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Wait for November for Clarity on 2013 Tax Policy

April 11, 2012 12:14 pm Published by Leave your thoughts

Now that the “payroll tax holiday” has been extended through the rest of 2012, can we expect other significant tax legislation from Congress? Not before the national elections.

Although our nation’s lawmakers may still act to keep several other expiring tax provisions, it seems unlikely Republicans and Democrats will reach consensus on the best tax policy for the country before November. Once voters have been heard, Congress will probably get down to business.

Their task is daunting. Several key tax law breaks are scheduled to be scaled back in 2013 if there’s no congressional action.

  • The two top tax brackets for ordinary income in 2012 are 33% and 35%. Absent new legislation, the two top rates in 2013 will rise to 36% and 39.6%, respectively.  
  • Currently, the maximum tax rate on long-term capital gains and qualified dividends is 15%. These “Bush tax cuts” are set to expire after 2012 when the capital gains rate will jump to 20% and dividends will be taxed at ordinary income rates.
  • For 2012, the maximum estate tax exclusion is $5.12 million, and a surviving spouse may take advantage of any leftover exclusion of the spouse who died. But that “portability” is scheduled to end next year, and the exclusion will revert to $1 million.

We still could see wholesale changes in these tax rules...but not until later in the year.

U.S. Households Cheer Stronger Employment Data

April 11, 2012 11:06 am Published by Leave your thoughts

An improving jobs picture sent consumer confidence up for six straight months through February, as Americans gained hope the economy is improving. Even people who said their own finances remained in poor shape felt more hopeful about the overall economy.

The University of Michigan’s Consumer Sentiment Index rose to 75.3 in February, up from a 31-year low of 54.9 in August 2011. That followed news that America’s unemployment rate had fallen to 8.3% in January. It had been at 9.1% in August, down from a 2009 high of 10%.

Consumer sentiment rose despite the fact that more households said their income had dropped from the previous month, and a majority said they did not think their income would grow during the next year.

Most economists are backing up this consumer optimism. A survey by the National Association for Business Economics in late February showed economists expect unemployment to remain at 8.3% this year. That’s a significant improvement from their November forecast of 8.9%.

The economists also predict job growth will accelerate next year and the jobless rate will fall to 7.8%. They forecast the U.S. economy will grow 2.4% this year, up from 2011, when economists believe the economy grew 1.6%.

The improving outlook among consumers and economists bodes well for 2012, as stock markets tend to rise on positive sentiment.

Getting a Life Insurance Check-Up

March 26, 2012 12:28 pm Published by Leave your thoughts

Do you need to update your life insurance protection? You may be surprised to learn that your existing policies are no longer sufficient to meet your needs.

If you’re like many people, you probably took care of your life insurance years ago. You bought as much coverage as you felt you needed, and then you stashed the contract in a drawer or safe somewhere and pretty much forgot about it. But it would be unusual if your family financial situation hadn’t changed significantly since then. For example, you might now have too little insurance if you’ve added another child or two to your brood. But it could also work the other way. If your children have left the family nest or you’ve retired, you may be able to cut the amount of your coverage.

Now is as good a time as any to dust off that old policy and review it. You may find it doesn’t reflect one or several major life events you’ve experienced since you acquired the coverage. Those might include:

  • You have married, divorced, or separated;
  • There has been a birth, death, disability, marriage, or divorce involving someone else in your family;
  • One or more of your children has completed college or graduate school;
  • You bought or sold your principal residence, a vacation home, or investment real estate;
  • You switched jobs, started your own business, or retired; or
  • There has been a big shift in your financial or business circumstances.

Other family changes could also have an impact. For instance, you may have taken on the care of an elderly or disabled relative, thus adding to your financial commitments and increasing the amount of replacement income that would be needed if you died. Meanwhile, if you’ve paid off your mortgage, you may be able to reduce your coverage.

