Archive for the ‘TAXES’ Category

Federal Tax Laws: More Change Coming

Monday, March 26th, 2012


There are many changes  in the Federal Income Tax Laws that have been implemented already or will be soon. Some expired last January others will expire by year end. Tax increases are also on the horizon.

 

Newly Expired Tax Laws

 

The first five were temporary tax relief items that expired January 1st of this year are:

 

1. The Alternative Minimum Tax (AMT) Patch – This expiration will subject many more taxpayers with tax preferential items such as, tax free income or substantial itemized deductions, to be subject to the Alternative Minimum Tax.

 

2. Charitable Contribution of IRA Assets – The exception allowed taxpayers to transfer assets directly from their qualified accounts to charity without paying income tax. With the expiration of this provision, taxpayers must now first pay Federal Income Tax on the withdrawal and then may transfer an amount to the charity.

 

3. State Sales Tax Deduction – The deduction was an alternative which allowed taxpayers to take the higher of their state sales taxes or income taxes paid as an itemized deduction. The change will mostly affect people living in states without state income taxes and seniors in states where retirement income is not subject to state income taxes and therefore not deducted.

 

4. Home Energy Tax Credit – This was a credit available for windows, doors, heating systems, cooling systems, etc. After January 1, 2012, these improvements no longer qualify for a tax credit.

 

5. School Teachers Expenses Deduction of $250 – School teachers who have been dipping into their own pockets for items used in their classrooms, used to be to take a $250 deduction to account for these expenses.

 

Year End Expiring Tax Laws

 

The next impending batch of tax laws which are scheduled to expire at the end of 2012, barring any intervening Congressional actions, are:

 

1. Payroll Tax Cut of Two Percentage Points – This is a reduction in the amount of social security taxes that has been withheld from employee paychecks. The expiration of this cut will result in the resumption of the scheduled 6.2% withholding for FICA taxes.

 

2. Top Income Tax Rate Cap – The rate will increase from 35% to 39.6%.

 

3. Capital Gains Tax – Both the 0% and 15% tax brackets will disappear. They will be replaced by a single 20% bracket.

 

4. Qualified Dividends Tax Rate – No longer will dividends that meet the qualifications of this category be taxed at 15%. These are scheduled to revert to ordinary income tax status.

 

5. American Opportunity Education Credit – This credit (up to $2500), was available to offset some of the costs of post secondary education, is also set to expire 12/31/2012 as well.

 

January 2013 Tax Increases

 

There is also several tax increases scheduled to become effective on January 1, 2013. Among the most noteworthy:

 

1. Net Investment Income Tax – There will be an additional tax of 3.8% for individuals with Adjusted Gross Incomes of $200,000 and couples with AGI’s greater than $250,000. The purpose of this additional tax will be for additional Medicare funding.

 

2. Phase-out of Personal Exemption – For higher income taxpayers, the amount of their personal exemptions will be phased out as income increases.

 

3. Itemized Deductions Limit – These deductions will be limited for taxpayers with incomes exceeding $150,000.

 

4. Flexible Spending Accounts – FSA funding is being cut from $5000 to $2500.

 

With this plethora of changes already in place or on the horizon, what is a taxpayer to do? The answer to that is as individual as the person reading the question.

 

If, you are in an effected tax bracket and are contemplating liquidating an equity position that you currently own, it may be in your best interest to consider this transaction in 2012 before the increased tax rates will diminish your after tax return. If there is a way to pay for itemized deductions this year, if you are possibly in jeopardy of getting them phased out next, that may be a good choice for you.

 

The bottom line is to keep these changes in mind when making financial decisions in the upcoming year.

 

Kurt Rusch CLU,ChFC

 

Defined Benefit VS. Defined Contribution

Wednesday, February 1st, 2012


In speaking with a client recently, I was asked to describe the difference between Defined Benefit Plans and Defined Contributions Plans. I was a bit taken a back because I assumed these were commonly understood concepts.

 

Investigating further, I discovered my assumption was wrong. The differences between Defined Benefit Plans and Defined Contribution Plans are not very well comprehended – even among many astute financial people.

 

Defined Benefit Plans

 

DBP’s are typically thought of as “old school” pension plans. When you enroll in these plans, the employer makes a promise to make specific payments based on formulas with variables such as number of years with the company, wages, age at retirement etc.

 

Companies will then fund these plans according to their own formula. Some companies have 100% company contributions to fund these plans while others will require employee contributions.

 

One of the main differences between these plans and Defined Contribution Plans is that the burden of investment return is with the employer. Any shortfall in the contractually promised benefit must be made up by additional contributions in a defined benefit plan. Contrarily, any surplus can be utilized to reduce future contributions to meet these obligations. These plans are becoming less and less prevalent as employers look to avoid the extra liability of making up contributions if investment returns lag.

