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The Social Security Survivor Benefit – Part 1

Jan 6th, 2012
by jblankenship.
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In a previous article we reviewed the very confusing  Social Security Spousal Benefit.  That article raised a lot of questions from readers about another confusing provision of the Social Security system: the Survivor Benefit.

As with all of these discussions, don’t expect to immediately understand it – this stuff is complicated, and even the Social Security staff often have difficulty explaining it.  Read through this carefully, see the referenced articles for background, and then re-read as needed.  And ask questions if you have them.

The Survivor Benefit is not related to the Spousal Benefit, although certain portions of the article with further explanations of the Spousal Benefit will be useful to review as we discuss the Survivor Benefit.

To start with, there are two benefits available to the spouse of a deceased Social Security participant.  The first is a small death benefit, amounting to $255 in a one-time payment.  The second is the Survivor Benefit, which is a lifetime benefit based upon the deceased participant’s benefit amount at his or her current age.

The Survivor Benefit is generally equal to the deceased worker’s benefit amount (if he or she was collecting benefits at death), and then reduced depending upon the surviving spouse’s age.  This is similar to the reduction that is applied to regular retirement benefits.  One major difference is that Survivor Benefits can be claimed as early as age 60, rather than age 62 as with regular retirement benefits.  At age 60, the Survivor Benefit is reduced to 71.5% for all dates of birth (we’ll get to more on this later).

In addition to the fact that the Survivor Benefit can be received two years earlier than the normal age of 62, the table for Full Retirement Age (FRA) is shifted by two years:

Year of Birth Survivor’s FRA
1939 or before 65
1940 65 and 2 months
1941 65 and 4 months
1942 65 and 6 months
1943 65 and 8 months
1944 65 and 10 months
1945-1956 66
1957 66 and 2 months
1958 66 and 4 months
1959 66 and 6 months
1960 66 and 8 months
1961 66 and 10 months
1962 or later 67

This means that your Full Retirement Age for Survivor Benefits could be offset by a couple of years from that for your own retirement benefit.

Calculation

Now to add some more complexity to the situation.  In order to calculate the Survivor Benefit, we have two factors to consider:

1. The amount of benefit that the deceased spouse would be receiving had he or she survived to this age; and

2. The age of the surviving spouse.

The First Factor: Benefit of the Deceased Spouse

When determining the value of the First Factor, you first need to know whether or not the deceased spouse was currently receiving benefits at the time of his or her death.  If so, the First Factor is equal to the present benefit that the deceased spouse was receiving at the time of his or her death plus any Cost of Living Adjustments that would have been applied if time has passed between the death and the survivor applying for benefits.

It’s important to note here that when the deceased spouse was already receiving benefits, any reductions or increases that had been applied are also applied to the Survivor Benefit.  For this reason, it’s critical to consider the implications when taking retirement benefits early – doing so can permanently reduce any Survivor Benefit that your spouse might receive should you die first.  If the deceased spouse began benefits early and was receiving a reduced benefit, the survivor is guaranteed the higher of the deceased spouse’s benefit or 82.5% of the deceased spouse’s PIA.

On the other hand, if the deceased spouse is not already receiving benefits, if the deceased spouse dies at FRA or later, the First Factor is the amount that the decedent would have received at the current age, if he or she were still living.  Otherwise, if the deceased spouse dies before FRA and had not yet begun receiving retirement benefits, the surviving spouse is entitled to a benefit equal to 100% of the deceased spouse’s PIA.

This makes the whole process a lot more complicated to understand, but here’s how it works: If the decedent spouse would have been at Full Retirement Age (FRA) at the time that the survivor applies for benefits, then the First Factor of our equation is based upon his or her Primary Insurance Amount, or PIA.  If you’ll recall, the Primary Insurance Amount is the amount of benefit that an individual receives in Social Security benefits at Full Retirement Age.

If the deceased spouse would have been younger than Full Retirement Age when the surviving spouse is filing for benefits and had not filed for benefits as of death, the First Factor is equal to the Primary Insurance Amount.  However, if the deceased spouse would have been older than Full Retirement age when the Survivor Benefit is applied for, there is an increase applied to the Primary Insurance Amount.  These reductions and increases are explained more completely via the tables in the article that provides further explanations of the provisions of the Social Security system.

The First Factor amount should be relatively easy to come up with, either from prior statements or by giving in and calling the Social Security Administration and getting the proper number.

So now that we have the First Factor figure, let’s move on to the Second Factor.

The Second Factor: Age of the Surviving Spouse

As mentioned previously, the Survivor Benefit can be available as early as age 60.  And as with all Social Security benefits, filing at an age earlier than Full Retirement Age (FRA) will result in a reduction of benefits, with a graduated elimination of the reduction as the surviving spouse approaches the Full Retirement Age for Survivor Benefits.

