Thursday, December 10, 2015

2016 inflation adjustments announced

The IRS has issued its year-end update on adjustments to certain dollar limits for 2016.
  • The annual exclusion remains at $14,000. This is the maximum amount that one person can give to another person in one year without having to file a gift tax return. For gifts above that amount, a return must be filed but no gift tax is owed so long as the total reportable gifts by one person over his or her lifetime is less than the gift tax exemption amount.
  • The estate tax, gift tax, and generation-skipping exemption amounts are increased to $5.45 million for persons dying in 2016.

Sunday, November 8, 2015

The new MyRA

The U.S. Treasury Department has announced a new type of retirement savings program to encourage people to start retirement savings. The "MyRA" program is essentially an entry-level Roth IRA program. Money can be contributed or can be deducted from paychecks and maintained in an account with the Federal government, and the money will earn interest at the rate used for the Government Securities Program, reportedly 2.34% in 2014.

These are the differences between a standard IRA and the new MyRA vehicle:



IRA MyRA
Source Before-tax money After-tax money
Tax deduction Yes No
Limits $5,500 per year $5,500 per year
Withdrawals Subject to income tax Not subject to income tax – tax has already been paid
Early withdrawal 10% penalty before age 59.5 (as to earnings only) No penalty
Invested Any vehicle – CDs, stocks, bonds, mutual funds Governmental account paying interest
Can lose money Yes No

According to the regulation, issued by Treasury in December 2014, the custodian of the accounts will invest the proceeds in a new investment vehicle called "Retirement Savings Bonds" which will not be held by individual savers. Rather, they will be held by custodian. Interestingly, there has been no announcement of who that custodian will be.

When the amount in the account reaches $15,000, or after the individual has participated for 30 years, whichever comes first, eligibility is at an end, and the individual will then be required to move the funds to a Roth IRA sponsored by a bank, credit union, or financial adviser.

Thursday, October 22, 2015

Recheck your beneficiary designations

Most people who have money in tax-deferred retirement accounts such as IRAs or 401-k plans know that it is important to name a designated beneficiary (DB) and a contingent beneficiary (CB) for those plans. The Federal statutes that govern these plans provide:
  • The account will be payable to the DB and can be paid out over the DB's life expectancy.
  • The account will be payable to the CB in the same fashion if the DB dies before the owner of the account.
  • If there is no DB or CB, the account is payable as the plan documents direct, and that may be to the estate of the owner.
  • If there is no proper DB/CB, the entire amount in the account must be distributed, as taxable income, within five years of the owner's death.
  • The owner's spouse must be the DB for "qualified" retirement plans, including 401-k plans, unless that right is specifically waived in writing.
We always recommend that the designations be reviewed in the event of any major life change, such as marriage, divorce, death, or retirement.

It is also a good idea to check the designations every year or two, even if no life change has occurred, to ensure that what was previously designated remains in place. We frequently hear about accounts for which a DB and CB were properly designated but for which the custodian has, for whatever reason, lost track of the designation. The owner of the account can correct such errors while he is alive. The family members who are disappointed after he dies cannot do so.

Thursday, August 27, 2015

Little-known property tax exemptions

It is time to pay summer property taxes. Most municipalities give residents until September 15 to pay.

Many people are unaware of special exemptions that apply under Michigan law.

Under MCL 211.7b, the homestead of a disabled veteran who was discharged under honorable conditions is exempted from all property taxes. To qualify, the veteran must have one of the following:
  • a 100% disability rating based on a service-related disability
  • a certificate from the VA for monetary assistance for specially adapted housing, or
  • a rating by the VA as "individually unemployable."
Under MCL 211.7u, the principal residence of a person who is "unable to contribute toward the public charges" by reason of poverty is exempt. There are requirements for filing an application and satisfying the municipality's criteria, and the determination must be made annually by the "supervisor and board of review." Each municipality is required to develop and make available to the public the policy and guidelines to be used for the exemption, and the policy and guidelines must be followed.

There are numerous other exemptions under Chapter 211 as well.