 

Defined Contribution Plans

 

DCP’s are the plans with growing popularity. An example of these types of plans would be: SIMPLE, 401(k), 403(b), and Section 457 plans. Employees are able to set aside a portion of their pay on a before tax basis. In some cases the employer will have a matching contribution that will be added in addition to the employer contribution.

 

The employee contributions are always 100% vested if that employee leaves employment. The employer contribution usually has a vesting schedule where a portion of the employer contribution will be forfeited by the employee if their years of service are not sufficient.

 

Other Comparisons

 

Defined Benefit Plans typically promise a lifetime of contractual income once you enter retirement. Defined Contribution Plans offer no such promises. Once your funds are depleted, your income stream is over. On the other hand, Defined Contribution plans will generally have a beneficiary designation where any remaining funds in the account can be passed to a beneficiary upon death.

 

Defined Benefit Plans provide choices as to how you prefer your lifetime income would be paid out. For example, you could receive the highest payout if you select a lifetime option with no provision for spousal continuation. You can also typically select a lesser amount with the remainder paid to a spouse if they survive you. These plans have no provision for leaving unused assets to non-spouse beneficiaries.

 

Retirees can select payment options as they see fit with Defined Contribution Plans. People can choose to take as little as is required by the IRS minimum distribution requirements all the way up to redeeming the entire account. Defined Contribution Plans offer the opportunity to pass assets along to beneficiaries for any unused balances.

 

Take Away

 

The biggest difference between DBP’s and DCP’s lies in the responsibility for investment return. In a Defined Contribution Plan, the onus of return lies with the employee. If their returns are not sufficient, it is up to them to increase their contribution rate or have fewer funds available at retirement.

 

Minding today’s terminology is half the battle.

 

Kurt Rusch  CLU, ChFC

 

Retirement Planning: New Year, New Rules

Saturday, January 21st, 2012

 

A plethora of legislative change became effective on the first of the year. Some of these changes will affect individuals planning for retirement as well as those already retired.

Here, is the short list:

 

1. Social Security checks will be getting larger. Recipients can expect to see their gross check increase by 3.6% with only small increases in their Medicare Premiums.

 

2. Standard Medicare Part B coverage will increase to $99.90 for 2012. This is an increase of $3.50 per month. For Part B enrollees who signed up in 2010 or 2011 and were charged an initial premium of $110.50 or $115.40, their premiums will decrease to the standard $99.90.

 

High Income recipients will continue to pay a higher portion of their Part B premiums with their rates being anywhere from $40.00 to $219.80 per month higher than the standard rate. (High Income Recipients are defined as: an individual with Adjusted Gross Income over $85,000 or couples with Adjusted Gross Income over $170,000.)

 

3. The Part D donut hole gap is shrinking. The biggest complaint about the Medicare Part D is the fear of hitting the donut hole where coverage is limited severely versus coverage prior to and after the hole.

 

Previously, drugs were discounted by 50% for brand name and 7% for generics while in the donut hole. These percentages are rising to reflect a 50% discount for brand name and 14% for generics in 2012. Eventually the donut hole is scheduled to be phased out.

 

4. Income subject to Social Security Taxes will increase. For 2012, Social Security will be incurred on earned income of up to $110,100, up from $106,800 in 2011. However, at least for January and February, Social Security withholding rates for the employee will continue to be 4.2%.

 

5. 401(k), 403(b) and Federal Government Thrift Plan contribution limits will increase. The 2012 limit will be $17,000, up from $16,500. The catch up provision available for employees 50 and older remains $5500.

 

6. IRA contribution limits will remain the same but the threshold for income to make these deductible contributions will increase. Contributions of up to $5000 or $6000 if aged 50 and older, will be fully deductible if the modified adjusted gross income is under $58,000 for individuals or $92,000 for couples.

 

A phase out occurs between $58,000 and $68,000 for individuals and $92,000 and $112,000 for couples where only a portion of a contribution will be deductible. For individuals without a retirement plan at work, the income limits are set at under $173,000 for full contribution to fully phased out at $183,000.

 

7. Roth IRA income limits will also remain the same with contributions of up to $5000 or $6000 for aged 50 and older. However, these will also see an increase in the income limits that will be able to participate. Individuals with adjusted gross incomes of up to $110,000 will be able to fully contribute to a Roth for 2012.

 

There will also be a phase out of the amount of contributions that can be made until no contribution can be made if income exceeds $125,000. For couples, the thresholds are income under $173,000 and phased out until income reaches $183,000 where a Roth IRA will not be a viable option.

