A Look into the Taxation of Social Security

Social security taxDid you know that you may be taxed on your Social Security income?

You might assume that since you’ve been putting money into Social Security over the course of your career, that the money you take out at retirement is free from taxes. Unfortunately, this isn’t necessarily the case.

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3 Reasons You Should NOT Make Extra Mortgage Payments

Earlymortgagepayoff

Everybody who has a mortgage dreams of the day when he can pay it off.  Although I cannot personally attest to owning a home outright, I certainly can imagine what it will feel like to send that last payment to the mortgage company.  I am looking forward to the day; however, I am in no hurry to accelerate that process.  Why?  Let’s look at some reasons.

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A Trillion Dollar Coin?

 

What’s this about a trillion dollar coin?

The United States hit its statutory borrowing limit, or debt ceiling, of $16.4 trillion at the end of 2012. Part of the recent political turmoil has been due to the inability of Congress to agree on measures to raise the debt limit, with Republicans holding out until Democrats agree to spending cuts on things like social security.

In order to circumvent this Congressional impasse, the U.S. Treasury could simply mint a trillion dollar coin.

31 USC § 5112 (k) states “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”

Source: uscode.house.gov

So, while the Treasury and U.S. Mint have strict guidelines for printing other forms of currency, this loophole gives the Treasury free reign to produce platinum coins. The purpose for this was to allow for the minting of commemorative coins for collecting purposes, but did not specifically limit production for those purposes.

The Treasury could then simply deposit this coin with the Federal Reserve and thereby have one trillion dollars with which to pay off debts.

Sound like an inflation nightmare? Minting a one trillion dollar coin is no more inflationary than borrowing another trillion dollars. So, in the end, it is simply a wash. A greater issue is the limiting affect that minting a coin in order to circumvent congressional deliberations would have on federal checks and balances.

However, the Treasury announced on January 12 that it would not be minting the coin because the Federal Reserve would not accept its validity as a deposit. So, for now, the issue is off the table.  We’ll see if it returns.

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

How to Read Your W2.

If you haven’t already recieved your W2, you probably will soon.  Once you receive it you should be able to take it to your tax professional and they will use the information reported on the form to prepare your tax return.  But have you ever wondered what the numbers in all the different boxes mean?  We have put together a chart that should help you to understand.

 If you have additional questions please don’t hesitate to talk to your tax advisor.  If you are in the Texarkana area I will be more than happy to recommend a competent tax professional.  You can find us at www.carrollinvestmentmanagement.com or send us an email at devin@carrollinvestmentmanagment.com.

The opinions voiced in this material are for are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

Changing Taxes in 2013: A Brief Summary of How It May Impact You

nofiscalcliff

For now the “fiscal cliff” has been temporarily averted with the American Taxpayer Relief Act of 2012 (ATRA).  Below are some of the major provisions of the Act.

Tax Rates and Brackets: There will be no increase in the income tax rate for individuals who make less than $400,000 (or married couples who make more than $450,000).  The rate will be 39.6% for those who make more than this amount.

Capital Gains:  The tax rate on capital gains was not changed for most filers.  For individuals in the bottom two income tax brackets there is no tax on capital gains.  The permanent rate for filers in between the bottom two brackets and the top bracket will be 15%.  For individuals who make over $400,000 ($450,000 for couples) the new rate will be 20%.

Dividends:  The ATRA permanently set the tax rate on qualified dividends as it is for capital gains.  Taxes on dividends were scheduled to be begin being taxed at ordinary income rates for 2013 and thereafter. 

Child Tax Credit: The per-child credit of $1,000 is permanent.  This was scheduled to revert back to $500 per child.

Marriage Penalty: The standard deduction for married couples has been permanently set at twice the value for single filers.  For 2013 the standard deduction will be $12,200 instead of the $10,150 that it was scheduled to revert to.

Estate Taxes:  The estate tax rate will be 40% and the exemption amount will remain at $5,000,000 instead of going back to $1,000,000.  The exemption amount will be indexed for inflation.

Source: National Association of Tax Professionals 2013

The Act, like most legislation, is lengthy and this is not intended to be an exhaustive description of the provisions or construed as tax advice.  The list above is simply an outline of the major pieces that my clients and friends have asked me about as the “fiscal cliff” conversation was escalating.  If you have additional questions please don’t hesitate to talk to your tax advisor.  If you are in the Texarkana area I will be more than happy to recommend a competent tax professional who is knowledgeable about the Act and its provisions.  You can find us at www.carrollinvestmentmanagement.com or send us an email at devin@carrollinvestmentmanagment.com.

