2013 Key Tax Proposals

On February 13, President Obama's Fiscal Year 2013 budget was released. Follow this link to get a full copy of the 2013 Budget. The Treasury's Green Book containing general explanations of the Administration's revenue proposals can be found here.

Robert Keebler, a leading professional in the area of tax and estate planning, highlighted some of the key proposals potentially affecting taxpayers below:

• Extend Bush tax cuts for all but the top two brackets. The only change would be to have the 33% and 35% rates go back to their pre-2001 levels of 36% and 39.6%. Taxpayers in the top two marginal brackets would still benefit from reduced rates on the portion of their income taxed in the lower brackets.
• Raise the long-term capital gains rate to 20% for single taxpayers making more than $200,000 per year, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately.
• Tax rate on qualified dividends would revert to ordinary income tax rates (up to 39.6%) for the same taxpayers. For everyone else, the rate would stay at 15% (or 0%)
• Tax carried interest as ordinary income.
• Reduce value of itemized deductions for taxpayers in the 33 and 35% brackets to 28% (33% bracket current starts at $178,650 for single taxpayers and $217,450 for married filing jointly.
• Reinstate the personal exemption phase-out for upper income taxpayers
• Extend reduction of social security tax on self-employed from 14.2% to 12.2% for the rest of 2012.
• Enact a permanent AMT Patch.
• Make the HOPE tax credit permanent. The credit is worth up to $2,500 per year.
• Make recent expansions of the low-income tax credit permanent.
• Restore the estate, gift and GST tax to 2009 rates.
• Require a minimum term for GRATs of ten years.
• Limit the duration of GST tax exemption to 90 years.

It is highly unlikely--approaching a 0% change--that tax reform will be taken up during the 2012 election year. If nothing is done, the Bush tax cuts will sunset to Clinton-era rates. Perhaps Congress will extend current rates for another year and take up reform in 2013.

Stay tuned...

Kevin Kroskey

Changes in IRA & 401(K)s for 2012

The IRS has made cost-of-living adjustments to IRAs and employer-sponsored retirement plans for 2012, so here is what you need to know about the newly altered contribution limits and phase-outs for these plans.

401(k) & IRA yearly contribution limits. In 2012, these are the annual contribution limits for some popular retirement savings vehicles.

·         401(k)s, 403(b)s, most 457 plans, Thrift Savings Plan (TSP) - $17,000 with an additional $5,500 catch-up contribution allowed for those 50 or older. (2012 COLA: $500.)

·         Traditional & Roth IRAs - $5,000 with an additional $1,000 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)

·         Simple IRAs - $11,500 with an additional $2,500 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)

·         SEP IRAs - $50,000 or 25% of an employee’s compensation, whichever is lesser. (2012 COLA: $1,000.)

·         415(b) defined benefit plans – the limitation on annual benefits under a defined benefit plan is increased to $200,000. (2012 COLA: $5,000.)^1,2,3,4

With the increase, it's a good idea to check your contribution rate (in $ or %) to ensure you are still contributing the maximum amount, if that is your intent.


Traditional IRA phase-outs. The new MAGI limits affecting deductions for traditional IRA contributions are:

·         Singles & heads of household covered by a workplace retirement plan: $58,000-68,000. (2012 COLA: $2,000.)

·         Married filing jointly, with spouse making the IRA contribution covered by a workplace retirement plan: $92,000-112,000. (2012 COLA: $2,000.)

·         Married filing jointly, IRA contributor not covered by a workplace retirement plan but married to someone who is: $173,000-183,000. That MAGI range is for a couple rather than an individual. (2012 COLA: $4,000.)¹

Roth IRA phase-outs. The MAGI limits affecting deductions for Roth IRA contributions are set as follows for 2012:

·         Singles & heads of household covered by a workplace retirement plan: $110,000-125,000. (2012 COLA: $3,000.)

