The Magic Age of 70 ½ and Your Required Minimum Distributions

 You could call it a rite of passage … one about which you have little choice. Taking a Required Minimum Distribution from your traditional IRA can’t be sidestepped or avoided without federal tax penalty.  The IRS keeps a watchful eye on distributions and navigating through the ins and outs is a must for all retirees who reach the magic age of 70 ½.  To complicate matters, SEP IRAs and SIMPLE IRAs are also subject to the same RMD rules.  On the flip side, Roth IRAs are an exception as no distributions are required during your lifetime. 

What is a Required Minimum Distribution(RMD)? 

• A specific minimum dollar amount that must be withdrawn every year after age 70 ½.  This number will change every year as account values change and life expectancy factors change.  RMDs are calculated by dividing your traditional IRA or retirement plan account balance (as of December 31 of the year prior to the calendar year during which the distribution must be made) by a life expectancy factor specified in IRS tables.  
• You can always withdraw MORE, but if you withdraw LESS you will be subject to federal penalty.
• RMD rules are designed to spread out IRA account distributions over your lifetime. 

Here’s the question I get asked most about RMD’s: “When must it be taken?” 

The short answer is the year you reach age 70 ½.  However, questions usually pop up because the RMD can be taken during the year you reach 70 ½ OR you can delay it until April 1st of the following year.  

For example: 

• Your 70^th birthday is December 2, 2012, so you will reach 70 ½ in June of 2013.
• You can take your first RMD during 2013, or you can delay it until April 1, 2014. 
• If you choose to delay until 2014, you will have to take two distributions during 2014 – one for 2013 and one for 2014.   

From a financial planning perspective, you might delay taking your first distribution if you expect to be in a lower income tax bracket in the following year, perhaps because you’re no longer working or will have less income from other sources.  On the other hand, receiving your first and second RMDs in the same year will increase income and could possibly push you into a higher federal income tax bracket for that year.  So the decision about whether to delay your first required distribution can be important, and should be based on your personal tax situation.

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This post contains general information meant to raise awareness of the importance of taking Required Minimum Distributions even if you don’t need or want the income.  Since RMD rules are very specific and IRS penalties punitive, my advice is to talk with your financial advisor or tax preparer to ensure you are meeting the annual distribution requirement.

Giving Charitably and Doubling Your Tax Benefit

 Many of you are inclined to make large charitable contributions by writing a check.  If the cash is not already sitting in cash, you many need to go to your taxable investment account to determine what to liquidate to create the cash for the donation.  Sure, this can provide you with an itemized deduction to potentially decrease your taxable income*, but might there be a way to make an even bigger impact on your current and future tax liability?

If you hold appreciated stocks or mutual funds in a taxable investment accounts, why not try to avoid paying capital gains tax when you sell to create the cash for your charitable donation?  Did you know that most charitable organizations, including churches and synagogues, can accept a donation of shares of a stock or mutual fund as a gift?  And did you know that in donating this way, you  can avoid paying capital gains tax on a security, and so can the qualified non-profit receiving organizations? 

So, by using an appreciated security, not only can you avoid capital gains tax that could be significantly higher than the 15% top rate we’ve had in recent years, but you may retain the right to use the value of the security donated as an itemized deduction. Double bonus!  (Triple bonus if this also allows you to tax-efficiently reduce an over-weighted position in your portfolio).

Before you write that big check to your favorite charity, consult your financial planner and tax advisor to see if opportunities exist to double your tax benefit by using appreciated securities instead.

This is how the capital gains rates look under the American Taxpayer Relief Act:

0% Capital Gains: 

Those in the 15% marginal tax bracket ($36,250 single filers/$72,500 married filing jointly)

15% Capital Gains:

Those in the 25%, 28%, 33%, or 35% marginal brackets

Those over $200,000/$250,000 but below $400,000/$450,000 are subject to the Medicare surtax, which means that effectively capital gains (and qualified dividends) are taxed at 18.8%

20% Capital Gains:

Those in the 39.6% marginal bracket ($400,000/$450,000).  Because of the Medicare surtax, this means that effectively, capital gains (and qualified dividends) are taxed at 23.8% (and up to 26% during the personal exemption and itemized deduction phase outs).