The opinions voiced in this material are for are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

Simplify Estate Planning With a Living Trust

Living trusts are one of the most prevalent estate planning tools in use today.1 Many people use a living trust instead of a will to avoid probate, a court-supervised process for transferring assets to the beneficiaries listed in your will, which can be expensive and exposes your estate to public record. A living will does not avoid the estate tax but makes the settlement process much easier.

Living trusts are most appropriate for those with substantial assets or complex estates. In general, financial planners frequently recommend them for individuals or couples with an estate of $100,000 or more. Estates of this size typically are subjected to probate in the deceased’s state of residence, which can cost anywhere between 2% and 4% of the estate’s value in court and legal fees. Young couples without significant assets and without children, who intend to leave their assets to each other when the first one of them dies, may not benefit from having a living trust.

Naming a Trustee

When establishing a living trust, most people name themselves as the trustee in charge of managing the trust’s assets. You should also name a successor trustee, either a person or an institution, who will manage the trust’s assets if you ever become unable or unwilling to do so yourself. A living trust is not irrevocable, so you can amend it at any time.

Almost any type of asset can be placed in a trust, including savings accounts, stocks, bonds, real estate, life insurance, business interests, art, collectibles, and personal property. To fund a trust, you need to change the name or title on your assets to the name of the trust. Be sure to be thorough: Anything that remains in your name will not be considered part of the trust.

Spouses and Domestic Partners

Since a living trust can hold both separate and community property, it can be a convenient estate-planning vehicle for spouses and registered domestic partners to plan for the management and ultimate distribution of their assets in one document.
Wills Versus Living Trusts

Wills Living Trusts
Probate Subject   to probateBecome   public record Not   subject to probateRemain   private
Cost Generally   cost less to create but probate costs can be significant. Generally   cost more to create but avoid probate.

 

An estate planning attorney can advise you on whether a living trust is appropriate for your personal situation. This type of “substitute will” may help you transfer assets to your heirs in a way that maintains your privacy.

Source/Disclaimer:

1The information presented here is not intended to be tax or legal advice. Each individual’s situation is different. You should speak to a tax or legal professional to discuss your personal situation.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.

New Tax Brackets For 2013

The so-called fiscal cliff was averted at the last minute by the American Taxpayer Relief Act of 2012 (ATRA). There was much talk about changes to the income tax rates and the various income levels that may be impacted.  Below are the newly revised income tax brackets.

 

Rate

Single Filers Married Joint Filers Head of Household Filers

10%

$0 to $8,925 $0 to $17,850 $0 to $12,750

15%

$8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600

25%

$36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450

28%

$87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150

33%

$183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350

35%

$398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000

     39.60%

$400,000 and up $450,000 and up $425,000 and up

Source: National Association of Tax Professionals 2013

The 2013 income tax brackets apply to money you earn during 2013.  You may not notice how this does or does not affect you until you file your income taxes in 2014.  Also keep in mind that the tax rates listed in these tables are marginal rates. That means that you do not owe your rate on all of your income. For example, if you are married and earn $100,000 per year, you would not owe 25% on all of your income.  You would owe 10% of $17,850 (income in the first bracket), 15% of $54,650 (income in the second bracket) and 25% of $27,500  (income in the third bracket).  In this case your effective tax rate would be about 17%.

If you have additional questions please don’t hesitate to talk to your tax advisor.  If you are in the Texarkana area I will be more than happy to recommend a competent tax professional who is knowledgeable about the Act and its provisions.  You can find us at www.carrollinvestmentmanagement.com or send us an email at devin@carrollinvestmentmanagment.com.

The opinions voiced in this material are for are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The Benefits of Bypass Trusts

Trying to predict the federal estate tax is about as easy as trying to predict the stock market. After a decade of almost yearly changes, the government has currently legislated a temporary fix that expires 2012. Given the uncertain nature of the tax, couples need to remain vigilant about estate planning. Bypass trusts can help a couple maximize use of the federal estate tax exemption and ultimately bequeath more of their wealth to successive generations.

For bypass trusts to achieve their goal, a couple needs to value their assets, title them appropriately, and review their estate plan every few years to determine whether the trust’s funding mechanisms remain appropriate. Trusts are complicated legal entities, and it is important to seek advice from an estate planning attorney with experience in this area.

Why Consider Bypass Trusts?

A married taxpayer may bequeath an unlimited amount of assets to a spouse without triggering federal estate taxes, a practice known as the unlimited marital deduction. A missed opportunity can arise when a surviving spouse inherits these assets and subsequently dies with an estate that is worth more than the amount of the federal estate tax exemption in effect at the time. In this scenario, the estate tax exemption of the spouse that died first was not used and, in effect, was wasted. Bypass trusts address this situation by maximizing the exemptions of both spouses.

