Social Security Ideas for Married Couples

The decision regarding what age to begin receiving Social Security benefits can be complicated. The decision is further complicated if you are married, because spouses’ ages, estimated benefit entitlements, and life expectancies should factor into the decision. As each individual approaches retirement age, they as a couple have a unique set of fiscal needs and goals. There are several different scenarios that should be considered before a decision is made. Below are examples of two possible courses of action.

File and suspend
Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker's benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But, according to Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse's record cannot do so until his or her spouse begins collecting retirement benefits. There is an exception--someone who has reached full retirement age but who does not want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse's earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways: 1) the spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%; 2) the spouse with lower earnings can immediately claim a higher (spousal) benefit; and 3) any survivor's benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

File for one benefit, then the other
Another strategy that can be used to increase household income for retirees is to have one spouse file for spousal benefits first, and then switch to his or her own higher retirement benefit later.

Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse's earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor's income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse's benefit.

This strategy might be used when both spouses have substantial earnings but do not want to postpone applying for benefits altogether. Louis files for his Social Security retirement benefit of $2,400 per month at age 66 (based on his own earnings record), but his wife Sue wants to wait until age 70 to file. At age 66 (her full retirement age) Sue applies for spousal benefits based on Louis's earnings record (Louis has already filed for benefits) and receives 50% of Louis's benefit amount ($1,200 per month). She then delays applying for benefits based on her own earnings record ($2,100 per month at full retirement age) so that she can earn delayed retirement credits. At age 70, Sue switches from collecting a spousal benefit to her own larger worker's retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Louis and Sue household income but also enables Louis to receive a larger survivor's benefit in the event of Sue's death.

Every couple’s situation is unique and various scenarios should be considered before the decision to begin receiving Social Security benefits is made. Contacting the Social Security Administration during your decision process may be beneficial. The website is www.socialsecurity.gov.

Applying the Tax Basis and At Risk Rules to Partners by Karla Hopkins

Individuals who invest in partnerships need to be aware of rules that limit the ability of the partner to deduct losses. Individual partners who have been allocated a loss must satisfy three separate loss limitations before the loss can be used. The loss limitations, in the order in which they apply are, Tax Basis limitations, At Risk limitations, and Passive Loss limitations. Here we will address the first two.

A partner’s share of losses is limited to his Adjusted Tax Basis at the end of the year. In general terms, Basis includes money contributed, the adjusted basis of property contributed plus taxable income and tax exempt income allocated to him. These amounts are reduced by losses, nondeductible expenses and distributions allocated to him. A partner’s Basis is further adjusted by liabilities of the partnership that he is liable for. Losses that exceed the partner’s basis are suspended to a future year when Basis may be restored by future income or contributions to the partnership.

The second limitation is called At Risk. The amount At Risk includes the amount of money and adjusted basis of property contributed, amounts borrowed with respect to the activity to the extent the partner is personally liable or has pledged property as security for the debt and amounts borrowed by the partnership for holding real property for which no person is personally liable for repayment. The amount At Risk is also increased and decreased by the income and deductions of the partnership each year. Unlike basis, At Risk can go negative from items other than losses. The consequences of a negative At Risk amount are potential for recapture of previously deducted losses as income in the year the amount At Risk is negative.

When a partnership is initially funded with debt and incurs losses; the debt, while providing Tax Basis for deducting the losses, may limit the losses due to the At Risk rules. Losses suspended due to the At Risk rules may later become deductible in the year under the At Risk rules even when the Tax Basis has already been reduced.

When a partner’s Tax and At Risk Basis have been substantially diminished, losses allocated to the partner may not be deductible, and distributions to the partner may result in income recognition. These limitations are calculated each year and it is important for a shareholder to understand them and to maintain accurate and current records of their Basis. The partnership does not always provide the information to its shareholders. The calculation is especially important in the year that the partnership interest is terminated or sold.

