February 16, 2013
January 27, 2013
Kiplinger magazine and the National Association of Personal Financial Advisors (NAPFA) are teaming up for the annual Jump-Start Your Retirement Plan Days to bring you free one-on-one personal finance advice.
NAPFA members (including me!) from across the U.S. will be standing by to answer your questions from 9:00 a.m. to 5:00 p.m. ET on Thursday, February 7 AND Tuesday, February 12, 2013.
This year, Jump-Start Days will feature four separate chat rooms, each hosted by expert financial advisors:
Chat Room #1: Taxes and Retirement
Chat Room #2: Saving for Retirement
Chat Room #3: Income in Retirement
Chat Room #4: Other Financial Challenges
The chat rooms will be open a week in advance so you can get your questions in early. To submit a question, simply follow the link above that best fits your question. Advisors will answer questions in the order they come in.
I will be in the Taxes and Retirement chat room from 11-1 on February 7. I look forward to answering your questions!
January 2, 2013
In true Congress style, a deal was passed at the last minute to keep the US from going over the fiscal cliff.
On Tuesday night the House passed a bill that will extend the Bush tax cuts for most of Americans, extend unemployment benefits, and delay spending cuts. Unfortunately, the bill left a lot of big issues on the table.
Here are the details:
The fiscal cliff related to both the tax laws that were scheduled to expire on December 31, 2012 and the spending cuts that were set to take place automatically on January 1, 2013.
The deal raises taxes for higher-income people (individuals who earn more than $400,000 and couples who earn more than $450,000), but keeps taxes the same for everyone else. Basically, the Bush tax cuts were made permanent for everyone except those who earn more than $400,000. If you earn more than $400,000 the Bush tax cuts will expire for you, causing your top tax rate to jump from 35% to 39.6%.
The lower and middle income groups didn’t escape increased taxes completely, however, as the 2% payroll tax cut was allowed to expire. That means most Americans will see their first paycheck in 2013 go down. This was expected so no surprise here…
One good thing to come from the bill is that the alternative minimum tax will be adjusted permanently for inflation. The AMT has never been adjusted for inflation causing more and more people to owe it every year. Without a legislative change, up to 30 million Americans would have had to pay the AMT for the first time on their 2012 income tax returns. The bill will permanently adjust the income exemption amount for inflation.
The itemized deduction and the personal exemption phaseouts were extended, meaning people who earn less than $250,000 (single) or $300,000 (married filing jointly) will not see their deductions phased out.
Capital gains and dividend tax rates will remain low for most taxpayers. A 20% rate will apply for individuals above the top income tax bracket, middle brackets will pay 15% and the zero rate is retained for taxpayers in the 10% and 15% brackets.
Parents will be happy to hear that the expanded American Opportunity Tax Credit, Child Tax Credit, Child Care Credit and Earned Income Tax Credit will all be preserved for the next five years. These credits were expected to return to pre-Bush levels on January 1, making many people ineligible for them.
Oh and remember the marriage penalty? You know, the smaller 15% tax bracket and the smaller standard deduction that applied to married taxpayers (compared proportionately to single taxpayers)? Well you can breathe easier, the marriage penalty has been permanently banished from the tax law.
Teachers will be happy to learn that the deduction for books, supplies, etc., was extended (although $250 is nowhere close to what most teachers pay for classroom supplies, every deduction helps). Also extended were the tuition and fees deduction and the ability to deduct state and local sales taxes in place of state and local income taxes. These were extended for one year.
Retirees can continue to make charitable donations from their IRA; the tax-free distributions from IRAs for charitable purposes provision was extended through 2013. This is a win-win for both retirees and charities, so hopefully this will be made permanent in future legislation.
Estate taxes were also addressed in this bill; the current exemption of $5.12 million will be preserved but the top tax rate will go up to 40% from the current 35%, however, that’s lower than if the bill had been allowed to expire completely.