 

How Bypass Trusts Work

Couples often establish bypass trusts within the framework of a living trust that determines legal ownership of the couple’s assets. Estate planning experts typically recommend that each spouse maintains a bypass trust with assets that are worth close to the value of the current estate tax exemption. Assets within the bypass trusts typically are those that the couple does not intend to use during their lifetimes but instead plans to bequeath to heirs.

Upon the death of the spouse that dies first, the surviving spouse inherits the decedent’s assets that are not part of the decedent’s bypass trust. Because of the unlimited marital deduction, there is no immediate tax liability for these assets. The surviving spouse is the beneficiary of the decedent’s bypass trust, which will not be included in the surviving spouse’s estate. The assets used to fund the decedent’s bypass trust thus bypass the estate tax that otherwise would have been assessed upon the death of the surviving spouse. When the surviving spouse dies, the couple’s heirs become beneficiaries of both bypass trusts.

If you believe that a bypass trust may be suitable for your situation, an estate planning attorney can help you learn more about the details.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Financial Planning Tips for Unmarried Couples

Today’s “modern family” is decidedly nontraditional. According to the latest Census data, fewer than 25% of American households currently consist of married couples with dependent children, while more than 40% of unmarried couples have children under the age of 18. Even the term “married” can be defined differently depending on where you live. Some states allow and recognize same-sex marriage, but the majority of states and federal government do not. Therefore, it’s important for domestic partners to ensure they have legal protections in place to protect their families and themselves.

 

Legal Protections

Unmarried partners lack many of the legal protections granted to spouses in the event of divorce or death. Although most states will consider a claim by an unmarried partner, there is no specific legal precedent in the absence of a written contract. Domestic partners may wish to consider creating a domestic-partnership agreement that details the sharing of expenses as well as the ownership and distribution of assets should the relationship end. Unmarried couples with children should consider signing a written agreement acknowledging parental rights and responsibilities and having each partner name the other as primary guardian in wills.

 

Retirement Considerations

Unmarried couples are not eligible for their partner’s Social Security benefits and, in some cases, employer-sponsored retirement plan distributions. The IRS allows a nonspousal beneficiary of an IRA to take required distributions over his or her lifetime rather than in a lump sum, allowing for potential tax-deferred growth over a longer period of time. Domestic partners who can afford to do so may want to contribute the annual maximum to an IRA to capitalize on this benefit.

 Estate Planning Issues

If an unmarried individual dies without a will, the state may distribute assets to his or her closest blood relatives, leaving the surviving domestic partner out in the cold. To help rebut a challenge to a will, domestic partners may want to videotape their wishes in the presence of an attorney.

Federal tax law allows all assets to pass to a spouse tax free and no applicable estate taxes are due until the second spouse dies. Unmarried couples, however, do not enjoy this tax advantage. For those with significant taxable assets, it will be necessary to pursue other avenues to avoid estate tax. One strategy is to purchase life insurance to pay any potential federal and state estate taxes. The surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, each partner should own enough insurance to pay anticipated taxes on the assets of his or her partner.

This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your legal and/or tax professional to discuss your personal situation.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Four Steps to a Simpler Financial Life

For many Americans, financial life seems to be getting more and more complicated. Perhaps that’s because more workers bear responsibility for their own retirement savings thanks to the proliferation of 401(k) and other plans. Or maybe it’s because there’s so much information and so many investment choices to sort through. Whatever the case, here are some suggestions that may help to simplify your financial life.

1. Start with a Plan

A little time spent planning now can benefit you later. First, determine short-term financial goals. Do you want to purchase a home in five years? Are your kids heading off to college soon? Is buying a car a top priority next year? Next, think about long-term goals, such as saving for retirement and, if your children are young, college expenses. Estimate how much money you’ll need to meet each of these goals.

2. Build a Better Budget

Next, look at your current monthly net income and then set up a budget. Creating a budget allows you to see exactly where all your money goes and to determine where you can scale back. After making cuts, invest that money to help pursue your financial goals.

3. Invest Systematically

You can take time and guesswork out of investing with a systematic investing program. With mutual funds, for example, you can make arrangements to automatically invest a specific amount of money on a regular (e.g., monthly) basis, a strategy also known as dollar cost averaging.* In addition to making investing easier, dollar cost averaging could potentially save you money. You’ll buy more shares when prices are low and fewer shares when they’re high. Over time, the average cost you pay for the shares may be less than the average price.

4. Rely on an Investment Professional

While the financial world is far more complex than it was just a few years ago, you don’t have to go it alone. Think about tapping into your investment professional’s expertise before making any major change in your investments. He or she can help you to evaluate how new tax rules and changing market conditions may affect your portfolio and, in turn, your financial goals. *Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in declining markets.

© 2011 Standard & Poor’s Financial Communications. All rights reserved.