 

8. Qualifying income limits for the Saver’s Credit will increase for 2012. This credit which can amount up to $1000 for individuals and $2000 for couples, will now be available to individual taxpayers with an AGI under $28,750, for Heads of Household with an AGI under $43,125, and for couples with an AGI under $57,500. The credit will apply to contributions to retirement plans whether individual or employer based.

 

This overview may provide changes which could affect your planning for this year and beyond. The uncertainty of anyone’s future, combined with changing laws and financial environments, dictates the need for dedicated and diligent review.

 

Kurt Rusch CLU, ChFC

 

Review, Retool & Renew

Wednesday, December 28th, 2011

 

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. –Charles Dickens

 

Was 2011 the best of times or the worst of times? The answer to that depends upon whether your glass was half full or half empty.

 

Review

 

Don’t let frustration cloud the path of renewal. There’s nothing worse than basking in what you didn’t accomplish – look to what worked first.

 

Take out a sheet of paper and draw a big “T” across and down the page. Write WORKING on the left side  and list the things you have in place you’re happy with. Consider whether you want to build further on any of these and make a note to do so.

 

Retool

 

Now write NEEDS WORK on the right side of the paper and list any financial concerns/objectives you’d like to address/reach in the coming year. What simple steps can be taken to start working on these?

 

Savings and cash flow are priority objectives for most people. Here are some easy things to do to rev up for the New Year:

 

Kitty Jar – Throw $5 bucks into a jar each week. A year from now you’ll have an extra $250 to pay bills, invest, or splurge with.

 

Automated Savings Account – Consider opening an automated savings account. Most banks have programs where you can designate a certain amount of money to be automatically transferred from your checking account each month into a savings account.

 

“Keep the Change” accounts are also an easy way to save automatically through your debit card transactions. Every time you buy something, the change is rounded up to the next dollar with the difference automatically deposited into the separate account. An additional amount of money may be required for auto transfer each month too, usually a $25 minimum. If you use your debit card in lieu of cash or check, an account like this can easily add up to far more than you might think over the course of a year.

 

Invested Savings – Mutual fund accounts can be opened for as little as $25 per month and set up on an automated basis. Naturally, this type of account carries no guarantee for positive results but if investing is a goal you have yet to reach, small accounts like these may be the best thing to do to get started.

 

Boost Cash Flow – There are numerous things you can do to increase cash flow: pay down/off revolving debt with the highest billed interest rates first, shop wiser, bag your lunch, etc. Now is also definitely the time to revisit the U.S. tax code. Taking advantage of every exemption, credit and deduction available to you can save hundreds to thousands in taxes. Ear mark your refund (ahead of time) for something on your list this year.

 

Embrace Economic Trends – Economies void of high interest rates of return provide affordable opportunities. Make low interest rates work for you! If you haven’t refinanced you home, do so. Financed items are cheaper now.

 

Renew

 

Work both sides of your “T” sheet and take simple steps to welcome in the New Year, clarity and resilience are on your side.

 

What was and what wasn’t becomes what can and what will in one quick tick tock. It’s really magical when you think about it.

 

We wish you a very Healthy & Prosperous New Year!

 

Kurt Rusch  CLU, ChFC

 

 

Top 3 FAQs on 401(k)s

Thursday, December 1st, 2011

 

The top three questions I am asked most often these days with regard to 401(k) accounts are:

 

Should I leave my 401(k) in a prior employer plan while out of work?

Is it best to roll my account into a new employer plan every time I change jobs?

Can I cash my 401(k) in if I need the money now?


Leave It

The main benefit of leaving 401(k) accounts at your former employer is that you don’t have to do anything. While this method is very convenient, it is not void of drawbacks. 401(k)’s typically come with a limited number of investment choices available to their participants. Leaving your accounts at former employers, may not serve you best, and can get confusing if you leave several or more accounts at various different companies.

 

Bring It

When you do get a new job, one option would be to roll your 401(k) over into the new employer’s retirement plan, if that is an available option. Obviously, this would make keeping track of your assets easier.

 

Some people find this an attractive option when their employer offers employee loan provisions for 401(k) accounts.  (These types of provisions allow employees to borrow against plan assets and pay the loan back via payroll deduction for return of principal and interest.) It is important to note that assets which have been lent out will be deprived of any growth on the loaned portion of the portfolio they would have received has they not taken out a loan.

 

Move It

Whether you leave your accounts at various employers, or bring them all to a new employer, investment options can be limited through workplace plans. Alternatively, there are numerous choices available if you opt to transfer your account into a Rollover IRA. This option gives investors the most flexibility if executed properly.

 

The first step in properly executing this exchange would be to assure that the account is a custodian to custodian transfer. By doing so, you eliminate the possible tax ramifications of not having the moneys properly transferred within a 60 day period as required by the IRS.