The reductions at various ages are listed in the table below by the surviving spouse’s year of birth:

Year of Birth 60 61 62 63 64 65 66 67
1939 or before -28.5% -22.8% -17.1% -11.4% -5.7% 0.0%
1940 -28.5% -23.0% -17.5% -12.0% -6.4% -0.9%
1941 -28.5% -23.2% -17.8% -12.5% -7.1% -1.8%
1942 -28.5% -23.3% -18.1% -13.0% -7.8% -2.6%
1943 -28.5% -23.5% -18.4% -13.4% -8.4% -3.4%
1944 -28.5% -23.6% -18.7% -13.8% -9.0% -4.1%
1945 to 1956 -28.5% -23.7% -19.0% -14.2% -9.5% -4.7% 0.0%
1957 -28.5% -23.9% -19.3% -14.6% -10.0% -5.4% -0.8%
1958 -28.5% -24.0% -19.5% -15.0% -10.5% -6.0% -1.5%
1959 -28.5% -24.1% -19.7% -15.3% -11.0% -6.6% -2.2%
1960 -28.5% -24.2% -19.9% -15.7% -11.4% -7.1% -2.8%
1961 -28.5% -24.3% -20.2% -16.0% -11.8% -7.6% -3.5%
1962 or later -28.5% -24.4% -20.4% -16.3% -12.2% -8.1% -4.1% 0.0%

As you can see, at age 60, the reduction is 28.5% for all dates of birth.  Then the reduction factor is gradually eliminated up through the Survivor Benefit Full Retirement Age.

The Calculation

Now that we have our two factors, the amount of the deceased spouse’s benefit and the age/reduction factor for the surviving spouse, we move on to the actual calculation. The reduction factor is simply applied to the deceased spouse’s benefit.

For example, let’s say that the deceased spouse’s benefit would have been $1,500, and the surviving spouse is 62 years old.  If the surviving spouse were to take the Survivor Benefit beginning today, the $1,500 would be reduced by 19.0%, to $1,215 (the 19.0% figure is based upon the table above – the surviving spouse is 62, so he or she was born in 1949 or 1950).  Waiting another four years would allow the surviving spouse to receive the full benefit (with no reduction), plus any Cost-of-Living Adjustments (COLAs) that would be applied between now and that date.

Additional Facts About the Survivor Benefit

There are a few more facts that could change the situation completely.

First of all, if the surviving spouse has remarried before age 60, the Survivor Benefit is no longer available to him or her.  If the surviving spouse re-marries before age 60 and then subsequently divorces or is subsequently widowed again, the Survivor Benefit is once again available. And if the surviving spouse has more than one late spouse, he or she is eligible to receive Survivor Benefits based upon the highest possible benefit from any of the prior spouses.

In addition to the Survivor Benefit that is available as early as age 60, there is also a Survivor Benefit available for a (potentially) much younger surviving spouse if that survivor is caring for a child aged 16 or younger.  This benefit is equal to 100% of the benefit that the decedent-spouse was receiving at his or her death, or the Primary Insurance Amount on his or her record, if he or she was not currently receiving benefits at death.

All of the benefits are dependent upon the fact that the deceased spouse has earned adequate quarters of credit with the Social Security system.  For full benefits, the deceased would need to have earned at least 40 quarters, or ten years of work earning (for 2011) $1,120 per quarter or $4,480 for the year.  For the surviving spouse caring for a child younger than age 16, reduced benefits are available if the deceased spouse had earned at least 6 quarters of credit in the three years prior to his or her death.  Any amount of quarters between the minimum of 6 and the maximum of 40 would allow for a phased increase in the benefit amount.

If a person was married to the deceased spouse for at least 10 years and was divorced, the Survivor Benefit is available just the same as if the couple had not divorced (as long as he or she has not remarried prior to age 60, as mentioned above).

Lastly for now, if the surviving spouse is disabled, the Survivor Benefit could be available as early as age 50, with the same reduction as for a non-disabled surviving spouse at age 60, 28.5%.

Okay, this is enough for Part 1.  In Part 2, I’ll cover some of the other types of Survivor Benefits – for children and other beneficiaries – as well as to review coordinating the Survivor Benefit with the surviving spouse’s own benefit.  If you’ve got more questions, please leave them as comments, or if you’d like more information I invite you to check out my book, A Social Security Owner’s Manual.

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Posted on Jan 6th, 2012
by author: jblankenship.

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Posted in: social security benefits, social security survivor benefits, survivor benefits, survivors.

Charitable Contributions From Your IRA – 2012 and Beyond

Jan 4th, 2012
by jblankenship.
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K S Hegde Charitable hospital
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January 1, 2013 update: Passage of the American Taxpayer Relief Act of 2012 has extended the QCD through the end of 2013.  See this article for more details.

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

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

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

The old way

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

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

The new way

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

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

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

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

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

Example

Taxpayer is single, age 73, and is subject to RMDs from his IRA.  He wishes to make a charitable contribution of $10,000 from his IRA funds to his church.  If this were 2011, he could make his distribution directly from the IRA to the church. Here’s how his tax return worked out:

Income (pension and IRA)

$50,000
Adjusted Gross Income

$50,000
Medical Expenses

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

$6,250
Charitable Contributions (beyond the direct QCD)

$1,000
Exemption

$3,700
Taxable Income

$39,050
Tax

$5,888

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

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

$60,000
Adjusted Gross Income

$60,000
Medical Expenses

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

$5,500
Charitable Contributions (includes the additional $10,000 distribution)

$11,000
Exemption

$3,800
Taxable Income

$39,700
Tax

$5,955

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

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

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Posted on Jan 4th, 2012
by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, charitable contribution, IRA, QCD.
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2012 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

Jan 1st, 2012
by jblankenship.
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Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $92,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $92,000 but less than $112,000, you are entitled to a partial deduction, reduced by 25% for every dollar over the lower limit (or 30% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $112,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $173,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $173,000 but less than $183,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $183,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $173,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $173,000 and $183,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

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

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Posted on Jan 1st, 2012
by author: jblankenship.

