Monthly Archives: February 2013

How to Make Objective Retirement Estate Planning Decisions

Cover3ATRA’s Retirement & Estate Planning Impact
What changes did the fiscal cliff deal put into play starting in 2013?


The American Taxpayer Relief Act of 2012 brought major changes to federal tax law, and it profoundly impacted retirement and estate planning. Here is an overview of seven big changes particularly relevant to retirees and/or those approaching retirement age.

Federal income tax brackets were altered. Where we once had six tax brackets, we now have seven for the foreseeable future. In addition to the 10%, 15%, 25%, 28%, 33% and 35% brackets, we now have a 39.6% top bracket for individuals with incomes greater than $400,000 and married joint filers with incomes exceeding $450,000.1,2

Additionally, a health care surtax kicked in for high earners. In 2013, a 3.8% Medicare surtax will be levied on the lesser of either a) net investment income or b) the amount of MAGI exceeding $200,000 for single filers, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. MAGI is not simply your wages; it can also include bonuses, taxable interest, RMDs taken from a traditional IRA or an employer-sponsored retirement plan, “unearned” net investment income such as dividends or net capital gains, passive income from a partnership, and even rents and royalties.3

The Medicare payroll tax also rises 0.9% for employees after their MAGIs exceed the $200,000 individual threshold this year. Your employer will deduct 1.45% in Medicare payroll taxes from your paycheck up until that threshold, and 0.9% more from your paycheck once your wages surpass it. While individuals may have MAGIs of $200,000 or less, a married couple filing jointly may have a MAGI that surpasses the applicable $250,000 threshold, with the 0.9% surtax therefore applying.3

Federal estate tax laws were modified. Estate taxes have risen; we now have a 40% top estate tax rate and a $5.25 million individual exemption (which is indexed for inflation, of course).1,4

The big news here: the individual estate tax exemption remains portable. In other words, any unused portion of a $5.25 million individual exemption may be transferred to the surviving spouse at the death of the first deceased spouse.4

Taxes on investment income are higher for the wealthy. Capital gains and dividend taxes are still set at 0% for those in the 10% and 15% federal income tax brackets, 15% for filers in the 25%, 28%, 33% and 35% brackets, and 20% for those in the new 39.6% bracket. Previously, those in the highest tax bracket faced 15% capital gains and dividend taxes.4

IRA charitable rollovers have returned. Gone in 2012, they are back for 2013 (and could stick around for subsequent tax years). If you are an IRA owner who will be 70½ or older in 2013, you may arrange an IRA charitable rollover (technically called a Qualified Charitable Donation) of up to $100,000 this year. You do this by asking your IRA custodian to send the amount of the donation directly to the charity or qualified non-profit organization. You can thereby subtract the gifted amount from your adjusted gross income, and the donation can also count toward your RMD. (Don’t just take a distribution from your IRA and give the money to charity yourself – then the money will be taxed as regular income.)5

Roth conversion rules were expanded for workplace retirement plans. It is now easier to make an in-plan Roth rollover inside your 401(k), 403(b), or 457(b) plan – although so far, this option has been met with a shrug by most retirement plan participants who are eligible. (The retirement plan has to allow a Roth option in the first place.) The conversion is permissible at any age and may include all pre-tax salary deferrals. Any account balance so converted must be included in the income of the taxpayer in the year of the Roth conversion.6,7

The AMT was finally indexed for inflation. The irritating Alternative Minimum Tax has been permanently patched, and the patch is retroactive to the beginning of 2012, thereby saving about 34 million taxpayers from an AMT threat on their 2012 1040s. For 2013, AMT exemption levels are $51,900 for single filers, $40,400 for those married and filing separately, and $80,800 for joint filers and qualifying widowers.1,2

1 – [1/11/13]
2 – [1/11/13]
3 – [1/4/13]
4 – [1/2/13]
5 – [1/2/13]
6 – [1/8/13]
7 – [1/10/13]

Find Your Inner Deductions

Common Deductions Taxpayers Overlook
Make sure you give them a look as you prepare your 1040.