 

It is important to make certain that you do not comingle these funds with separately funded IRA’s you may have if you want to roll them into a new employer plan at some point in time. Comingling will render the account incapable of subsequently rolling back into a 401(k) plan; keeping the funds in a separate IRA Rollover Account will allow redeposit into a current 401(k).

 

Cash It In

If, and that’s a really a big ‘IF’, you really need the money before retiring, you can cash in all or part of your retirement plan. BUT, the IRS will make you pay dearly for early access. The IRS levies a 10 % penalty on anyone under age 59 ½ who cashes in all or part of their retirement plan. On top of that, you will also have to pay Federal Income Taxes on the amount withdrawn.

 

What most people don’t realize is how costly early withdrawal can be. For example, if a 40 year old in the 28% income tax bracket cashes in their $10,000 401(k), the after tax net proceeds would only be $6200. This is because they would owe $1000 in penalty for taking an early distribution plus $2800 in Federal Income Taxes. In reality, the liquidation of this retirement account yields a 62% pay out and a 38% tax and penalty on the total account value.

 

One other thought regarding early withdrawal – there are some situations where the IRS will waive the 10% penalty on early withdrawal. An example of this would be for dire and non-reimbursed medical expenses which do not exceed 7.5% of your adjusted gross income.

 

It is extremely important to tread carefully when manipulating any type of “qualified” account. Check additional rules and exemptions for early distribution on the IRS tax topics page.

 

Kurt Rusch, CLU, ChFC

 

 

TAX RETURNS: Do it yourself or not?

Tuesday, March 1st, 2011

Software programs, such as Turbo Tax, have unequivocally made tax returns easier to execute. While tax professionals have been using them for decades, consumers weren’t heavily marketed to buy until recently. Is it wise to do your own taxes? The answer to that question depends on what you are and aren’t willing to do.

If you shake in your boots at the mention of the IRS, then filing your own return is obviously not an option. If you’re the type of person who is willing to do some research, computer confident and isn’t facing a plethora of intricate tax situations, then you may want to take a crack at it.

Coming from a tax background, I am comfortable with doing returns and ecstatic with today’s technology. However, though the software leads me through a line by line order, it does not interrogate me about potential credits and deductions my clients may be able to take. I need to know what to look for on their behalf first. Capturing personalized and legitimate calculations is still something that can’t be categorically computerized.

Most recently, one of my clients did their own return using Turbo Tax and asked me to review it before they filed. They came up with a refund under $100; I came up with a refund of several thousand from legitimate tax credits they could take but were unaware of. This is definitely one of those moments where it absolutely does pay to do your homework. But where do you start?

My first suggestion would be to Google the current year tax and see what comes up. You need to know if there are new rules and law changes which will affect the return year, as well as any which may be expiring or have been extended for credits, allowances, deductions and so forth.

You don’t have to read the tax code, but you do need to be aware of what to look for. A great place to start is the IRS Newsroom. These websites pages are surprisingly easy to navigate via short categorical listings by tax year. Generally speaking, here are a few things to keep in mind when doing your return:

Consider Credit Basics

Make sure that you examine your situation for qualification/eligibility of Earned Income Credits and Child Tax Credits.

Pay Attention to Non Recurring Items

If you are going to be the recipient of non recurring income items such as inherited annuities, make sure that you account for the possibility of having your Social Security payments taxed at a higher rate. Changes to financial accounts, stock transactions, home sales, business ownerships and other such items should also be scrutinized.

Review Retirement Plans

Utilize deductible IRA’s if qualified. This could result in what amounts to up to a 30% subsidy from the Fed’s that can be saved tax deferred toward your retirement.

Know Your State Regs

In Illinois, contributions to eligible 529 Plans for education qualify to be deducted from taxable Illinois income. In 2009, Illinois started requiring the property tax ID number to be included on returns in order to qualify for the 5% credit for property taxes paid.

Backup, Backup, Backup

Though you may be a wiz at Quicken, you still need to substantiate those account entries with back up. Keep detailed records of itemized deductions such as charitable contributions, medical expenses, business expenses, etc. With regard to record retention, the rule of thumb is 3 years; some schools of thought say 7 years is better. The statue of limitations runs out in 10.

Check Filing Status

Make sure that you use the proper filing status. The difference in tax liability between filing Single vs. Head of Household can be substantial.

These are the basics of what you need to know and consider if you choose to do your own return. I will be posting more tax articles in the coming weeks as well. Please feel free to contact me if you have a question you’d like some help with.

As of today, there are 49 days left before the 2011 filing deadline falls on April 18th. Are you prepared?

Kurt Rusch CLU, ChFC