Sunday, July 5, 2015

Raising money for those in need

If you are soliciting funds for the benefit of an individual (such as someone who has lost his home in a fire or has a serious illness and has incurred medical bills), you should be aware of when and how you may have to register and report your activities, and also be aware of some other rules that apply to fundraising activity.

In Michigan, the Charitable Organizations and Solicitations Act governs fundraising in general. It generally requires registration with the state to solicit contributions for a charitable purpose, but it makes an exception (MCL 400.273) for contributions intended for a particular individual if
  • The person to benefit is identified by name when the contribution is requested;
  • Only the actual and reasonable expenses for fundraising costs are deducted;
  • No fundraiser is paid in any manner for his services; and
  • The money is turned over to the person to benefit. 
If your activities meet these requirements, registration is not necessary. Be prepared to document compliance with the four requirements.

The money that is collected is not considered income to either the beneficiary or the fundraiser (assuming that it is turned over to the beneficiary). It is regarded as a gift from the original donor to the beneficiary, and gifts under $14,000 per year have no Federal tax-related requirements. The recipient does not have to report it as income, and the donor does not have to file a gift tax return. The contributions, however, are not tax-deductible by the donors. 

You may think of asking a church or another charitable organization make the request for contributions, since it is a tax-exempt organization. An organization that exists as a nonprofit corporation and is exempt from income tax under section 501-c-3 of the Internal Revenue Code, however, is not permitted to use any of its assets for the benefit of a particular individual. Mixing this kind of individual benefit donation with the charitable purposes of a church or nonprofit is not recommended, since that could jeopardize its own status as a qualified charitable organization.

Asking a church to use its premises for a benefit dinner or similar gathering is not problematic, so long as it is the organizer, and not the church, who receives the money and properly transmits it as required.

What about Federal requirements - reporting the collections to the IRS? Although charitable entities which qualify as 501-c-3 organizations are required to file informational returns with the IRS, even though they are not taxed on their receipts, the fact that donations to a fundraiser on behalf of a particular individual are legally characterized as gifts means that there is no obligation to file any return.

Importantly, those who are asked to contribute to such a fundraiser should be informed that their contributions are not eligible for any tax deduction.

Sunday, June 14, 2015

Social Security and "fairness"

In Playing God with Social Security Fairness, economist and Social Security guru Lawrence Kotlikoff responds to an article by economist Alice Munnell, criticizing Kotlikoff and others for promoting strategies for maximizing their Social Security benefits.

Munnell quotes the Obama Administration as saying that these strategies "allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits." Not mentioned, of course, is that the vast majority of people receiving Social Security benefits depend on them as their sole or major source of income, and are far from "upper-income." Any of them, not just those with high incomes, can follow the recommendations made by Kotlikoff and others to maximize what they will receive.

Kotlikoff notes that using the methods that are built into the system by Congress and the Social Security Administration is simply not "gaming the system." He states further,
"It's not our jobs as individual citizens to make the system more equitable by paying more taxes or taking fewer benefits unless we can persuade everyone else in our shoes to do the same thing, which we most certainly cannot."
Many decades ago, in Commissioner v. Newman, 159 F.2d 848 (1947), Judge Learned Hand said,
"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."
But that quote was about taxes, you may say. These authors are advising people about governmental benefits.

As Kotlikoff notes, there are 25 or more different systems within which citizens interact financially with their governments, and many have elements of both positive tax (money paid to the government) and negative tax (money received). And of course the Social Security system is comprised of a combination of taxes paid by those who work, and benefits received by those who become eligible.

The "fairness" issue is very similar to that involved in Medicaid planning by elder law attorneys. These lawyers advise clients about, and use, the techniques permitted under the Medicaid statute and rules to allow clients to become eligible for Medicaid coverage for nursing home care when that need arises. Some years ago, Congress responded to that issue by enacting an amazingly hamhanded and clearly unconstitutional statute that simply made it a crime for lawyers to advise their clients on how to make themselves eligible for Medicaid coverage.

The government can, and occasionally does, take action to modify the rules if it appears that there are unforeseen complications or problems. If the rules lead to an undesired result, Congress or the SSA is free to change the rules. But to criticize lawyers and other advisors for telling citizens what the rules are and how they can maximize the benefits that they receive is contrary to our sense of fairness.