A partner may avoid the Tax Basis and At Risk consequences by being aware of his tax basis and amount at risk and by taking measures to increase these amounts prior to the anticipated event.

The above is meant to be only a brief and general overview of the Tax Basis and AT Risk rules of partnerships. To calculate your basis requires a detailed evaluation of the partnership agreement and other relevant partnership elections.

Did you ever wonder what the total federal and state taxes you pay are?

The Total Tax Insights calculator using this link to an AICPA tool can make it easier to learn what you should know about what you’re paying in taxes. The result while approximate may surprise you. It might make you reconsider where to live and what kind of car to drive or whether you should change jobs or shop differently. Information is knowledge and knowledge is key for everyone's financial planning. It can help you work toward better tax and financial planning and decision-making. Follow this link to get started.
http://www.totaltaxinsights.org/Calculator

Thanksgiving: A truly American Holiday by Carolyn Flaherty

Thanksgiving resonates as a truly American holiday. Although not officially a holiday until President Lincoln declared it so in 1863, the tradition of Thanksgiving dates all the way back to 1621 when the Mayflower Pilgrims held a three day harvest festival to celebrate that year’s bountiful crops. After a truly devastating winter when the settlers lost nearly half their population, they had great reason to celebrate their survival, their plentiful crops and the help they garnered from Native Americans.

The Pilgrim settlers came to America seeking freedom and a better way of life. Indeed, historically immigrants to America come seeking freedom and prosperity. Imagine leaving everything you know, your family and friends and setting out to unknown, undeveloped lands. To embark on such a journey requires a great deal of courage, strength, faith, and confidence:  an overall quality I refer to as “true grit.”

To American stereotypes that label us loud, large and abrasive: I say,” Yes, we are gritty.” We are a nation built by those who were told they couldn't but knew they could. We are a nation of survivors. When I contemplate early Americans, those who built this great nation: I am proud of the entrepreneurial spirit upon which America evolved from the belief of freedom and prosperity to the reality of both.

The economy may be difficult when compared to recent decades. However, when you compare our economy and average wealth to that of the world, we have much to be thankful for. Times may feel uncertain or even volatile. You may be under great personal or professional stress. Yet, even on the worst day in the United States of America, there is still freedom and the potential for future prosperity. Therefore, today I am thankful for potential and for the inspiring people who have fought for, built and defended that potential and this great nation.

We wish you a very Happy Thanksgiving from Pavento, Ratcliffe, Renzi & Company. As you take pause today to share a meal with family and friends, we hope you will also reflect on and celebrate the things you are thankful for.

SALES TAX NEXUS by Karla Hopkins

Over the past three years states have increased their sales tax collection efforts because of the need to raise additional tax revenue. One way they have done this is to expand the definition of what activities create sales tax nexus for out-of-state retailers. In some states, courts have ruled that in addition to a seller’s direct physical presence, an indirect presence may create sales tax nexus. One example of an indirect presence is through independent contractors in a state.

To illustrate indirect nexus: In New York nexus can exist when a customer in New York purchases a product through a retailer’s agreement with a New York resident for commission even if the ultimate retailer is out-of-state. In other words, potential customers that reach the out-of-state retailer’s website by clicking on a link on the in-state affiliate’s website could be subject to sales tax by the ultimate retailer even though that retailer has no physical presence in New York. Two more states, Rhode Island and North Carolina have also developed similar legislation. In addition, during 2011 fifteen other states have proposed laws that expand the nexus laws in some way.

Some states have passed legislation to include a nexus determination for a controlled group where one member of the group is located in their state even if that entity is not even the retailer selling the product into the state.

While in most states, the legislation that was passed to capture the sales tax on out-of-state retailers is being challenged in the court systems, it appears that the trend for states to expand sales tax nexus standards to include remote out-of-state retailers is continuing forward. The federal government has also become much more involved and Congress is currently considering three remote sales tax proposals.

So, what’s the saying, buyers beware? When entering a new state with your business be sure that you are well versed on the laws specific to that state; not only for income and payroll tax, but especially sales tax.