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2012 MAGI Limits – Single or Head of Household

Jan 1st, 2012
by jblankenship.
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synchronized swim team

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility.

For a Traditional IRA (Filing Status Single or Head of Household):

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $58,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $58,000 but less than $68,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $68,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $110,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $110,000 and $125,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200. If your MAGI is $125,000 or more, you cannot contribute to a Roth IRA.

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Posted on Jan 1st, 2012
by author: jblankenship.

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2012 IRA MAGI Limits – Married Filing Separately

Jan 1st, 2012
by jblankenship.
2 comments
if there was ever a doubt
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Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar (or 60% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2012.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $10,000 or more, you can not contribute to a Roth IRA.

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Posted on Jan 1st, 2012
by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, IRA, ira contribution limits, magi.
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Review of 2011 Stats

Jan 1st, 2012
by jblankenship.
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ducks in a row by dalvenjahEd. Note: As in past years, I’m taking a break from my normal business of posting retirement, tax and other personal financial planning topics to report on the blog itself and the statistics we’ve seen in this, the 8th year of publication for this blog. I’ll be back to regular programming with the next entry. – jb

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

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

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

General Statistics for 2011

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

Top 10 Most-Viewed Posts for 2011

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

Top 10 Referrers for 2011

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

Top 10 Search Engine Terms for 2011

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

Top 10 Most Popular Links Clicked in 2011

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

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

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Posted on Jan 1st, 2012
by author: jblankenship.

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Posted in: #noTOP, 2011 tax year, rant.
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Book Review: Financial Fitness Forever

Dec 26th, 2011
by jblankenship.
1 comment

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

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

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

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

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

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

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

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

Posted on Dec 26th, 2011
by author: jblankenship.

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Posted in: Book review, financial planning.
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One More File and Suspend Option

Dec 23rd, 2011
by jblankenship.
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We’ve discussed the file and suspend option in multiple articles, but did you know that there is one more option for file and suspend. This is one that provides you with the opportunity to earn delayed retirement credits (DRCs) on your Social Security benefits, even if you started receiving benefits early.

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

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

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

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

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

Voluntary Suspension of Retirement Benefits

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

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

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

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

 

Before you make your decision

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

  • If you are enrolled in Medicare Part B (Supplementary Medical Insurance), you will be billed by the Centers for Medicare & Medicaid Services (CMS) for future Part B premiums.These premiums cannot be deducted from your suspended retirement benefits. If you do not pay the premiums timely, you may lose your Part B Medicare coverage. (You will have the option of automatically paying the bill from an account at your bank or financial institution.)Exception: If you also receive benefits as a spouse or ex-spouse, we can deduct your Part B premium from that benefit payment.
  • If you also receive Supplemental Security Income (SSI) benefits, suspending your retirement benefits will make you ineligible for SSI.
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Posted on Dec 23rd, 2011
by author: jblankenship.

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Posted in: #noTOP, file and suspend, social security administration, social security survivor benefits.
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Year End Income Tax Planning

Dec 5th, 2011
by jblankenship.
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Estate
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Once you’ve reached the last month of the tax year, there aren’t a lot of things that can be done to minimize your income taxes.  But there are a few things that could be done.

For example, you could double up your real estate taxes by prepaying next year’s tax during December.  Doing this with, for example, a $3,000 per year real estate tax bill could result in a reduction of tax for the year of $750 if you’re in the 25% bracket.  Keep in mind though, that you’ll have forked out this money long before it is actually due in most cases, and for the next year you won’t have this deduction available if you used it in this year.

The same could be done with your charitable contributions – there’s no reason that you can’t make additional contributions to your favorite charities at the end of this year instead of waiting until next year.

You could also send your final estimated state income tax payment due in January of next year during December and claim that payment on this year’s itemized deductions as well.

Prepaying your January mortgage payment will credit that mortgage interest to this year as well, further increasing your itemized deductions.

Other itemized deductions could be “stacked” in one year, such as medical expenses (subject to the 7.5% floor) and miscellaneous deductions (subject to the 2% floor).

It’s important to keep in mind that the moves that you make this year might reduce your tax now – but you might have an adverse impact on next year’s income tax by doing so.  It will pay to run the calculations based on what you know about this year’s tax and next year’s tax to make sure that it is in your best interest to do this.

Here’s how it might play out: if you prepaid your next year’s real estate tax during this year, it might reduce your deductions below the Standard Deduction – which could be a good thing.  In doing this, you would get to use the Standard Deduction to increase your tax deductions on next year’s return when you specifically reduced your deductions for that year by prepaying the deductible real estate tax in during this year.  In this fashion you might be making the most of the standard deduction and your itemized deductions year after year – one year using the “stacked” deductions, the next using the standard deduction.

These prepayment options could have a negative affect if you are subject to the Alternative Minimum Tax (AMT).  Prepaying your state tax, mortgage interest and some medical expenses might trigger or cause an increase in AMT.

One tactic that you might consider is selling a taxable investment that has an inherent loss; this is especially useful if you’ve sold another investment at some point in the tax year that has resulted in a taxable gain.  Losses can be used to offset those capital gains dollar for dollar, and an additional $3,000 in capital losses can be used to reduce your ordinary income as well.