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

*Note that the American Taxpayer Relief Act of 2012 implemented a phase out of itemized deductions for taxpayers with taxable income of over $250,000 for single filers/$300,000 married filing jointly.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

How Will the Fiscal Cliff Deal Impact You?

 At the last second of the so-called eleventh hour, the Fiscal Cliff deal known as the American Taxpayer Relief Act of 2012 was forged. Because it is still relatively fresh you, no doubt, have questions and are wondering just how the provisions might impact your bottom line. Here’s a basic breakdown of the changes for taxpayers:

• Did taxes go up or down?  Well, it depends upon your measuring stick and perhaps political persuasion.  Bear with me – here is the timeline. At midnight on 12/31/12 the Bush era tax cuts expired, meaning in theory income taxes for most Americans increased.  On 1/1/13 Congress enacted new law and reduced income taxes for most Americans.   According to the Tax Policy Center, a nonpartisan research group in Washington, about 0.7 percent of households (those making over $500k) will be subject to an income tax increase in 2013.
• Payroll Tax Impact? However, if your measuring stick compares what you expect to pay in 2013 versus what you paid in 2012…..most will experience higher taxes (about 77% of households).  This is due to the fact that payroll taxes are being restored.  For example, a family earning $100,000 will pay roughly $2,000 (2%) more in payroll taxes in 2013 over 2012.
• What’s your number?  There are different income (taxable income) thresholds for various income tax provisions that will be important in 2013.  Here are some that you and your planner will want to review:
  • $200,000 single/$250,000 married filing jointly:
    • New Medicare surtax of 3.8% on net investment income
    • New 0.9% additional tax on wages above the thresholds
  • $250,000 single/$300,000 married filing jointly:
    • Limitations on personal exemptions and Itemized deductions restored in 2013.
    • The net effect is approximately a 2% increase in marginal rates for those above the thresholds.
  • $400,000 single/$450,000 married filing jointly:
    • New top marginal bracket of 39.6%
    • Capital gains and qualifying dividends taxed at 20% up from 15%. Because of the Medicare surtax, this means that effectively capital gains and qualified dividends are taxed at 23.8%.
• Estate & Gift Tax:   The new law makes permanent the exemption equivalent at $5.12M and top rate up to 40% from 35%.  Also, "portability" between spouses is now permanent. 
• Annual gift exclusion: $14,000 up from $13,000
• Charitable IRA:  Those over 70.5 may again choose to make tax free gifts up to $100,000 from their IRA to qualified charities.
• Remaining issues to be resolved:  Based on what the new law doesn't change, we are sure to witness further confrontation over spending cuts and the debt ceiling. 

For more information pertaining to your individual situation, feel free to contact me at timothy.wyman@CenterFinPlan.com.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  You should discuss any tax or legal matters with the appropriate professional.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

4 Things Corporations Can Do With Their Cash

 After a few very profitable years, many corporations have record amounts of cash on hand.  Wouldn’t this be a nice problem?  I have yet to experience this but feel I am up for the challenge.  I always have an idea of what I could do with extra money...a cute pair of shoes, turn my bathroom into a Tuscan escape, or even set foot on Antarctica.  I could go on for days.  Publicly traded Corporations, on the other hand, have a much more limited list of what they can do with extra cash on the books.  They can:

1. Invest in their own securities through stock buyback programs
2. Invest in capital, Research and Development, or hire more employees
3. Acquire other companies
4. Return the money to shareholders in the form of dividends

The first point is one I would like to dwell on.  Generally, when stock buybacks are announced, investors assume that this will automatically add value to the stock price.  This is logical, fewer shares outstanding means that the remaining shares own a larger slice of the company.  However, this is not always the case.  Often repurchased shares go right back out as part of compensation packages.  Also companies don’t always complete share repurchase programs if they need to use the cash in another way.