When you review your policy, examine it as if you were buying life insurance for the first time. It’s your projections for the future that are the crucial factors—not the way things were a few years earlier. And don’t forget to review all of your life insurance policies, including any group coverage you get through your employer (or your spouse’s employer), taking into account recent estate tax law changes.

The amount of coverage you need is likely to drop as you get older, and you may eventually decide you can do without life insurance, though it could also play a role in your estate plan. Also, consider the return you may receive on cash value, especially with whole life policies. What’s certain is that your financial situation will continue to evolve, so it makes sense to make an insurance review a regular event—if you mark it on your calendar each year, you won't forget to conduct this important checkup.

Six Disability Facts to Consider

March 21, 2012 11:57 am Published by Leave your thoughts

You probably already understand the importance of having life insurance. The proceeds from a life policy can help cover your family’s current expenses and may provide a cushion for the future if you die prematurely. But another kind of coverage—disability income (DI) insurance—is often ignored or neglected. And that’s a mistake, because DI insurance can be even more vital than life insurance in maintaining a family’s financial well-being. A new white paper from the Council for Disability Awareness, an independent nonprofit group, provides these six startling facts.

1. More than one in four of today’s 20-year-olds will become disabled before they retire. (Source: Social Security Administration, Fact Sheet, March 18, 2011)

2. Some 8.5 million disabled U.S. wage earners were receiving Social Security Disability Insurance (SSDI) benefits at the end of September 2011. (Source: Social Security Administration, Office of Disability and Income Security Programs)

3. Ninety percent of new long-term disability claims are the result of an illness, not an accident, and fewer than 5% of claims are work-related. (Source: 2011 Council for Disability Awareness Long-Term Disability Claims Study)

4. The average long-term disability claim lasts 31.2 months. (Source: 2010 GenRe Disability Fact Book)

5. New applications for Social Security Disability Insurance (SSDI) benefits increased 27% from 2008 to 2010. (Source: Social Security Administration, Office of Disability and Income Security Programs)

6. About 100 million workers lack private disability income insurance. (Source: Social Security Administration, Fact Sheet, March 18, 2011)

If you don’t have DI insurance, either through a policy from your employer or one you’ve bought on your own, you can choose from among a wide array of products whose costs and benefits vary widely. Here are several factors you’ll need to take into account.

  • How a policy defines “disability” is crucial. The best policies pay benefits if you can’t work in your chosen profession, and they don’t consider the nature of an injury.
  • DI insurance policies generally require a waiting period before paying benefits, and a shorter waiting period normally translates into higher premiums.
  • Typically, a policy will state how long and under what circumstances it will pay disability income benefits. It could, for example, provide benefits only until you qualify to receive Social Security retirement benefits.
  • If you opt for a noncancellable policy, the insurer can’t drop you off its rolls if your health declines.

Finally, don’t be seduced by the low costs of a fly-by-night operation. You’ll be better off opting for an experienced company with a good reputation.

Tips on Long-Term Care Insurance

March 21, 2012 9:40 am Published by Leave your thoughts

The cost of an extended nursing home stay can be frightening. In some parts of the country, annual expenses may run to $100,000 or even more. At that rate, it doesn’t take long for a lifetime’s savings to be depleted. That’s why most long-term care ends up on the tab of Medicaid, the joint federal-state health plan for the poor. But your family will qualify for help only after you’ve exhausted most of your assets.

Advance planning can help you avoid dire financial consequences. For instance, you could purchase a long-term care insurance (LTCI) policy for yourself or a relative to defray some or all of the nursing home costs. That can help preserve family funds and put off panic sales of investments. Still, premiums for LTCI are based on several factors, including the health of the person who’s being insured, and can be pricey. And the older you are when you get this insurance, the more you’ll pay.

What do you know about long-term care insurance? This brief quiz can test your knowledge.

1) Benefits under an LTCI policy will begin to be paid:

  1. Once the insured becomes ill or disabled.
  2. Once the insured applies for benefits.
  3. When the policy’s lifetime amount is fully paid up.
  4. After a waiting period has been satisfied.