You can also make up for underpayment of estimated tax by taking a withdrawal from an IRA (especially if you’re over age 59½) and having tax withheld from the withdrawal.  This can also be accomplished by having more tax withheld from your paycheck if you’re still working, by filing a new W4.

Another move you can make includes the Qualified Charitable Distribution from your IRA – allowing you to bypass recognizing that income, including your RMD.  This can only be done if you’re at least age 70½ and subject to Required Minimum Distributions.

You can also delay your first RMD (if you reached age 70½ this year) until as late as April 1 of next year, although that will mean you have to take two RMDs next year.  But in some circumstances that may be the better option.

You can also make a deductible contribution to your IRA, if you qualify – but you don’t have to do that before the end of the year, you have until April 15 to do that.

This isn’t an exhaustive list of year-end tax moves, just several of the more prominent ones.  Hopefully you’ll find what you need here to help with your year-end tax plans.

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Posted on Dec 5th, 2011
by author: jblankenship.

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Posted in: 2011 tax year, 2012 tax year, capital gains and losses, capital losses, charitable contribution, income tax, IRA, itemized deductions, mortgage.
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Expiring Tax Provisions for 2011

Nov 21st, 2011
by jblankenship.
3 comments
expired
Image by polapix via Flickr

There are quite a few tax provisions that will be expiring at the end of 2011 – nowhere near the number of provisions that were set to expire at the end of 2010 (many of which were subsequently extended), but still there are quite a few sun-setting this year.

Listed below are some of the major provisions that will expire at the end of 2011 that will affect individual taxpayers.

Charitable Contributions from IRA The provision that allows an IRA owner, subject to Required Minimum Distributions (RMDs) and over age 70½ to make a Qualified Charitable Distribution (QCD) directly to a charity from his IRA will expire as of 12/31/2011.  This provision allows the IRA owner to make this charitable contribution without having to recognize the income – which could have a profound effect on the taxpayer’s return.  Remember, this one expired once before, at the end of 2009, but was extended retroactively through the end of 2011, so it’s possible it could be extended again.

Educator Expenses The actual expenses that teachers incur for classroom supplies, mileage and the like in support of the education process, up to $250 per spouse.  Neither spouse can deduct more than $250 of his or her own qualified expenses.

Electric Vehicle Credit for Low-Speed Vehicles, Motorcycles, and 3-Wheeled Vehicles The credit for these qualified vehicles, of 10% of the purchase price up to $2,500, is available through the end of 2011, after it was extended at the end of 2010.  The credit for electric vehicle conversion kits is also expiring at the end of 2011.

Energy Efficient Home Credit The credit for an energy efficient home and for energy efficient improvements, reduced to a total credit of $500, based on 30% of the cost of the materials, is set to expire at the end of 2011.  If $500 or more of the credit has been used in 2009 or 2010, the 2011 credit is not available.

Mortgage Insurance Premium Deduction The itemized deduction of mortgage insurance premiums is set to expire at the end of 2011.

Rollover from FSA or HRA to an HSA  Up to the end of 2011, taxpayers have the ability to rollover funds from a Flex-Spending Account (FSA) or a Health Reimbursement Account (HRA) to a Health Savings Account (HSA).  The HSA is only available if you have a High Deductible Health Plan (HDHP), although you could have a “grandfathered” HSA from an earlier HDHP without current coverage by the HDHP.

Sales Tax Deduction Instead of State Income Tax Deduction Also expiring at the end of 2011 is the ability to utilize state sales tax instead of state income tax as a deduction on your Schedule A.  This will make a huge difference for folks that live in states with low or no state income tax – and folks that are planning the purchase of high-ticket items subject to sales tax, such as motor homes, boats, and luxury vehicles.

Tuition and Fees Deduction Once again set to expire at the end of 2011 is the deduction of qualified secondary education expenses up to $4,000 for AGIs up to $130,000 ($65,000 for single filers) or up to $2,000 for AGIs up to $160,000 ($80,000 for single filers).

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Posted on Nov 21st, 2011
by author: jblankenship.

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Posted in: #noTOP, 2011 tax year, income tax, income tax credit, irs.
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It Pays to Wait For Your Social Security Benefits

Nov 18th, 2011
by jblankenship.
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Social Security Poster: old man

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It’s usually best, for most things in the financial world, to act now rather than waiting around. The notable exception is with regard to applying for Social Security benefits. We’ve discussed it before (in fact part of this article is a re-hash of an earlier post) but it is an important point that needs more emphasis, in my opinion. As you’ll see from the table below, if you’re in the group that was born after 1943 (that’s you, Boomers!) you can increase the amount of your Social Security benefit by 8% for every year that you delay receiving benefits after your Full Retirement Age (FRA – see this article for an explanation).