·         Married filing jointly: $173,000-183,000. (2012 COLA: $4,000.)

·         Married filing separately, with the Roth IRA contributor covered by a workplace retirement plan: $0-10,000. (No 2012 COLA.)¹

Lastly, a couple of notes for employers. When it comes to defining "key employees" in a top-heavy plan, the determination limit goes up $5,000 to $165,000 in 2012. The maximum taxable earnings amount for Social Security increases to $110,100 from $106,800.⁵

Best Regards,

Kevin Kroskey

Citations.
This article prepared by Peter Montoya.
1 www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
2 money.usnews.com/money/blogs/planning-to-retire/2011/10/21/401k-and-ira-changes-coming-in-2012 [10/21/11]
3 www.irs.gov/retirement/participant/article/0,,id=211345,00.html [10/20/11]
4 www.irs.gov/retirement/article/0,,id=111419,00.html#12 [10/21/11]
5 www.lexology.com/library/detail.aspx?g=cbc951c9-7f27-4a92-93e3-4c0193f51347 [10/20/11]

What Beneficiaries Need to Know

What do you do when an account owner passes away?

If your loved ones have invested, saved or insured themselves to any degree, you may be named as a beneficiary to one or more of their accounts, policies or assets in the event of their deaths. While we all hope “that day” never comes, we do need to know what to do financially if and when it does.

Legally, just who is a “beneficiary”? IRAs, annuities, life insurance policies and qualified retirement plans such as 401(k)s and 403(b)s are set up so that the accounts, policies or assets are payable or transferable on the death of the owner to a beneficiary, usually an individual named on a contractual document that is filled out when the account or policy is first created.

In addition to the primary beneficiary, the account or policy owner is asked to name a contingent (secondary) beneficiary. The contingent beneficiary will receive the asset if the primary beneficiary is deceased.

Some retirement accounts and policies may have multiple beneficiaries. Charities, schools and nonprofits are also occasionally named as beneficiaries. If you have individually listed one (or more) of your kids or grandkids as designated beneficiaries of your 401(k) or IRA, that designation should override a charitable bequest you have stated in a trust or will.¹

A will is NOT a beneficiary form. When it comes to 401(k)s and IRAs, beneficiary designations are commonly considered first and wills second. If you willed your IRA assets to your son in 2008 but named the man who is now your ex-husband as the beneficiary of your IRA back in 1996, those IRA assets are set up to transfer to your ex-husband in the event of your death. Sometimes beneficiary forms are revised; often they are never revised.¹

If a retirement account owner passes away, what steps need to be taken? First, the beneficiary form must be found, either with the IRA or retirement plan custodian (the financial firm overseeing the account) or within the financial records of the person deceased. Beyond that, the financial institution holding the IRA or retirement plan assets should also ask you to supply:

·         A certified copy of the account owner's death certificate

·         A notarized affidavit of domicile (a document certifying his or her place of residence at the time of death)

If the named beneficiary is a minor, a birth certificate for that person will be requested. If the beneficiary is a trust, the custodian will want to see a W-9 form and a copy of the trust agreement.^2,3,4

If you are named as the primary beneficiary, you usually have four options regardless of what kind of retirement savings account you have inherited:

1)    Open an inherited IRA and transfer or roll over the funds into it.

2)    Roll over or transfer the assets to your own, existing IRA (spouse only).

3)    Withdraw the assets as a lump sum (liquidate the account, get a check).

4)    Disclaim as much as 100% of the assets, thereby permitting some or all of them to be inherited by a contingent beneficiary

However, these options may be influenced or limited by four factors:

1)    The kind of retirement plan you have inherited.

2)    Whether the named beneficiary is a spouse, non-spouse, trust or estate.

3)    The age at which the account owner passed away.

4)    The resulting tax consequences.