2) Which of the following does NOT affect premium cost?

  1. The age of the insured
  2. The value of the insured’s retirement assets 
  3. The length of the benefit period
  4. The amount of the daily benefit

3) To qualify to receive LTCI benefits:

  1. The insured must sell any primary residence.
  2. The insured must need assistance with basic daily activities.
  3. The family must elect to begin coverage.
  4. The family must obtain permission from a nursing home.  

4) What is the tax treatment of LTCI policies?

  1. Premiums are fully tax-deductible.
  2. Premiums are tax-deductible only by retirees.
  3. Premiums may be partly tax-deductible.
  4. Premiums are never tax-deductible.

5) The amount that can be used to defray nursing home costs:

  1. Depends on the daily benefit.
  2. Depends on the insured’s age.
  3. Depends on the retirement assets owned by the insured.
  4. Is limited by state law.

6) A policy that is “guaranteed renewable” for life means that:

  1. It can’t be voided if the insured’s health changes.
  2. It can’t be voided whether or not the premiums are paid.
  3. It will still pay benefits after the lifetime limit has been exceeded.
  4. Premiums can never increase.

7) LTCI policies are generally offered by:

  1. Banks.
  2. Estate planning attorneys.
  3. Medical practitioners.
  4. Financial services firms.

Answers: 1-d; 2-b; 3-b; 4-c; 5-a; 6-a; 7-d

Knowhow on Year-End Tax Planning

March 12, 2012 12:53 pm Published by Leave your thoughts

There’s no time like the end of the year for tax planning. By making a few small adjustments, you may be able to cut your tax bill for the current year by hundreds or even thousands of dollars. Sometimes, simply pushing up a payment or postponing income by just a few days could make all the difference.

Of course, every situation is different and there are no right or wrong strategies to use across the board. For instance, if you expect to be in a higher tax bracket in 2012 than you are in 2011, you might defy conventional wisdom and accelerate taxable income into the current year.

To further complicate matters, there is a possibility—admittedly remote—that Congress might reform the tax code by the end of 2011, and your best-laid plans could be thwarted. Still, you shouldn’t hesitate to implement fundamental tax strategies. Typically, individuals may benefit from shifting charitable deductions, medical expenses, and the like, while small business owners might purchase equipment or supplies at year-end to boost deductions for 2011.

Do you think you know the basics? Here’s a brief quiz to test your knowledge.

1) If you install qualified energy-saving improvements in your home in 2011:

  1. You may qualify for a 10% credit.
  2. You may qualify for a 30% credit.
  3. You may deduct the full cost.
  4. You may depreciate the cost over time.

2) For 2011, unreimbursed medical and dental expenses:

  1. Are completely deductible
  2. Are completely nondeductible
  3. Are deductible only in excess of 7.5% of adjusted gross income (AGI)
  4. Are deductible only in excess of 10% of AGI

3) If you donate used clothing to charity, you can generally deduct:

  1. The amount you paid for the clothing
  2. The amount that charity receives for selling the clothing
  3. The fair market value of the clothing
  4. Zero

4) If you charge a charitable gift of $100 in December 2011 and you pay the credit card bill in January 2012, how much can you deduct in 2011?

  1. Zero
  2. $25
  3. $50
  4. $100

5) The alternative minimum tax (AMT) may be triggered by:

  1. An overabundance of “tax preference” items
  2. Failure to pay sufficient estimated tax
  3. Filing separate tax returns, if married
  4. Excess expenses in the last quarter of the year

6) Which of the following is not deductible by individuals in 2011?

  1. State and local income taxes
  2. Credit card interest
  3. Miscellaneous expenses (subject to limits)     
  4. Casualty losses (subject to limits)

7) Which of the following is true about a holiday party for all employees?