While taxes will remain low for most people, there are a couple of new taxes for high income taxpayers. The additional 0.9% hospital insurance tax on high income taxpayers ($200,000 if you’re single, $250,000 if you’re married and filing jointly) took effect on January 1. Also effective on January 1 is the 3.8% Medicare tax on the lesser of an individual’s net investment income or the amount the individual’s modified adjusted gross income exceeds a threshold amount. The threshold amounts are the same as the additional hospital insurance tax.
One of the surprises in this bill, for me anyway, is that the higher floor for deducting medical expenses was not axed. In 2012, you could deduct medical expenses that exceeded 7.5% of your adjusted gross income (AGI). Starting in 2013, the “floor” was raised to 10% of your AGI. The bill does include some relief; if you or your spouse has turned 65 before the end of the year the increased floor does not apply, but only for the years 2013-2016. So retirees will still be able to deduct medical expenses, but the higher floor will mean many taxpayers under age 65 will no longer be able to deduct medical expenses.
The deal also delayed the automatic spending cuts from happening, but only for two months. Congress will need to come up with a new plan for the deficit before March or the US will face another cliff scenario.
Two of the biggest spending cuts on the table were unemployment benefits and Medicare. The bill includes an extension of unemployment benefits for one year. Without this clause, more than 2 million people would have lost their unemployment benefits.
Regarding Medicare, doctors were facing a large pay cut in 2013 as Medicare reimbursement rates were set to be adjusted automatically to stay in line with GDP growth. This would have caused a 27% pay cut for physicians. While you may not be overly concerned with high income doctors taking a pay cut, you should be. Doctors fed up with looming pay cuts have been turning Medicare patients away, making it hard for consumers to get the care they need. The bill prevents this pay cut from happening, but just for one year. This issue will need to be addressed soon as it adds $31 billion to the deficit.
The bill will go to the White House next to be signed by President Obama. It is expected to be signed into law by Thursday.
Unfortunately, this is not the end of the fiscal cliff. According to CNNMoney, we have three more cliff-like deadlines in the next few months including the debt ceiling (not addressed in the current bill), the sequester (a series of automatic cuts in federal spending that will take place if Congress doesn’t act), and the continuing budget deficit. These must all be addressed by the end of March, so keep your seat belts on, the ride isn’t over yet.
October 11, 2012
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February 7, 2012
Getting a jump on your taxes long before the April deadline is the best tip of all. To do so, the IRS recommends gathering your records in advance, including W-2s and 1099s. In addition, the IRS recommends getting the right forms, all of which are available 24 hours a day, seven days a week at the IRS’ Web site, www.IRS.gov. That site also has some helpful calculators to get you started.
That being said, tax payers should avoid getting too early a jump on their taxes. With the preferential qualified stock dividend rate, complicated foreign tax credits, lower capital gains rates and other changes over the last few years, many investors are finding that they receive Revised 1099s, or other tax reporting documents, well into March. If you’ve already filed your return, this can lead to costs of re-filing an amended return that you may wish to avoid. The best bet may be to get your tax return all completed, and then hold off filing it until the end of March, to see if any amended 1099s arrive.
Of course, keeping organized, thorough records is the key to filing on time. The IRS suggests that you can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year and help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.
To be sure, some citizens wonder whether they need to file a tax return. According to the IRS, you must file a tax return if your income is above a certain level and that amount varies depending on filing status, age and the type of income you receive. For example a married couple, under age 65, generally is not required to file for the 2006 tax year until their joint income exceeds $16,900. Even if you do not have to file, the IRS notes that you should file to get money back if Federal Income Tax was withheld from your pay, or you qualify for certain credits.
It’s also important to choose your correct filing status, of which there are five options. According to the IRS, your federal tax filing status is based on your marital and family situation. It is an important factor in determining whether you must file a return, your standard deduction and your correct amount of tax.