The irony is companies are usually flush with cash after business has been booming for a couple years or longer and after their stock prices have already jumped substantially.  This is when they tend to go on their shopping sprees.  When prices are down, in the midst of a crisis like early 2009, companies usually hold on to any cash they may have left, fearfully, rather than taking advantage of short-term depressions in their stock prices. 

David Zion an analyst and accountant for Credit Suisse came out with an excellent report on many stock buybacks over the past decade.  It shows that corporations are just as prone to poor investment behavior with their cash as many investors (maybe even worse).  Looking at one of the largest buyback programs over the eight years of the study, according to the Credit Suisse report, Hewlett Packard (HPQ) averaged an annualized loss of 11.3%!

Many experts are postulating that an increase in dividend taxes, which may occur next year, could lead to an increase in corporate stock buybacks (capital gains could be taxed at a much lower rate than dividends).  Be very skeptical, though, since stock buybacks are no guarantee of generating capital gains!

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James.  Raymond James Financial Services, Inc., Its affiliates, officers, directors or branch offices may in the normal course of business have a position in securities mentioned in this report.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  As of 12/5/12 close, HPQ was trading at $13.82/share.  HPQ is not closely followed by Raymond James Research.

Year End Tax Planning: Capital Gains -- Good or Bad?

 The holiday season is the perfect antidote to the sadness of yet another beautiful fall ending.  Once the last leaves have fallen off of the trees and the smell of them burning in our fire pits has wafted away, it is promptly replaced with good food, family and the smell of something baking in my oven.  The holiday season is an exciting time of the year with many of us frantically buying Christmas presents, and some even planning New Year’s celebrations.   However, in the middle of the holiday hustle and bustle, it is important to stop and put your taxpayer hat on.

Typically from mid-November to the end of the year investment companies must pay out their capital gains distributions.  As you can see from the chart below, the majority of firms tend to distribute in December.

If you own mutual funds in a taxable account and the distributions are anticipated to be large, you should weigh the advantages and disadvantages of owning the investment and incurring the capital gain.  By incurring the capital gain you are increasing your basis in the investment.  This year is a unique year with the complications of the fiscal cliff.  It may be a good time to incur those gains this year to have fewer in coming years!   You will want to consult with your tax advisor and financial planner to determine this for yourself.

Many companies will release estimates in October and November as a service to their shareholders, but not all do.  You can typically find these by checking the company’s website.  So take some time out from all the shopping mall traffic this holiday season and talk to your financial planner today!

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Wile E. Coyote and the Fiscal Cliff

 Have you ever had one of those dreams where you were just about ready to fall off a cliff … and thankfully you woke up just before looking like Wile E. Coyote?  Known as “The Coyote” to many who grew up watching “The Road Runner” and “Looney Tunes”, Wile E. Coyote fell off more than his share of cliffs in many an episode. 

Hopefully U.S. taxpayers will not end up like The Coyote as our nation faces a “fiscal cliff”.   While Chuck Jones created Wile E. Coyote, we have Ben Bernanke, Federal Reserve Chairman, credited with introducing the fiscal cliff metaphor.

The fiscal cliff essentially stands for the possible economic challenges coming should Congress fail to act on some important measures, most notably: 

• The expiration of the Bush Tax Cuts
• The expiration of the 2% reduction in payroll taxes
• Scheduled (forced) federal government spending cuts   

Add ‘em up and in the profound words of The Road Runner … beep beep.  Congress must act or the above measures are set to become law. If Congress doesn’t address the fiscal cliff successfully, economic growth as measured by gross domestic product in 2013 will be muted at best and contracted at worst.  

Without taking a political position or laying blame, Congress has unfortunately shown an inability to ACT in the past. Consider this your warning sign: Fiscal cliff ahead! You can keep running like The Coyote, or you can stop and pay attention to the sign. Proper advanced planning is critical in achieving your most important financial and life goals.  If you would like more information, email me and request a copy of our “Financial Planning in an Uncertain Tax Landscape” white paper from our partner Raymond James.  If you would like to schedule a time to discuss your specific planning needs, feel free to call or email to schedule a meeting. 