Delaying Receipt of Benefits to Increase the Amount

If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive. Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits – which can be an increase of as much as 32½% if you delay until age 70 and you were born in 1941 – when your FRA is 65 years and 8 months, and the increase amount is 7½% per year at that age. See the table below for the increase amounts per year based upon birth year:

Birth Year FRA Delay Credit Minimum (age 62) Maximum (age 70)
1940 65 & 6 mos 7% 77½% 131½%
1941 65 & 8 mos 7½% 76% 132½%
1942 65 & 10 mos 7½% 75 5/6% 131¼%
1943-1954 66 8% 75% 132%
1955 66 & 2 mos 8% 74 1/6% 130%
1956 66 & 4 mos 8% 73% 129%
1957 66 & 6 mos 8% 72½% 128%
1958 66 & 8 mos 8% 71% 126%
1959 66 & 10 mos 8% 70 5/6% 125%
1960 & later 67 8% 70% 124%

So you can see the impact of delaying receipt of retirement benefits – it can amount to more than 50% of the PIA (Primary Insurance Amount), when you consider early benefits versus late benefits. Of course, by taking benefits later, you’re foregoing receipt of some monthly benefit payments; given this, early in the game you’d be ahead in terms of total benefit received. This tends to go away as the break-even point is reached in your mid-70’s to early-80’s in most cases, which we’ll review in a later article.

An Example

Here’s an example of the benefit of delay in action: You were born in 1954, and as such your FRA is age 66. According to the benefit statement you’ve received from Social Security, you are eligible for a monthly benefit payment of $2,000 when you reach your FRA (which would be in 2020). If you delayed applying for your benefit until the next year, your monthly benefit payment would be $2,160 per month – an increase of $1,920 per year. If you delayed until age 68 (two years after FRA), the monthly payment would be increased to $2,320, for an annual increase of $3,840. At age 69, delaying would increase your annual benefit by $5,760, and at age 70, your monthly payment would be $2,640, for an annual benefit of $31,680 – $7,680 more than at FRA. This amounts to a 32% increase in your benefit by delaying receipt of the benefit by 4 years!

Notes

It’s important to note that this is not a compounding increase – that is, your potentially-increased benefit from one year is not multiplied by the increase for the following year. The factor for each year (or portion of a year) is simply added to the factor(s) from prior years. You also don’t have to wait a full year to achieve the benefit – this delay is calculated on a monthly basis, so if you delayed by 6 months your increase would be 4% over the FRA amount. The biggest benefit of this is that you can not only increase the amount you will receive over your lifetime, but also the survivor benefit that your spouse will receive upon your passing. For some folks this can make a huge difference as they plan for the inevitable.

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Posted on Nov 18th, 2011
by author: jblankenship.

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Posted in: DRC, PIA, Social Security.
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Book Review – Freedom From Wealth

Nov 14th, 2011
by jblankenship.
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Freedom From Wealth

This book is an excellent resource for folks who have been accumulating wealth over their lifetimes – wealth that is more than they need to live off of.  Granted this isn’t everyone, but it’s probably a lot more of you than you think.  You don’t need to be a Bill Gates to have these sorts of issues in your path.

When you’ve worked your entire life to build up your wealth, you likely want to leave some of it to your children and grandchildren, but is it best to just hand it all over to them at your passing?  What if you also hoped to make a difference in the world with your money – perhaps with charitable activities, or to help your offspring to establish their own place in the world, or to leave a legacy, a way that your name can live on?

The first part of this book, fully half of the text, helps the reader to understand some of the issues that are necessary to address in order to be successful with such intents.  It’s important to develop strategies and employ the proper resources so that you can ensure that not only will your dreams be fulfilled, but also that your children and grandchildren will not become constrained by the wealth you’ve passed into their care.

That’s what the title is all about.  The authors, Charles A. Lowenhaupt and Donald B. Trone, have many, many years of experience in working with families as they transfer wealth over multiple generations, and this experience has shown that without proper planning, the wealth itself (and fulfilling the goals of the original wealth accumulator) can become a burden to the successive generations.  By putting the appropriate strategies into place, the heirs of the original wealth accumulator can carry out the intended plans and achieve their own life goals without feeling that the wealth itself is a burden.

The book begins with a full chapter devoted to the question “What is wealth for?”.  The answer isn’t as easy as you think.  The easier question for most folks who haven’t really thought about it much is “What is wealth NOT for?” – as in,

  • I don’t want it used for taxes.
  • I don’t want it squandered.
  • I don’t want my spouse to take it in a divorce.
  • I don’t believe in charity, so I don’t want it to go to charity.
  • I don’t want my children to have it too young.
  • I don’t want my lawyers to use it up in fees.

So – what wealth is for is something altogether more than the sum of all the things it’s not for.  Clearly, part of it is to provide sustenance to the owner of the wealth – but that may only be a small part of the overall accumulated wealth.  What else does the wealth holder hope to accomplish?  Do your heirs understand your hopes and dreams?  More importantly, do they agree with your hopes for your wealth?

The remainder of the book is a workbook of sorts that will help the reader to walk through the process of developing the strategy to achieve his or her life (and beyond life) goals.  This matter isn’t a simple undertaking; depending upon the size and complexity of the wealth portfolio, it will likely be in the best interest of the holder of wealth to hire appropriate resources (advisors and the like) the assist in the process.  This book can be a very good first step in the process.

Posted on Nov 14th, 2011
by author: jblankenship.

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Posted in: Book review, fiduciary, financial planning.
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2012 Bend Points for Social Security Retirement

Nov 4th, 2011
by jblankenship.
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A sheet bend.