Besides choosing the correct filing status, it’s important to calculate whether you should itemize deductions or not? And that will depend on how much you spent on certain expenses last year. According to the IRS, money paid for medical care in excess of 7.5 percent of adjusted gross income (AGI), mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions in excess of 2 percent of AGI can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing. The standard deduction amounts are based on your filing status and are subject to inflation adjustments each year.
Also of note, if you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the IRS and may have to pay tax on the gifts (if, including prior taxable gifts, in excess of your $1 million lifetime exclusion). The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. Gifts include money and property, including the use of property without expecting to receive something of equal value in return. There are some exceptions to the tax rules on gifts.
In some cases, a taxpayer may want to consider using a paid tax preparer. If so, the IRS has tips on its Web site to follow. Of note, only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Although you might not find that you need the services of a paid CPA or accountant every year, having a relationship established when unexpected opportunities or events occur will make getting timely professional input that much easier. Someone who knows your income and deduction patterns, and can quickly answer routine questions or research the more complicated issues, may well be worth the price – even in the years when things seem straightforward.
When completing your tax return, make sure that you take your time, double-check your math and verify all Social Security numbers. Math errors and incorrect Social Security numbers are among the most common mistakes found on tax returns.
And remember, if you are getting a tax refund, consider making an automatic contribution to your IRA; this is the first year that this can be done.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA. Kristine is a fee only financial planner serving the greater Kansas City area.
August 7, 2011
It’s one of the six steps of the financial planning process. But, oftentimes, it’s the one step that gets overlooked. It’s the sixth step – the annual financial check-up.
The annual financial check-up is indeed the most important of the financial planning steps. And yet, financial planners and clients sometimes downplay its significance.
What is the annual review and why is it so important? In short, the annual review is the opportunity to measure a client’s progress against their plan of action. It’s also the one time when planners and clients can examine the many changes that typically occur any given 12-month period – the birth of a child, the death of a loved one, the loss of a job, a major purchase – and then readjust the client’s financial plan, charting a new course if need be or further affirming the client’s progress towards their personal financial goal achievement.
Indeed, lives are seldom static and that’s why financial plans are not necessarily set-and-forget documents. But what exactly should financial planners and clients examine in their annual meetings? And when should they conduct their annual meetings.
Typically, financial planners will collect a client’s data, prioritize their goals, examine their resources, make recommendations, and implement a plan as part of the financial planning process. In an annual review, the financial planner will do much of the same and then some. They will first typically examine a client’s progress against the plan time frames. This sort of monitoring benefits both planners and their clients. Clients get an opportunity to step back from their busy lives and review their goals and confirm that their priorities remain the same Planners have a chance to reconnect with their clients to affirm their positive actions towards goal achievement or to help refocus them so that they don’t get too far off track. And planners get a chance to enhance the relationship and trust.
In some cases, planners and clients will want to establish a regular appointment, meeting on an annual basis, and in some cases on a quarterly or semi-annual basis. Typically, the planner and client will review in these meetings short-term goals, examining what if anything may have changed. In some cases, the planner will make changes to a client’s investment portfolio in light of tactical or strategic asset allocation models in place. In other cases, a planner will suggest changes based on certain life events. The birth of a child or grandchild may require a discussion about 529 plans. A divorce may require changing beneficiary designations on retirement accounts and life insurance policies.
In addition a planner may want to review with their clients new research that has become available in the interim to either confirm rationale or provide a basis to alter a client’s short-term or long-term strategies. For instance, new research that shows the escalating costs of nursing homes or health care in retirement wouldn’t change the goal of “secure long-term retirement,” but it would change the strategy to achieve that goal.
Besides reviewing family developments, planners would also address in an annual review regulatory and other changes that could affect adversely or positively a client’s financial plan. The new Medicare Part D plan or the introduction of the Roth 401(k) could prove useful to some clients. In other cases, the annual review is a chance to review potential changes, changes in the federal estate tax laws, for instance, and devise possible plans of actions.