Estate Planning In Our Digital World by Karla Hopkins

Nowadays most people have files and information stored on computers and smart phones such as online accounts with banks, email providers, social networks and music accounts.

These types of accounts and the identity of the service provider are often changing and as a result, planning for the location and security of online assets should now be a part of everyone’s estate planning.

Today, many people pay bills online, receive paperless account statements, keep their checkbooks online, and file their income tax returns online. It’s even possible that these important records are kept only in a digital format with no paper trail of the assets or bills.

Further complicating this subject is that since the digital world is fairly new, policies concerning access to these accounts upon the death or incapacity of someone are inconsistent and in flux. Often you must act quickly to protect online accounts from being deleted or frozen if the account has not been recently accessed. Yet, it is not uncommon for service providers to refuse to give to others the passwords for incompetent or deceased individuals.

Therefore, the first challenge is identifying the digital assets and then getting the username and passwords for the accounts. If there is no record, it could take a long time and a lot of effort to identify the accounts and gain access to them.

As such, individuals should prepare a list of all online accounts and other digital assets. This can be done with a written list. However, keep in mind that the list must be updated each time a password is changed or an account is added. Electronic lists, either on a computer or online, of usernames, passwords and accounts might prove to be more convenient to update.

The list should be kept secure. If you choose to maintain a written list, it should be kept in a safe deposit box, home safe, or with your attorney. Online lists can be secured by a master password. Keep the master password and instructions for accessing the electronic list in a safe deposit box, home safe, or with your attorney.

To begin to plan for your digital assets, consider what would happen if your computer were lost or stolen. What important information would be lost? Could your loved one obtain access to online accounts if you were to die or become incapacitated? What digital assets would you want your family to be able to access? Who would you want to have such access? In addition to personal electronic data, many also have business electronic files. It is important for your employer to be able to obtain access to your business files if necessary.

Planning ahead is always best to ensure that no account or asset is overlooked.

CONTRIBUTING TO A CHILD’s IRA by Karla Hopkins

Establishing an IRA in a child’s name can be an effective planning technique for a child with earned income. The annual limit cannot exceed the lesser of $5,000 or the earned income.

The key to contributing to an IRA is that the child actually earned income. This can include income from a part-time job, summer jobs, babysitting, lawn mowing or paper routes. Where you may not have reported the income in the past, you may elect to so that the child is eligible for an IRA. When a child is employed by a family member, the IRS can be expected to scrutinize carefully whether the income was in fact earned, and a reasonable hourly rate must be used for the work actually performed.

Parents often get frustrated when even a small amount of their child’s income is subject to tax. This occurs because of several things like the disallowance of the personal exemption, reduced standard deduction, higher interest and dividend income from savings accounts.

Under the Kiddie Tax rules, dependent’s investment income is taxed at the parent’s higher tax rate. (if the investment income exceeds $1,900) One way to shelter investment income of a dependent is by contributing to a deductible IRA. Because a deductible IRA is a pretax earnings account, the benefit of compounding investment income is a significant retirement benefit for the dependent.

Establishing and funding a ROTH IRA, which is a nondeductible contribution, can also be a significant retirement and long term tax favored savings strategy for a dependent. Contributions to a ROTH IRA are not deductible but if certain conditions exist, distributions are tax free.

Even though the contributions to a ROTH IRA are not deductible, this may be considered a small price to pay (i.e. the tax on the dependent’s investment income) for the power of tax free compounded earnings inside the ROTH IRA combined with the ability to withdraw funds tax free upon retirement or after age 59 1/2.

Also, if the ROTH IRA has been established for at least five years, the contribution amounts can be withdrawn tax free any time after the five year window which could be an advantageous college funding plan. The contribution does not necessarily have to come from the child’s earnings. As parents, you could gift the additional money for the IRA so that the child continues to keep his spending money. The long term savings available from this type of arrangement is highly recommended.