By Greg Oliver

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit (as was the case when some filers ignored the Making Work Pay Credit), you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work in 2012? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job in 2012, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence in 2012, you can take a deduction for job-related moving expenses even if you don’t itemize.1

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

Health insurance & Medicare costs. About 7% of us pay health coverage costs out of pocket. If you are in that 7%, you may write off 100% of your premiums as an adjustment to your business income per the Small Business Jobs Act of 2010. That write-off privilege extends to you, your spouse and 100% of your dependents.2,3

Some small business owners have qualified for Medicare. If you are one of them, and you and/or your spouse aren’t eligible for coverage under an employer-subsidized health plan, then you may deduct premiums paid for Medicare Part B, Medicare Part D and Medigap policies. You don’t have to itemize to get this deduction, and the 7.5%-of-AGI test for itemized medical costs isn’t relevant to this.1

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid in 2012 per the fiscal cliff bill passed into law on January 2.1

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter in 2012? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

Education & training expenses. Did you take any classes related to your career in 2012? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs. Even certain periodical subscriptions may qualify for such deductions.2

Eating out on business. The cost of a business lunch, breakfast or dinner – or a lunch, breakfast or dinner associated with business development – qualifies for an itemized deduction.2

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile for 2012, and tolls and parking fees qualify as well).1

Superstorm Sandy losses. The IRS allows filers living in federally declared disaster areas to file casualty claims for the year in which the disaster occurred, and the flexibility to amend the previous year’s return. This means that you can deduct 2012 casualty losses on either your 2011 or 2012 federal tax return.4

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs and take a 2012 mileage deduction ($0.555 per mile plus tolls and parking fees).1

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $35,000 in death taxes, you can deduct that $35,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $17,500 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on. If you withdrew such inherited assets in 2012, you have the opportunity to claim the appropriate deduction for the 2012 tax year.1

And now, some opportunities for quasi-deductions that often go overlooked…

The child care credit. If you paid for child care while you worked in 2012, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

Parents as dependents. If you have parents whose taxable incomes are underneath the $3,800 personal exemption for 2012 and you pay more than half of their support, they might qualify as dependents on your federal return even if they live at a different address.4

Filing status shifts. Are you a single filer? Do you have a relative or one or more children who qualifies as a dependent? If so, you could change your filing status to head of household, which could save you some tax dollars.4

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)1

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

1 – [1/3/13]
2 – [1/18/13]
3 – [1/23/13]
4 – [1/23/13]

Speed up IRA success


Important dates for your IRA are coming in April.


Many of us associate April with taxes. We should also associate it with IRAs, for April is the month with the deadlines for IRA contributions and mandatory IRA withdrawals.

The deadline for your 2012 IRA contribution is April 15, 2013. For tax year 2012, you can contribute up to $5,000 to your Roth or traditional IRA. One exception: If you turned 50 in 2012, your Roth or traditional IRA contribution limit for 2012 is $6,000. You get 15½ months to make your IRA contribution for a given tax year. You can make your 2013 IRA contribution at any time until Monday, April 15, 2014.1

Have you already made your IRA contributions? Hopefully, you contribute the maximum annually and make your contribution soon; the earlier that money is invested, the longer it can work for you.

Be sure to indicate the year of the IRA contribution on the check. This seems pretty basic, yet is too often overlooked. Write “2012 IRA contribution” or “2013 IRA contribution” or something equally simple and clear on your check (and include your account number on the check to help your IRA custodian). If you’re making your contribution electronically, be sure this gets communicated. If you don’t tell your IRA custodian what year the contribution is for, it will be accepted as an IRA contribution for the current year per IRS guidelines.2

Avoid racing against the clock. If you wait until the last minute, you may feel safe mailing your 2012 IRA contribution check to your IRA custodian with an April 15, 2013 postmark. That feeling might be unwarranted. Postmark deadlines for prior-year contributions vary among IRA custodians, and sometimes checks that arrive after the deadline count as current-year contributions regardless of postmark. Why not save yourself the risk and mail your 2012 contribution in with plenty of time to spare? 2

The recharacterization deadline for 2012 Roth IRA conversions is October 15. If you converted a traditional IRA to a Roth IRA last year and need to undo it for tax purposes, October 15 is the absolute deadline to “recharacterize” the Roth account. If you need to do this, please request a recharacterization with your IRA custodian well before October 15.3

The RMD deadline is April 1. If you turned 70½ in 2012, you have until April 1 of this year to take your first Required Minimum Distribution from your traditional IRA; that is, your first mandatory income withdrawal. Your IRA custodian should have notified you of this deadline at the end of January, and many IRA custodians will typically calculate your annual RMD for you and offer to send you a check for the amount. (If not, many of them have online calculators or similar tools that will help you figure out your RMD amount.) If you have a Roth IRA, you are never required to take an RMD (during your lifetime) and you can still keep contributing to it after age 70½. Keep the deadlines in mind; April will be here before you know it.4

Greg Oliver 093475-294075=921
1 – [1/2/13]
2 – [3/10/11]
3 – [1/2/13]
4 – [1/2/13]

The Wrong Beneficiary could Spark World War III?

The Right Beneficiary
Who should inherit your IRA or 401(k)? See that they do.


Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.3

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

Citations.G. OLIVER 8023-058-0485-40584-0584-058 OH
1 – [6/10/11]
2 – [1/30/13]
3 – [1/30/13]
4 – [9/10]
5 – [8/1/12]