Last week we covered some of the differences in annuities and the various types of annuities someone can purchase. In our final annuity installment (no pun intended) I want to explain some of the fees and expenses that some annuities and annuity providers employ. As mentioned in my first annuity article annuities are an insurance product – insuring against living too long. Most companies that offer annuities will charge for this insurance by means of what are called mortality and expense charges. M&E charges can be as low as .25% to as high as over 2%. These charges are the expenses the annuity company charges to the entire risk pool of policyholders in order to pay for the few that will outlive their life expectancy. Most policyholders and annuitant will not outlive their life expectancy and thus pay for those that do. M&E charges will also help the annuity company […]
tax
State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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Getting a Transcript From the IRS
Often when dealing with an issue regarding a prior year’s tax return it is necessary to get a copy of the information that the IRS has on record for your return as filed. Of course, you should always keep a copy of your original return, but in the absence of an original, the IRS’s record, known as a “transcript”, stands as the only way for you to have access to the filed information. A couple of months ago the IRS sent around their Summertime Tax Tip 2012-18 which details how you can request and receive a transcript for a prior year’s return. The actual text of IRS Summertime Tax Tap 2012-18 follows: How to Get a Transcript or Copy of a Prior Year’s Tax Return from the IRS Taxpayers should keep copies of their tax returns, but if they cannot be located or have been destroyed during natural disasters or […]
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Penalties for Failure to File or Pay
When you don’t file your tax return or if you don’t pay the tax owed on time, the IRS has specific penalties that are applied to your account. Recently the IRS issued their Tax Tip 2012-74, which lists eight facts about these penalties. The actual text of the Tax Tip is listed below: Failure to File of Pay Penalties: Eight Facts The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay, or both. Here are eight important points about the two different penalties you may face if you file or pay late. If you do not file by the deadline, you might face a failure-to-file penalty. If […]
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Roth Conversion/Recharacterization Strategy
Image via Wikipedia 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 […]
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What Can Be Done to Save Social Security?
Image by Lady_Helena via Flickr This is, of course, one of the most volatile questions on the political landscape these days. We have some constituencies claiming that the whole plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system. True, the system is in dire straits – not bankrupt, but needing attention. Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes. Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed. In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – […]
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The “Tax on Sale of Your Home” Email Myth
Image by Sean MacEntee via Flickr If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email. In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks. The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from. In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you. Here’s the […]
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UBTI in an IRA
Image via Wikipedia I’ve mentioned before about various types of transactions that are not allowed in your IRA, but we’ve not actually covered the topic of Unrelated Business Taxable Income (UBTI) in your IRA. UBTI isn’t prohibited within an IRA, but it does pose problems and adds a great deal of complexity to your account. Unrelated Business Taxable Income So, what is UBTI anyway? The concept of UBTI pre-dates IRAs – it was originally developed in relation to charitable organizations, trusts, and other tax-exempt entities. The IRS developed this concept to ensure that tax-exempt organizations didn’t have a competitive advantage over taxable organizations, such as for-profit corporations. The way that income is determined to be “unrelated” is by checking these two tests: Is the income from a trade or business that is regularly carried on? Is the trade or business unrelated to the tax-exempt entity’s exercise of the entity’s tax-exempt […]
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A Restriction on the Home Buyer Credit
Here is a case where, even though the IRS documentation did not state it directly, the real rule of the law makes an explicit statement, and therefore the Code is where the final rules are taken from. In this particular case, there is a situation where the home buyer credit is not available: if the home is purchased from a parent or another close relative (and vice versa). And the taxpayer who relied only on an IRS publication found out the hard way that the Internal Revenue Code is the final word on the subject. There was a recent Tax Court case (Nievinski, TC Summary Opinion 2011-10) that challenged the limitation, and the Tax Court ruled in favor of the Service. The argument was that, in a particular document, IRS Publication 4819 “Important Information About the First-Time Homebuyer Credit”, there was no express explanation of this limitation. Image via The […]
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Proposed Social Security Wage Base Increases
October 19, 2011 update: the expected wage base increase has been confirmed as $110,100 for 2012. For more information, see this article. The Social Security Administration has released the proposed figures for the increase in the wage base for taxation for 2012 and projected some figures for the years up to 2015. This is the limited amount of income against which Social Security withholding tax is applied. For 2009 through 2011, the wage base has been static – at $106,800 for each year. The amount did not increase for these years since the average wage index (AWI) actually decreased from 2008 to 2009, and the modest increase in the index from 2009 to 2010 did not make up for the decrease in the prior year. For 2011, the AWI is expected to increase once again, by 3.08%. This sets the projected wage base for 2012 at $110,100, up a total of […]
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Tax Benefits For Parents
As parents, we spend a lot of money raising our children – from basic needs such as food, housing, doctor bills, and clothing, to education, daycare, soccer teams and lessons on the clarinet – it seems like the list is endless. Since the kids don’t generally pay you back (at least in dollars), the IRS steps in to help out. There are several tax benefits that you may be eligible for just because the little urchins are in your care… and here’s a list of ten tax benefits that the IRS has put together (taken from IRS Tax Tip 2011-18): Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Child Tax Credit You may be able to take this credit on your tax return for each of your […]
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The Roth Recharacterization
