator to ensure that the new plan will accept a rollover. Once you have the rollover distribution form from the old employer, get any pertinent information from the new employer, such as your employee id, or an account number for the new plan.

On the rollover distribution form, you’ll have the option to send the distribution directly to the new plan – called a trustee-to-trustee transfer. In this manner, the funds never come into your possession. This is important, because if you take distribution in cash from the old plan, the IRS requires that 20% is automatically withheld from the distribution. You could still send the distribution to the new plan – but you’d have to come up with the 20% that was withheld in order to make the transfer “whole”. It’s not required that you make a complete transfer, but if you take any of the funds in cash, including the withheld 20%, this money will be taxable as ordinary income, and if you’re under age 59½ it will likely also be subject to an additional 10% penalty.

After all of this has occurred, your new plan will have the additional old plan money rolled into the account. Most likely this will be entirely in cash when it arrives in the account – so you will need to make investment allocation choices for the new addition to the account.

Posted on Feb 20th, 2013

by author: jblankenship.

Posted in: 401 k 403 b, qrp, qualified retirement plan, rollover.
Tagged: 401k · 403b · qrp · qualified retirement plan · rollover

Choosing a Tax Preparer

Feb 18th, 2013

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It’s that time of year again – time to do your income taxes. While lots of folks will opt for the “box”, using one of the many do-it-yourself options like TurboTax, Tax Cut and others, many folks will choose to go to a professional tax preparer to have their returns prepared.

There are several types of professionals who are qualified to prepare your tax return: Certified Public Accountants (CPAs), attorneys, Enrolled Agents (EAs), and unenrolled tax preparers. You’re likely familiar with CPAs and attorneys, so I won’t go into explaining them. Enrolled Agents (EAs) are enrolled with the IRS and empowered to represent taxpayers before the IRS. This type of professional must pass a rigorous series of exams to be enrolled, and then must complete 72 hours of continuing education every three years to remain enrolled.

CPAs, attorneys and EAs (as well as Enrolled Actuaries) are among a group known as Federally Authorized Tax Practitioners (FATPs). There are other folks who are authorized to prepare taxes as well – but some of the qualifications are a bit up in the air at the moment. The Registered Tax Return Preparer (RTRP) designation is to be the new designation for those outside the FATP group, but this designation has recently been challenged in court. This leaves the unenrolled preparer group with no regulation – essentially it’s the wild, wild west, you don’t know what qualifications your preparer may have. Sometimes, they even double as a Statue of Liberty <gasp!>.

So what should you look for when choosing a tax preparer? The IRS recently issued their Tax Tip 2013-07, which lists Ten Tips to Help You Choose a Tax Preparer. The actual text of the Tip is listed below:

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully. Even if someone else prepares your return, you are legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax return preparer:

Check the preparer’s qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.
Check on the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Also check for any disciplinary actions and for the status of their licenses. For certified public accountants, check with the state boards of accountancy. For attorneys, check with the state bar associations. For enrolled agents, check with the IRS Office of Enrollment.
Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can. Also, always make sure any refund due is sent to you or deposited into an account in your name. Taxpayers should not deposit their refund into a preparer’s bank account.
Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.
Make sure the preparer is accessible. Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date. This may be helpful in the event questions arise about your tax return.
Provide records and receipts. Reputable preparers will request to see your records and receipts. They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your latest pay stub before you receive your Form W-2. This is against IRS e-file rules.
Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
Review the entire return before signing. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
Make sure the preparer signs and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.
Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).

Posted on Feb 18th, 2013

by author: jblankenship.