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Tax Records -- Trash It or Stash It?

Whether you’ve just finished your tax preparation regimen or you’re pushing the limits and still gathering your information, you’re likely facing a pile of papers on your home office desk (or perhaps the kitchen table).  If you haven’t already gone through the process of organizing your financial records in 2012, now is the time. 

In a previous post, I provided financial document retention guidelines that will be helpful in the tax-time clean-up process.  When cleaning up the tax mess, here’s what you should keep:

• Records of Income - shred your paystubs once you have your W-2; keep your W-2 with a copy of your tax return.
• Interest, Dividend and Capital Gain/Loss Records – keep until the appropriate 1099 is received.  Keep year-end statement for investment accounts to track progress, and purchase confirmations until the investment is sold.
• Charitable Donations and Deductible Expenses – Keep with your tax return.
• Real Estate-Related Papers – keep all records for 3 to 6 years after the property is sold and all taxes paid.  Although most real estate sales these days won’t have capital gain implications (current tax law allows up to a $250,000 gain for single filers and $500,000 for joint filers before there is income tax assessed on the gain), you may be able to use a loss on real estate for a tax advantage.
• Tax Returns – Keep them forever.

While it may seem that there are more records you need to keep than those you can shred, remember there are ways to lessen the burden on your space.  Personal scanners are inexpensive and can allow you to electronically file and store these important documents; just be sure to back up your files. Or, if your financial advisor has an electronic document management system, he or she may be willing to hold a copy of your records in your client file.

Whether it’s the New Year or Tax Time, or another time during the year that triggers your financial record keeping clean-up, use our easy-to-use record retention guidelines and make it an annual event! You might even consider printing out this blog and filing it away for easy reference when tax time rolls around again.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Before You Tell Your CPA “You’re Fired!”

It’s that time of year again … when you gather up all of your tax documents, send them to your CPA or tax preparer and wait for the results.  Will you pay or will Uncle Sam be sending you a check?  For those that find themselves owing money on April 17, the first thought many times is, “Help – I need a new tax preparer!” Before you go firing anyone, check a few important lines on your tax return: 

• Line 43:  Did your taxable income increase over last year? 

• Line 44:  What is the total amount of tax owed for the year? 

• Line 72:  How much was withheld from your various income sources throughout the year? 

Remember, it is possible to pay less income tax than you did last year and yet OWE money to the IRS at tax filing time. How can that be?  Perhaps you simply had less withheld over the year.  

Here’s an example:

Joe and Sandy had to pay $2,000 more at tax time then they did last year.  However, the “extra” tax wasn’t really extra at all.  The total tax due for the year was about the same as last year.  The difference?  They had less tax withheld from their wages, pensions, or IRA distributions this year.  So, they owed the same amount for the year, but they paid (read: withheld) less throughout the year.  So, don’t go firing your tax preparer just yet! You may need to adjust your withholding via Form W-4 to avoid any surprises next April.

You should discuss any tax or legal matters with the appropriate professional.

Logic & Taxes Don’t Mix

A question I get a lot at income tax time is, “Can I deduct investment management fees?” While this should be a straight forward answer…we are talking about the tax code where nothing is simple.  As a law professor of mine once said, never put logic and income taxes in the same sentence.  Your tax preparer is the best person to consult with on this issue – but in the meantime, here are some guidelines:

The first place to start when trying to determine if an investment management fee is deductible or not is to determine the type of account (Taxable, Traditional IRA, Roth IRA, 401k, etc.).

Investment management fees paid in taxable accounts (such as single, joint or living trust accounts) are a tax deductible expense and reported as a miscellaneous itemized deduction on Schedule A of Form 1040.  That’s the easy part – but not the whole story. There is more to the story because not everyone can actually benefit from miscellaneous itemized deductions.  In order to benefit from your miscellaneous itemized deductions, in aggregate they must exceed 2% of your Adjusted Gross Income. As an example, if you have Adjusted Gross Income of $75,000, then the first $1,500 of miscellaneous itemized deductions are not deductible – only the balance can be deducted.  To further confuse the issue, if you are subject to the Alternative Minimum Tax some or all of these deductions could be disallowed as a tax preference.