Sunday, June 7, 2015

Gradual loss of control in the elderly

A pair of articles were published recently about a subtle threat to the financial well-being of older clients.

At a website called Seeking Alpha - The Biggest Threat to Your Retirement Portfolio: Mild Dementia
In the New York Times - As Cognition Slips, Financial Skills Are Often the First to Go

The articles recommend that adult children, agents, or other protectors of elderly parents help with monitoring their accounts and transactions to look for early signs of mismanagement of funds, sending money to inappropriate recipients, and the like.
"People are able to make these disastrous investing decisions in the earliest stages of dementia because their loved ones, who assume dementia announces itself with forgetfulness, don't realize there are quite a few syndromes that develop into dementia whose first symptoms are not forgetfulness, but are instead loss of judgment, impulse control, and emotional balance."
Recommendations include:
  • Sign authorization forms, well in advance, to allow your doctors to discuss your medical issues with your children or other selected agents.
  • Include language in powers of attorney, trust agreements, and other substitution documents to permit a doctor to use "signs of poor judgment" or loss of emotional control to justify a declaration that you should not be handling your own finances.
  • Share information about your portfolio and investment patterns with your agent, and give him or her access to be able to monitor activity within those accounts. 
  • Place a credit freeze on the parent's accounts.
  • Set up automated bill payments. 
  • Ask that insurance companies and other regular payees send duplicate notices to your agent so that he or she can be notified of a missed premium payment or other similar lapse.
  • Give early authorization to your attorneys and financial advisers to contact your agent if they see anything that gives cause for concern.
Each of these, of course, requires a careful balance between maintaining control and privacy and enabling a substitute decision-maker to effectively protect your interests.

Tuesday, May 19, 2015

Attorneys as representative payees?

An article in Bifocal, the journal of the American Bar Association's Commission on Law and Aging, notes that the Social Security Administration is "considering several long-term strategies" to address the fact that there are numerous social security recipients who are of limited capacity, in need of a representative payee, but for whom no suitable family member or friend is available. The SSA believes that attorneys, regardless of their areas of practice, are particularly qualified to serve in this role on a pro bono basis. (What is not mentioned in the article is that retired attorneys are in an even better position to serve.)

The SSA is pursuing a pilot program in the State of Maryland and will consider expanding it to other states depending on the response.

Tuesday, January 13, 2015

Social Security calculations

If you have done some reading on the subject, you no doubt know that you will need to decide at what age you wish to start drawing social security benefits, and that decision will make a significant difference on the level of your monthly benefit. Much of the available online information makes it appear that you have only three choices: begin to draw benefits at age 62, the full retirement age, or age 70. In truth, you can begin at any time between age 62 and age 70. The longer you wait, the larger your monthly benefit will be. A person whose full retirement age is 66 will find that the monthly benefit increases for each year he waits after age 62:

Age
Monthly
62
750
63
800
64
866
65
933
66
1,000
67
1,080
68
1,166
69
1,240
70
1,320

Thus, a single 62-year-old can increase his benefits by 33% by waiting until age 66, and by 76% by waiting until age 70. That decision is permanent. If he chooses to draw $800 per month at age 63, that will be his monthly benefit for the rest of his life.

Should he start at age 62 or should he wait? For some people, there is no choice. If they are not working, have health issues, or otherwise need the money now and cannot wait, they will start as soon as they can.

For those who can choose, life expectancy is a major consideration. The retiree who waits until age 66 or age 70 will catch up at a certain point, assuming he lives that long, and after that he will be ahead of the game when the total cumulative benefits are considered. The longer he lives, the further ahead he will be.

After doing some calculations, we estimate that the breakeven point, after which the retiree who waits will begin to pull ahead of the one who takes benefits early, will be:

Contrast
Breakeven
Age 66 vs. age 62
Age 76
Age 70 vs. age 66
Age 81

For the married worker whose spouse will be drawing spousal benefits, the same breakeven point applies, but the dollar difference is more pronounced because the spousal benefit is calculated as a percentage of the worker's benefit.

This SSA publication (PDF) is very informative on the subject.

See our previous entries on social security planning.