  1. A small business can deduct none of the cost
  2. A small business can deduct 25% of the cost
  3. A small business can deduct 50% of the cost
  4. A small business can deduct 100% of the cost

Answers: 1-a; 2-c; 3-c; 4-d; 5-a; 6-b; 7-d

More Celebration: Congress Extends Payroll Tax Holiday

March 10, 2012 12:44 pm Published by Leave your thoughts

Get out the party hats and streamers: After an acrimonious debate in Congress, our nation’s lawmakers have extended the “payroll tax holiday” for the remainder of 2012.

The tax cut was first enacted as a one-shot deal for 2011. Under a provision in the 2010 Tax Relief Act, the usual 6.2% Social Security tax rate for employees was reduced by two percentage points to an effective?4.2% rate on wages up to the?Social Security ceiling ($106,800 in 2011). The self-employed got a comparable tax break. The usual 1.45% Medicare portion of the payroll tax (2.9% for the self-employed) continued to apply to all wages.

In a last-ditch effort at the end of 2011, Congress enacted compromise legislation that kept the payroll tax holiday in effect through February 2012. And now, after weeks of wrangling and political grandstanding, Congress has approved a further extension through the end of the year on amounts up to this year’s wage base of $110,100.

For example, if earn $100,000?in 2012, you will save $2,000 in payroll tax (2% of $100,000). The maximum tax savings is $2,202?(2% of $110,100).

Glad to have more money in your pocket? Don’t squander your tax savings on frivolities or extravagances you don’t really need. A better move is to use this extra cash for a sound investment or to bolster your retirement savings.

Stock Option Rules After Job Loss

March 2, 2012 8:46 am Published by Leave your thoughts

It may not be the first thing you think about if you’re abruptly asked to clean out your desk, but deciding what to do about your stock grants or options could have major financial implications. And the rules are neither simple nor intuitive.

“When someone loses a job, the vesting on outstanding stock options usually stops,” says Bruce Brumberg, co-founder of myStockOptions.com, which provides information about stock grants and options. “For options that are already vested, you need to know how long you have to exercise them before they’re forfeited.”

Rules vary according to the type of stock grant or stock option involved. Some companies make grants of restricted stock or of restricted stock units, or RSUs—similar to restricted stock but with important differences. Other employers provide various kinds of options, with grants sometimes linked to length of employment or to meeting performance goals, that let you buy shares at a specified price, often during a stated time window. Vesting approaches may also vary, with some shares or options vesting gradually and others all at once (known as “cliff” vesting).

In the case of restricted stock and restricted stock units (RSUs), you generally forfeit stock that hasn’t vested when you leave the company, while you get to keep shares that have already vested. However, your employment agreement or stock plan may include a provision that protects you if you’re terminated after your company is acquired by another firm.

Performance stock or options grants are typically based on whether you achieve goals during a specified period, and if you have to leave before the period ends, you’ll lose the shares even if you would have met the objective. If shares or options vest gradually, you’ll get to keep only those that have already vested. So, for example, if you’re granted options to buy 1,000 shares of company stock that have a four-year vesting schedule, with 25% vesting each year, and you’re fired after 2½ years, you’ll get to exercise the options for 500 shares. With cliff vesting, you’ll forfeit the entire grant if you leave before vesting.

If you’re forced out, it’s crucial to review the rules about grants and options as soon as possible and to exercise options, if that makes financial sense, during a post-termination exercise period that typically lasts 90 days. If you fail to meet the deadline or to adhere to any special terms of a separation agreement, your options will expire.

Finally, if you participated in an employee stock purchase plan, you get to keep shares bought for you while you were employed, but your eligibility to participate ends with your job. The company will have to return any money withheld from your paycheck to purchase shares you didn’t receive.

Come to Terms with Term Life Policies

February 24, 2012 1:48 pm Published by Leave your thoughts

For many people, permanent life insurance—which includes whole and universal life policies, among others—is a good financial fit. Very often, however, a less expensive option—term life insurance—works even better. As the name implies, this type of policy provides coverage for a specific term, usually a level-premium period of 10 to 30 years (which is then often renewable to age 80 or beyond). That limitation means you pay less in premiums, though the cost advantage generally decreases as you get older.