Planners and clients will often want to measure the “performance” of the investment portfolio as part of the annual review. Typically, performance should be measured against several benchmarks, the most important of which is the client’s own personal goals. For instance, if the planner and the client established that a portfolio should grow by 5 percent per year before taxes then the performance should be measured against that yard stick. To be sure, it’s important that portfolios be measured against standard benchmarks. But only as a point of reference. Meeting personal investment goals is far more important that over performing or underperforming the Dow Jones industrial average. By and large, it’s imprudent for planners and clients to make wholesale changes to a portfolio bases solely on one quarter as well as one year of performance.
In summary, annual reviews provide a chance for planners to examine a client’s long-term goals. These reviews can establish whether the client is generally on course to meet their goals. It’s also a chance to review changes that have occurred and begin to anticipate changes that may occur. It’s a chance to implement any new plan of action that has been developed in light of changing goals or changing performance. And then last, the annual review provides the perfect opportunity to establish future review meetings.
One of the most important worksheets to review is a balance sheet or net worth statement. If reaching all of the client’s goals will require a net worth of $1 million at some point in the future, it is the balance sheet that will demonstrate movement toward or away from that goal. It is a road map. When going out of town, a map is almost always consulted before and during the trip. Progress toward your ultimate destination is noted by each passing town or landmark. It is easy to see when you move off track and what corrections should be made to get you back on the correct path in the least amount of time or distance. The balance sheet measures your progress toward your monetary goal in a finite manner. What the numbers show from year-to-year are not as important as what they show after several years looked at as a whole.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA. Kristine is a fee only financial planner serving the greater Kansas City area.
May 7, 2011
On any given day, you will find not one but several studies that examine the current state of affairs for Baby Boomers, the 77 million Americans born between 1946 and 1964 that are now slowly approaching retirement. And what’s emerging is an interesting, though at times bleak, picture of one of the most analyzed groups in America.
Here are some of the highlights of that research and the financial planning implications.
Retirement security: The 2006 Employee Benefit Research Institute’s annual retirement confidence survey recently reported that just 25 percent of workers are very confident about having adequate funds for a comfortable retirement. In some ways, that should come as no surprise given that half of all workers say they’ve saved less than $25,000 toward retirement, and even among workers 55 and older, more than four in 10 have retirement savings under $25,000. The implication for workers is that they will need to start saving more money toward retirement, with some financial planning experts suggesting that workers might need roughly 20 times their annual pre-retirement spending set aside toward retirement.
What’s more, workers are underestimating the percent of retirement income they might need in retirement. At present, many financial planners suggest replacing at least 75 percent of pre-retirement income in retirement, if not 100 percent given longer life expectancies and increasing healthcare costs.
Retirement is a state, not a date. A new MetLife Mature Market Institute study indicates that 78 percent of respondents age 55-59 are working or looking for work, as are 60 percent of 60-65 year-olds and 37 percent of 66-70 year-olds. Across all three age groups, roughly 15 percent of workers have actually accepted retirement benefits from a previous employer, and then chose to return to work or are seeking work. These employees, who have become known as the ‘working retired,’ represent 11 percent of 55-59 year-olds, 16 percent of 60-65 year-olds, and 19 percent of 66-70 year-olds. Their motives for doing so are mixed, with 72 percent of those age 55-59 (and 60 percent of those age 60-65) citing the need for ‘income to live on’ as a primary reason for working, but among 66-70 year-olds, 72% percent of employees cited the desire to ‘stay active and engaged’ as a primary reason to work, followed by ‘the opportunity to do meaningful work’ (47 percent) and ‘social interaction with colleagues’ (42 percent). Of note, many financial planning experts suggest that working part-time or full-time during retirement years is one way to make up any retirement income shortfall. But odds are high, about one in two, that some workers will be unable to work during retirement because of an illness or disability, corporate downsizing and restructuring, or the need to provide financial support to a family member of loved one. And it’s also important to understand the tax issues of working during retirement.