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For those of you who aren’t quite up to snuff on the carnage that makes up the Social Security retirement benefit calculation, there are a couple of figures that are important to the calculation process called Bend Points.  Bend Points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. They’re called bend points because they represent points on a graph of your AIME in calculating the PIA, and they actually bend.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Here, however, we’ll go over how Bend Points are calculated for each year. To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis. According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2012 bend points is from 2010.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth at that time. At any rate, now that we know these two numbers, we can jump back to 2010’s AWI Series figure, which is $41,673.83. It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, multiplied by the bend points for 1979 equals your current year bend points.

So here is the math for 2012’s bend points:

  • $41,673.83 / $9779.44 = 4.2614
  • 4.2614 * $180 = $767.05, which is rounded down to $767 – the first bend point
  • 4.2614 * $1,085 = $4,623.59, rounded up to $4,624 – the second bend point

And that’s all there is to it. Hope this helps you understand the bend points a little better.

Posted on Nov 4th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2012 Calendar Year, Annual limits, Social Security.

2012 Social Security Earnings Limits

Oct 28th, 2011
by jblankenship.
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BERLIN - NOVEMBER 17: A protester wearing a s...

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For the Earnings Test, there is a limit to the amount of income that can be earned if you’re under Full Retirement Age (FRA).  The limits for 2012 were recently released:

For years in which the recipient of Social Security retirement benefits is younger than FRA, Social Security benefits will be reduced by $1 for every $2 greater than $14,640, or $1,220 per month.

For the year in which the recipient reaches FRA (but prior to reaching FRA), Social Security retirement benefits will be reduced by $1 for every $3 over the limit of $38,880 or $3,240 per month.

After reaching FRA, there is no limit on earnings.

Posted on Oct 28th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2012 Calendar Year, Earnings Limits.
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2012 Retirement Plan Limits

Oct 26th, 2011
by jblankenship.
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The new limits for retirement plans in 2012 have just recently been published.  The details of these new limits are below:

IRA

The contribution limit (and therefore the deductible contribution limit) for a traditional IRA remains the same in 2012 as in 2011 – at $5,000.  The catch up provision, available to taxpayers age 50 or better, also remains the same at $1,000.

If you’re a Single filer and covered by a retirement plan via an employer, the deductibility phases out when your Adjusted Gross Income (AGI) is over $58,000 and phases out completely at an AGI of $68,000.  This is an increase of $2,000 over the 2011 phase-out range.

If you’re Married and filing jointly and the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is between $92,000 and $112,000, also up from 2011 by $2,000.

If you’re not covered by a workplace retirement plan, the deductibility phase-out range is increased by $4,000 over the 2011 figures.  The phase-out range is between $173,000 and $183,000.

As always, a non-deductible IRA contribution of up to the limits ($5,000 or $6,000 if over age 50) can be made at any income limit.

Roth IRA

The contribution limit in 2012 for a Roth IRA is also the same as 2011 – $5,000 or $6,000 if over age 50.  The income limits have increased a bit for 2012.  The new AGI limit for Roth IRA contributions for married folks filing jointly is increased to $173,000, up from $169,000.  Contribution eligibility is phased out completely for an AGI of $183,000.  For all other filers, the phase-out AGI limit is increased by $3,000 to the 2012 range of $110,000 to $125,000.

401(k), 403(b) and 457 plans

The contribution or deferral limit for these Qualified Retirement Plans (QRPs) for 2012 is $17,000, an increase of $500.  The over 50 catch-up contribution amount remains unchanged for 2012 at $5,500.

The annual compensation limit (against which retirement plan contributions are factored for deductibility by the employer) is increased by $5,000 to the 2012 limit of $250,000.

SIMPLE plans

The contribution limit for SIMPLE IRA plans is unchanged for 2012, at $11,500, with an over-50 catch-up provision of $2,500.

Saver’s Credit

The Saver’s Credit AGI limit is increased for 2012 to $34,500 for married taxpayers filing jointly, which is an increase of $500.  For Head of Household filers, this AGI limit is increased to $25,875, up $375 from 2011.  For all other filers, the saver’s credit AGI limit is increased to $17,250, up from $17,000 in 2011.

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Posted on Oct 26th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, contribution limit, cost of living adjustment, income tax, ira contribution limits, qrp, qualified retirement plan.
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2012 Income Tax by the Numbers

Oct 24th, 2011
by jblankenship.
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CARDIFF, WALES - AUGUST 08: A seagull

Recently, the IRS released the updated figures as they apply to 2012 income tax rates and schedules, via Revenue Procedure 2011-52.  Below is a summary of the key information from this procedure document.

Adoption Assistance

The credit for adoption expenses was changed by the Patient Protection and Affordable Care Act of 2010 (and others) such that this credit was increased to $13,170, and the credit became refundable.  This provision will expire at the end of calendar year 2011, which will cause the credit to fall back to an amount of $10,000. This amount is then adjusted for inflation, such that the limit for 2012 is $12,650, and remains non-refundable. The limit for adopting a special needs child is the same at $12,650 for 2012. We’ll see if any changes come through to make any changes to the refundability.

The modified AGI limits for the phase-out of adoption credit assistance is between $189,710 and $229,710.