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. After all the hoopla around Roth conversions in 2010, now is the time to consider whether or not a recharacterization is in your future. So what is a recharacterization, and how does it work? Recharacterization is the “backing out” of your Roth conversion. In other words, you can literally make the conversion as if it had never been done at all, with your money back in the traditional IRA where it started. Why would you want to do that? Here’s an example: let’s say you converted $100,000 to a Roth IRA in 2010 and you are ready to pay the tax on your 2010 return (you elected out of the spread to 2011 […]
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Why Your Paycheck is Changing in 2011
After the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act) late last year, there were certain changes that will impact your take-home pay in 2011, versus what you were seeing in 2010. For starters, although the 2010 Tax Act extended the tax rates to be the same as they were in 2010, as always there are increases in the tax tables which have a minor impact on your take-home pay. Typically, this change will increase your tax withheld, reducing your take-home pay. The 2010 Tax Act also included a provision to reduce the withholding requirement for Social Security from 6.2% to 4.2%, which will have the effect of increasing your take-home pay by 2%. One other change to your paycheck came about because of a provision that was not included to be extended as a part of the 2010 Tax Act […]
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The Making Work Pay Credit
Many (or most) working taxpayers will be eligible to receive a special credit on their 2010 tax return, called the Making Work Pay Credit. The IRS has recently produced their Tax Tip 2011-15 which explains five important provisions about the Making Work Pay Credit: The Making Work Pay Credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010. Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for […]
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Over-The-Counter Drugs via Your Flex-Spending Account
In case you missed it when I wrote about Guidance from the IRS on Flex Spending Plans – one of the changes you’ll have to deal with beginning with 2011 is that you can no longer use your Flex-Spending Account (FSA) to reimburse yourself for over-the-counter drugs like you’ve been able to do in the past. However, there is a way to get the over-the-counter (OTC) drugs that your physician recommends and use your FSA funds to pay for it… if your physician gives you a prescription for it. Even though the IRS has disallowed the use of FSA funds for OTC drugs, if your physician gives you a prescription for the OTC drug, your FSA can be used to pay for the drug. There are some rules though: first, the prescription has to provided to the pharmacist prior to the purchase, and the pharmacist must dispense the drug just […]
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Date Set for Processing Delayed Returns
The IRS announced on January 20, 2011, that the delayed returns – those that have itemized deductions on Schedule A, include higher education tuition and fees deductions on Form 8917, and/or that include the educator expenses deduction, can begin processing on February 14. Many processors (commercial software) will accept these returns now and send them to the IRS beginning on February 14, so there is no reason to delay. And if your processor (or tax guy or gal) doesn’t allow for the early acceptance, you can still get your information in to them and they’ll submit it when the time is right. This delay was explained in the article that I wrote earlier about how some returns would be delayed this year due to the late passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Photo by hillary h
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Credit for Energy Saving Home Improvements for 2011
This tax credit has undergone a change from previous years. In 2010, for example, you could achieve a credit for as much as 30% of the cost of your energy-saving home improvements, with a ceiling of $1,500. Beginning January 1, 2011, the credit rate is now just 10%, and the ceiling has been lowered to $500. Something important to keep in mind about this credit: any credit claimed in prior years (2009 and/or 2010) will be used to reduce your ceiling. In other words, if you claimed the full credit (or any amount up to $500) on a previous year’s tax return, you have no energy-saving home improvement credit available to you. In addition to the changes above, there are specific item caps in place as well. For example, if you are putting in a new furnace or water heater, the credit for those units is capped at $150. If […]
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Book Review: Small Business Taxes Made Easy
This book was a surprise to me – I did not expect to find such a thorough guidebook on the process of starting up a small business, but that’s what Small Business Taxes Made Easy is. Author Eva Rosenberg, (“TaxMama” to her devotees) has not only the experience, but also the in-depth understanding of both the small business and the small business-person to lead you through this process and help you to succeed, quite possibly in spite of yourself. The title of the book is misleading, as the first several chapters of the book have little to do with taxes and much to do with all of the administrivia that you need to go through when setting up a small business. In fact, you really don’t get to tax matters at all until about page 70 (of 261) in the book. The first few chapters take you through the concepts […]
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Earned Income Tax Credit 2011 Style
There have been a few changes to the Earned Income Tax Credit (EITC) for 2011 and years beyond. Some of these changes are pretty significant, others are more of the common variety. No More Advance Payments In the past, if a taxpayer was likely to be eligible to receive the EITC on filing his or her return, the law allowed the taxpayer to apply for and receive advance payment of a portion of the credit. This is because the credit is refundable – even if you don’t owe any tax on your tax return, you’ll get something back with the EITC. With the passage of the Education Jobs and Medicaid Assistance Act of 2010 signed into law August 10, 2010, the Advance payment of EITC was repealed, effective after December 31, 2010. Third-Child EITC The American Recovery and Reinvestment Act (ARRA) increased the EITC by 5% for families with three […]
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Tax Filing for 2010 Returns Will Start A Little Late for Some
Since the 2010 Tax Act was passed so late in the year, the IRS is having to delay the start of processing for some returns, since their systems have to be updated. While most returns can begin being processed pretty much immediately in January, there are some that will have to be delayed for processing until sometime in mid- to late-February. The three specific areas that will cause the delay are: Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The primary benefit is for folks who live in areas without state and local income taxes and is claimed on Schedule A, Line 5. Taxpayers claiming the […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.