In the meantime, much has to change in America to make the workplace of the future “work” for boomers. According to AARP’s “Reimagining America,” pension and other laws need to change for older workers so they don’t get penalized for working longer. Employers need to accommodate the needs of older workers, providing flex-time schedules or low-stress jobs, and older workers need to invest in education and skills-training to meet the demands of a constantly changing market for skills, knowledge and experience.
Healthcare costs: A recent Fidelity Investment study suggests that a 65-year-old couple retiring today will need about $200,000 set aside just pay for healthcare costs in retirement. The 2006 estimate, which assumes that the individuals do not have employer-sponsored retiree healthcare, includes expenses associated with Medicare Part B and D premiums (32 percent), Medicare cost-sharing provisions (co-payments, coinsurance, deductibles and excluded benefits) (36 percent), and prescription drug out-of-pocket costs (32 percent). It does not include other health expenses, such as over the counter medications, most dental services and long-term care. And many employers who offer (or had offered) some level of retiree healthcare benefits, are now phasing out or significantly constraining such benefits because they feel they can no longer afford them in the current competitive global environment. While it is uncertain exactly how much of a burden will be placed on the shoulders of retirees for these costs, it appears likely that the costs will “eat up” an expanding portion of retirees’ savings and investments during their golden years.
Given that the average balance in a 401(k) retirement plan for a Baby Boomer turning 60 is now $100,000, financial planning experts suggest that workers will need to plan on funding retiree healthcare expenses in a variety of ways, such as health savings accounts. In addition, those who are able may need to continue working for employers that provide health insurance or retiree health insurance plans.
Volunteerism: Half of Americans age 50 to 70 want jobs that contribute to the greater good now and in retirement, according to a MetLife Foundation/Civic Ventures New Face of Work Survey. According to that survey, Baby Boomers will invent not only a new stage of life between the middle years and true old age but a new stage of work. “Boomers may give back as volunteers, but this survey suggests that their most important contributions to society will likely be through work,” said the study’s author. The planning implication is that Boomers should consider volunteering now, if able, to get a sense of what sorts of work and organizations will best suit them in retirement.
The reality for Baby Boomers is that they’re living longer, fuller lives. They need the help of planners now more than ever.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA. Kristine is President and Owner of Beacon Financial Advisors, a fee only financial planning firm located in Lee’s Summit, MO.
December 20, 2010
Good news for charitable IRA owners over age 70 ½… the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed last week by President Obama, extends the ability to give up to $100,000 directly from your IRA to a charitable institution, tax-free. Furthermore, because this bill was passed so late in the year, you get an extra month to complete the transfer and have it count for your 2010 taxes (transfers made in January 2011 will count as if they were made in 2010).
If you’re not familiar with charitable IRA donations, for the past few years taxpayers age 70 ½ or older have been able to make direct transfers of up to $100,000 per year from their IRA to a charity. By giving the money directly to charity (rather than receiving the distribution then later cutting a check to your favorite charity), taxpayers were able to exclude the IRA distribution from their income.
This was a great strategy for IRA owners who didn’t need the money from the required minimum distribution as they won’t have to pay a large tax bill for IRA withdrawals that they wouldn’t otherwise have taken (if not required to by the RMD rules).
The direct transfer strategy not only reduced their taxable income, but it also reduced their adjusted gross income, which resulted in many taxpayers having less of their Social Security income taxed; it also allowed taxpayers to qualify for credits and deductions that they would not have qualified for otherwise because their income was too high.
This IRA donation strategy was introduced in the Pension Protection Act of 2006 and was originally only intended to apply to the 2007 tax year. It was later extended to include 2008 and 2009. IRA owners who have taken advantage of this strategy were hoping that it would be extended for 2010, but for a while it didn’t look like it would happen. Thankfully, Congress included a provision in the tax bill passed last week to extend the ability to donate IRAs directly to charity for not only 2010, but 2011 as well.