Tax Tables

For 2012, the tax rate tables are below:

Married Filing Jointly

If Taxable Income is: The Tax is:
Not over $17,400 10% of the taxable income
Over $17,400 but not over $70,700 $1,740 plus 15% of the excess over $17,400
Over $70,700 but not over $142,700 $9,735 plus 25% of the excess over $70,700
Over $142,700 but not over $217,450 $27,735 plus 28% of the excess over $142,700
Over $217,450 but not over $388,350 $48,665 plus 33% of the excess over $217,450
Over $388,350 $105,062 plus 35% of the excess over $388,350

Head of Household

If Taxable Income is: The Tax is:
Not over $12,400 10% of the taxable income
Over $12,400 but not over $47,350 $1,240 plus 15% of the excess over $12,400
Over $47,350 but not over $122,300 $6,482.50 plus 25% of the excess over $47,350
Over $122,300 but not over $198,050 $25,220 plus 28% of the excess over $122,300
Over $198,050 but not over $388,350 $46,430 plus 33% of the excess over $198,050
Over $388,350 $109,229 plus 35% of the excess over $388,350

Filing Single

If Taxable Income is: The Tax is:
Not over $8,700 10% of the taxable income
Over $8,700 but not over $35,350 $870 plus 15% of the excess over $8,700
Over $35,350 but not over $85,650 $4,867.50 plus 25% of the excess over $35,350
Over $85,650 but not over $178,650 $17,442.50 plus 28% of the excess over $85,650
Over $178,650 but not over $388,350 $43,482.50 plus 33% of the excess over $178,650
Over $388,350 $112,683.50 plus 35% of the excess over $388,350

Married Filing Separately

If Taxable Income is: The Tax is:
Not over $8,700 10% of the taxable income
Over $8,700 but not over $35,350 $870 plus 15% of the excess over $8,700
Over $35,350 but not over $71,350 $4,867.50 plus 25% of the excess over $35,350
Over $71,350 but not over $108,725 $13,867.50 plus 28% of the excess over $71,350
Over $108,725 but not over $194,175 $24,332.50 plus 33% of the excess over $108,725
Over $194,175 $52,531 plus 35% of the excess over $194,175

Estates and Trusts

If Taxable Income is: The Tax is:
Not over $2,400 15% of the taxable income
Over $2,400 but not over $5,600 $360 plus 25% of the excess over $2,400
Over $5,600 but not over $8,500 $1,160 plus 28% of the excess over $5,600
Over $8,500 but not over $11,650 $1,972 plus 33% of the excess over $8,500
Over $11,650 $3,011.50 plus 35% of the excess over $11,650

Child Tax Credit and Education Credits

For 2012, the Child Tax Credit is $1,000.  The maximum amount of Additional Child Tax Credit that is refundable (via Form 8812) is $3,000.

The American Opportunity Credit (formerly the Hope Credit) remains the same for 2012 at a maximum credit of $2,500 with the calculations remaining the same – 100% of the first $2,000 of qualified tuition and expenses, and 25% of the expenses above $2,000 up to $4,000 in total. The modified AGI phase-out ranges are exactly the same as in 2011.

The Lifetime Learning Credit is maximum amount is also unchanged in 2012, at $2,000, calculated as 20% of the allowable expenses up to $10,000. The modified AGI limit for phase-out of this credit is increased to between $52,000 and $62,000 for Single filers. The phase-out limit range for married filing jointly filers is increased to between $102,000 and $124,000.

Earned Income Credit

For 2012, the following amounts apply for Earned Income Tax Credit. The earned income amount is the amount of earned income at or above which the maximum amount of the earned income credit is allowed. The threshold phaseout amount is the amount of AGI (or if greater, earned income) above which the maximum amount of the credit begins to phase out. The completed phase-out amount is the amount of AGI (or if greater, earned income) at or above which no credit is allowed.

Number of Qualifying Children
Item 1 2 3+ None
Earned Income Amount $9,320 $13,090 $13,090 $6,210
Maximum Amount of Credit $3,169 $5,236 $5,891 $475
Threshold Phase-out (Single, HoH) $17,090 $17,090 $17,090 $7,770
Completed Phase-out (Single, HoH) $36,920 $41,952 $45,060 $13,980
Threshold Phase-out (MFJ) $22,300 $22,300 $22,300 $12,980
Completed Phase-out (MFJ) $42,130 $47,162 $50,270 $19,190

The investment income limit has increased for 2012 to $3,200, up from $3,100 in 2011.

Standard Deduction

As is the case pretty much every year, the Standard Deduction has also increased. The table below details the amounts for 2012:

Filing Status Standard Deduction
Married Filing Jointly $11,900
Head of Household $8,700
Single $5,950
Married Filing Separately $5,950

For dependents of others, the Standard Deduction is the greater of $950 or $300 plus the amount of earned income of the taxpayer.

The additional Standard Deduction for folks over age 65 or blind is $1,150 if married and filing jointly, or $1,400 for singles or heads of household.

Personal Exemption

The amount of the personal exemption is increased to $3,800 in 2012 from the 2011 amount of $3,650.

Long-Term Care Premium Deductions

The amount of deductible long-term care premiums for 2012 is as follows:

Age by end of year Premium deductible
40 or less $350
More than 40 but not more than 50 $660
More than 50 but not more than 60 $1,310
More than 60 but not more than 70 $3,500
More than 70 $4,370

Estate and Gift Taxes

For 2012, the applicable Unified Credit for estate and gift tax exclusion is increased from $5,000,000 to $5,120,000.

The annual gift tax exclusion remains at $13,000 for 2012.

Arrow Shaft Tax

In case you’re wondering, the tax on the first sale by the manufacturer, producer, or importer of any shaft of any type used in the manufacture of certain arrows is $.046 per shaft. (More at § 4161(b)(2)(A) if you need the details on this one.)