Unlike permanent or “cash value” life insurance, which lets you build up cash value in your policy, term insurance provides only a death benefit and is often referred to as “pure” insurance. A big advantage of term insurance is its simplicity. Permanent life policies come in myriad forms, and may put the investment portion of your premium into fixed or variable investments. Fees vary widely depending on the type of policy and the riders and options you choose. Though often touted for the ability to promote saving through required premium payments, whole life and other permanent policies may be inferior to other retirement savings vehicles such as employer-sponsored plans or IRAs. In contrast, term policies are easy to understand—you make a specified payment in return for a promised death benefit.

Term insurance often appeals to those who are in the prime of their careers but who have multiple financial commitments, for mortgage payments, retirement and education savings, and other obligations. Term insurance lets such policyholders cheaply guarantee financial security for their families in the case of an untimely death.

The face amount of a term policy—its death benefit—remains the same throughout whatever number of years the policy is in force. For most level-premium policies, the insurer can’t adjust that amount, the length of the term, or the amount of the premiums. When the term expires, however, your insurance coverage ends. Many term policies guarantee you the chance to renew the insurance for an additional term, but the new premiums will be higher, reflecting your shorter life expectancy.

The cost of a particular term policy depends on your age, your health, and other factors. Typically, when you apply for a policy, you’ll have to answer detailed questions about your medical history and risk factors—policies for smokers usually cost more, for example—and you’ll have to pass a medical examination. (Some term insurance policies, approved in most states, enable you to obtain coverage without taking a physical.)

To find a term policy, you can shop online or you can work through an insurance agent. Choose a highly rated insurance company that will be around if and when your heirs need to collect on your policy.

A Common Error in Powers of Attorney

February 23, 2012 9:50 am Published by Leave your thoughts

Even if you do things the right way in estate planning, things may still turn out wrong if small details are overlooked. For instance, while you may recognize that it’s important to establish a power of attorney for an elderly relative, if the document fails to address certain contingencies, you may be powerless to act when your help is needed most.

A power of attorney, governed by state law, is a legal document allowing one person to act on another’s behalf. It must be created by someone—the principal—who has the mental capacity to understand all of its ramifications. The person appointed to act for the principal is known as the attorney-in-fact or the agent.
Once the principal has signed the document, the attorney-in-fact can make decisions for him or her.

Powers under a power of attorney may be broad or limited. For example, a broad power of attorney often grants control over all of the principal’s assets. On the other hand, a limited power might restrict an agent’s activities to selling a home or other real estate.

The most common type of power of attorney, the durable power of attorney, remains in effect should the principal become incapacitated, whereas a non-durable power of attorney is typically used for a specific purpose, such as temporarily managing a person’s financial affairs while that person is incapacitated.

While all of this may seem straightforward enough, if the power of attorney isn’t carefully drafted to accommodate changing conditions, a family’s intentions could be defeated. A common error is a document that fails to name one or more contingent attorneys-in-fact who can step in if the person named in the document is unable to fulfill the responsibilities of this position. That might happen if the original agent has died or is incapacitated or otherwise unwilling or unable to act.

To see what can go wrong, consider this hypothetical situation. John Greenbow, age 80, names his spouse Nina, age 75, as his attorney-in-fact, and their two children, Lester and Michelle, as contingent attorneys-in-fact. John creates a separate document naming himself as attorney-in-fact for Nina. Five years later, Nina shows signs of Alzheimer’s disease, so John assumes her financial affairs. But he suffers a stroke soon after and is incapacitated. While Lester and Michelle have been designated as attorneys-in-fact for John, they aren’t authorized to act on behalf of Nina.

This problem could have been easily avoided if John had incorporated language into Nina’s power of attorney that would have enabled the children to act on her behalf as well. And that’s the point—it’s crucial to think ahead and plan for the worst imaginable scenario. If you’ve anticipated all possible scenarios, you can rest easy knowing help will be there when it’s needed.