Since this bill was passed so late in the year, you may have already taken your 2010 RMD and written a check to your favorite charity. You can still deduct your donation on Schedule A: Itemized Deductions (if you itemize your deductions). However, please note that you can’t do both. If you do a direct transfer to a charity from your IRA you will exclude the distribution from your income; if you write a check to a charity you will deduct it on Schedule A.
Thanks to Kay Bell at Bankrate.com for the update on RMD charitable donations in “How the New Tax Law Affects Your 2010 Taxes”.
Kristine McKinley is a fee-only financial planner located in Lee’s Summit, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at email@example.com.
December 17, 2010
“We had a responsibility to protect middle class families from a tax increase that would have hit their paychecks and harmed the recovery” – Treasury Secretary Timothy Geithner statement after the House passed the newest tax bill last night.
Nothing like waiting til the last minute…
Financial advisors have been preparing their clients for higher taxes as we waited for Congress to do something to stop the Bush era tax credits from expiring at the end of this year.
Given the slow recovery the economy is experiencing an increase in taxes that would have resulted had the Bush tax cuts not been extended would have been a tough blow, especially for the middle income class.
Congress finally passed a bill that would extend the Bush tax cuts, as well as introduce a few new ones. The bill, called the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 is expected to be signed by President Obama later today.
Here are some of the highlights of the new tax bill:
- The current tax rates have been extended for two years. They were scheduled to go up in 2011. The 10% bracket was going to disappear, and most of the other tax brackets were going to go up, which would have been devastating to taxpayers in this economy. Hopefully the economy will have grown and will be stable before tax rates do go up in 2013.
- The current capital gains and dividends rates have been extended through 2012. This will give many people an opportunity to sell positions that have a gain before capital gain rates go up.
- The Alternative Minimum Tax (AMT) exemption will remain at the higher levels for two more years, giving relief to middle income taxpayers who would have to pay AMT without this band-aid. I’m still looking for permanent AMT changes in the future.
- The new tax bill includes a payroll tax deduction for workers. Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.
- Unemployment benefits will be extended for another 13 months, giving people who have been unemployed for an extended time period more time to find another job (with unemployment rates still close to 10% this was to be expected).
- The estate tax has been reinstated for 2011, but the top tax rate will be 35% and the exemption amount will be $5 million per person and $10 million per couple. Without this tax bill, the estate tax would have been reinstated at 55% with only a $1 million exemption.
These are just a few of the provisions included in the new tax bill. The response to the new tax bill has been mixed. Some economists say this bill will boost economic growth and create millions of jobs. Others are calling this bill “weak stimulus”. While I’m not sure how much this bill will boost the economy, I do believe that if the Bush tax cuts were allowed to expire the higher taxes that would have resulted would have been very difficult for taxpayers in this struggling economy.
For more information on the new tax bill and how it will affect you, please visit Tax Cut Deal: How it Affects You at CNNMoney.com.
December 9, 2010
Why so much focus on Roth IRAs this year? The rules that determine who can convert a traditional IRA to a Roth IRA have been changed which will allow more people to convert to Roth IRAs. Before 2010, only people with modified adjusted gross incomes of less than $100,000 could convert. Starting in 2010, this income limitation has been lifted, meaning most people are eligible to convert their traditional IRAs to Roth IRAs.
In addition to the income limitation being lifted, the IRS is allowing taxpayers who do a Roth IRA conversion in 2010 to spread their taxes out over two years. So instead of paying it all on your 2010 tax return, you can pay half in 2011 and half in 2012.
This may seem like a no-brainer for people who want to do a Roth IRA conversion in 2010, but don’t leap before you look. Just because you can do a Roth IRA conversion in 2010 doesn’t mean you should do a Roth IRA conversion in 2010.