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Posted on Oct 24th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2012 tax year, hope credit, income tax, income tax credit, irs, lifetime learning credit.
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Social Security Benefit Increase for 2012

Oct 19th, 2011
by jblankenship.
1 comment

For the first time in two years, Social Security benefits will increase in January 2012. The increase in benefits is set at 3.6%.

The 3.6 percent cost-of-living adjustment (COLA) will begin with benefits that nearly 55 million Social Security beneficiaries receive in January 2012. Increased payments to more than 8 million SSI beneficiaries will begin on December 30, 2011.

Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum.

Posted on Oct 19th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2012 calendar year, Annual limits, Social Security.

The Mystery of Social Security

Oct 14th, 2011
by jblankenship.
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ssom

Social Security has become a significant part of many retirees’ sustenance, ever since it was first introduced back in the 1930’s. As the traditional pension plan goes the way of the buggy-whip and common investor behavior leads to poor results in savings plans (if there are any savings at all!), the Social Security benefit becomes more and more important.

Unfortunately, the way Social Security works is a mystery for most folks. There’s really not much in the way of guidance for using the system, and relying solely on the phone representatives from the Social Security Administration is bound to lead you to a less-than-optimal result.

As with most financial activities, it pays to learn as much as you can about your options, possible strategies, and the pluses and minuses of various choices that you make. A Social Security Owner’s Manual is an attempt at providing you with the groundwork to better understand the Social Security system so that you can at least be well-informed of your options as you approach the date when you begin taking benefits.

Posted on Oct 14th, 2011
by author: jblankenship.

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Posted in: #noTOP, Book review, file and suspend, retirement benefits, social security benefits, social security retirement, Social Security spousal benefit, spousal benefits.
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Roth Conversion/Recharacterization Strategy

Sep 28th, 2011
by Jim.
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Uranium conversion 1
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1/1/2018 Note: Recharacterization of Roth conversion is no longer allowed as of tax year 2018. The last tax year that you could recharacterize Roth conversions is 2017. See Roth Recharacterization is No Longer Allowed for more details.

If you have an IRA you probably know about the concept of a Roth IRA conversion – where you take distribution of a portion of your IRA and directly transfer that money into your a Roth IRA, paying tax as you go.  Then the Roth IRA can continue to grow tax-free (as Roth IRAs do) and you’ll never owe tax on your qualified distributions from the Roth IRA.

In addition, if the investments you’ve made in the Roth IRA have lost money, before October 15 of the following year you have the opportunity to recharacterize your Roth conversion.  If you didn’t recharacterize, you’d be paying tax on a conversion amount that is much lower now if there was a downturn in the investments, so your average tax rate is much higher than you’d hoped.  By recharacterizing, you can undo the conversion or a part of it.

I had a question raised to me recently about using the recharacterization option to your advantage.  Here’s the gist of the strategy:  If you have an IRA worth, say $100,000, you could convert it into two Roth IRAs, one half invested in a 2x leveraged bull-oriented investment, and the other half invested in a 2x leveraged bear-oriented investment.

If the two investments go flat for the year, your conversion could be recharacterized with no tax consequence.  However, if the market went up by 10%, your bear holding would be down 20% (being leveraged 2x) and the bull holding would be up 20% (vice versa had the market dropped).  This would give you the opportunity to recharacterize only the bear holding, leaving you with a traditional IRA worth $40,000.  Your Roth IRA would be worth $60,000, although you would only have to pay tax on the original $50,000 converted.  At a 25% tax rate that works out to $12,500 in tax, which would only be 20.83% on the Roth IRA.

Perhaps that rate isn’t low enough for you though – maybe you need to ensure that the tax rate is even lower, say 15% or less.  Following the example, you’d need to see an increase of 66% or more in your holdings, which would equate to a 33% move in the market (for your leveraged holdings, one way or the other).  If the market doesn’t move in the amount you hoped, you can just recharacterize the entire conversion, nothing lost.

You probably want to pull your “winnings” off the table and put the remaining Roth IRA into a safe(r) investment than the leveraged investments chosen before, such as a balanced fund or even straight bonds.

Now you now can pull the same maneuver in the following year with whatever is left in the traditional IRA, splitting it just as before.  Over time you should wind up with a significant Roth IRA with a lower tax cost.

This is not a huge payoff strategy – you’ll be losing money in your traditional IRA holdings each year, guaranteed.  Your net position would be the same (minus the tax).

After the first year of the example, assuming a 20% gain you’d have with $60,000 in the Roth and $40,000 in the traditional IRA, having paid $12,500 in tax.  Second year, same result and you’d have $84,000 in Roth, and $16,000 in traditional IRA, paying $5,000 more in tax.  Third year, again the same 20% gain  resulting in a total of $93,600 in Roth, $6,400 in trad, paying $2,000 in tax.  And so on, until the amount gets too small to work with any more.

The end result is that all of this tallies up to the same $100,000 that you started with, having paid tax of just less than $21,000, versus the original $25,000 you would have paid.  Holding out for a higher return from the strategy would yield a lower tax rate overall.

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Posted on Sep 28th, 2011
by author: Jim.

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Posted in: #noTOP, conversion, IRA, Roth Conversion, roth ira conversion, tax.
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