For accounts such as Traditional IRA’s, ROTH IRA’s, and 401k’s, my interpretation of the tax code is that investment management fees paid by assets in the account are not deductible nor are they considered taxable income. In summary: not deductible (but you don’t pay income on the fee either). That said, some will argue that the fee is deductible, just as it is for taxable accounts discussed above. Lastly, some tax professionals will suggest that the fee is deductible if paid with money outside of the IRA. For example, some tax professionals will suggest that fees attributed to IRA type funds be paid via a separate check making them deductible.

As you can see, there are some gray areas on this topic.  What can you do?

• Be sure to share the fact that you paid investment management fees with your tax preparer
• Break the fees out by account type (taxable versus other types)

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

Why Age Matters with Michigan's New Pension Tax: Updated

Originally posted December 26, 2011

Michigan held out...they protected people collecting pensions for as long as possible. But the tax breaks are over, as Michigan follows suit with many other states in the nation by taxing pensions. It all begins January 1, 2012. Not all retirees with pension income are affected. However, if your pension income is subject to Michigan tax, under the new rules, you will need to withhold Michigan tax in the amount of 4.35%.

Here’s how the new law may affect you --

1.  IF YOU WERE BORN BEFORE 1946

No change in current law

• Social Security is exempt
• Senior citizen subtraction for interest, dividends and capital gains is unchanged
• Public pension is exempt
• For 2012 private pensions subtract up to $47,309 for single filers and $94,618 for joint filers.    

What will happen:  No Michigan tax is withheld from pension payments unless you request it. 

 2.   IF YOU WERE BORN BETWEEN 1946 AND 1952

Before the taxpayer reaches age 67

• Social Security is exempt
• Railroad and Military pensions are exempt
• Not eligible for the senior citizen subtraction for interest, dividends and capital gains.
• Public and private pension limited subtraction of $20,000 for single filers or $40,000 for joint filers. 

After the taxpayer reaches age 67 (**Will first occur in 2013**)

• Social Security is exempt
• Railroad and Military pensions are exempt (but see below)
• Not eligible for senior citizen subtraction for interest, dividends and capital gains
• Subtraction against all income of $20,000 for single filers and $40,000 for joint filers.
  • Not eligible for this income subtraction if choosing to claim a military or railroad pension exemption.

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

TAXPAYER EXAMPLE:

Tom and Nancy Jones are a married couple. Tom was born in 1947, is retired and collects social security and a pension.  Nancy was born in 1951, and is still working.

Tom’s Pension = $30,000

Tom’s Social Security = $20,000

Nancy’s wages = $40,000 

Will the Jones' be subject to pension tax in this scenario? 

Not under current tax law

• Pension subtraction = $30,000
• No withholding necessary on pension
• Social security is exempt   

3.  IF YOU WERE BORN AFTER 1952

Your pension will be subject to Michigan income tax until you reach age 67. 

Before the taxpayer reaches age 67

• Social Security is exempt
• Railroad and military pensions are exempt
• Not eligible for the senior citizen subtraction for interest, dividends and capital gains
• Not eligible for public or private pension subtraction

After taxpayer reaches age 67 (**Will first occur in 2020)

• Not eligible for senior citizen subtraction for interest, dividends and capital gains
• Not eligible for public or private pension subtraction
• Income exemption election:
  • ELECT exemption against all income of $20,000 for single filers or $40,000 for joint filers
    • No exemption for Social Security, military or railroad retirement
    • No personal exemptions

**OR**

•   ELECT to exempt Social Security, military and railroad pension.  May claim personal exemptions.

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

As always, our advice is to work with your professional advisors if you have any questions about the tax law changes and your pension income. Laurie.Renchik@Centerfinplan.com or Julie.Hall@Centerfinplan.com

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

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Source:  www.michigan.gov