Before you make ANY choice, you should welcome the input of a tax advisor.^3,5

What if you are a spousal beneficiary? If that is the case, you may elect to:

·         Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA or SIMPLE IRA into your own traditional or Roth IRA, or an inherited traditional or Roth IRA

·         Withdraw the assets as a lump sum

·         Roll over or transfer qualified retirement plan assets from a 401(k), 403(b), etc. into your own retirement account, or take them as a lump sum

·         Disclaim up to 100% of the assets within 9 months of the original account owner’s death^3,5,8

                           

What if you are a non-spousal beneficiary? If this is so, you may elect to:

·         Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an Inherited IRA

·         Withdraw the assets as a lump sum

·         Disclaim up to 100% of the assets within 9 months of the original account owner’s death

·         Leave the assets in the plan (sometimes permissible with qualified retirement plans) ^3,5

What if a trust, estate or charity is named as the beneficiary? If that is the circumstance, there are three choices:

·         Transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an Inherited IRA

·         Withdraw the assets as a lump sum

·         Disclaim up to 100% of the assets within 9 months of the original account owner’s death^3,5

The next calendar year will be very important. Inheritors of retirement accounts have until September 30 of the year following the original account owner’s death to review and remove beneficiaries, and until December 31 of that year to divide the IRA assets among multiple beneficiaries. Usually, December 31 of the year after the original retirement plan owner’s passing is the deadline for the first RMD (Required Minimum Distribution) from an inherited traditional or Roth IRA.⁶

Now, how about U.S. Savings Bonds? If you are named as the primary beneficiary of a U.S. Treasury Bond, you have three options:

·         Redeem it at a financial institution (you will need your personal I.D. for this).

·         Get the security reissued in your name or the names of multiple beneficiaries. You do this via Treasury Department Form 4000, which you must sign before a certifying officer at a bank (not a notary). Then you send that signed form and a certified copy of the death certificate to a Savings Bond Processing Site.

·         Do nothing at all, as the primary beneficiary automatically becomes the bond owner when the original bond owner passes away.⁷

What about savings & checking accounts? Bank accounts are often payable-on-death (POD) assets or “Totten trusts.” All a beneficiary needs to claim the assets is his or her personal identification and a certified copy of the death certificate of the original account holder. There is no need for probate. (Some states limit charities and non-profits from being POD beneficiaries of bank accounts.)⁷

How about real estate? Lastly, it is worth noting that about a dozen states use transfer-on-death (TOD) deeds for real property, including Ohio. If you live in such a state, you have to go to the county recorder or registrar, usually with a certified copy of the death certificate and a notarized affidavit which informs the recorder or registrar that ownership of the property has changed. If the deed names multiple beneficiaries and some are dead, the surviving beneficiaries must present the recorder or registrar with certified copies of the death certificates of the deceased beneficiaries.

Best Regards,

Kevin Kroskey

Citations.

1 - www.cbsnews.com/8301-505146_162-37941197/ira-beneficiary-forms-may-be-more-important-than-your-will/ [6/10/09]        
2 www.ehow.com/info_12081482_ira-beneficiary-require-death-certificate.html [9/20/11]
3 - www.schwab.com/cms/P-1625576.3/CS13416-02_MKT13598-10_FINAL_118091.pdf?cmsid=P-1625576&cv0 [12/10]
4 - personal.fidelity.com/accounts/pdf/InheritedNonRetirementIntro.pdf [12/16/11]
5 - www.fidelity.com/ira/inherited-ira [12/16/11]
6 - www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/12/14/investopedia6585.DTL [12/14/11]           
7 - www.nolo.com/legal-encyclopedia/claim-payable-on-death-assets-32436.html[12/16/11]
8 - http://www.montoyaregistry.com/Financial-Market.aspx?financial-market=who-should-inherit-your-ira-andor-401k&category=22 [12/16/11]

Hire an Advisor or Go it Alone?

Walter Updegrave, in addition to being an award-winning journalist, speaker, author and senior editor of MONEY is a professional who truly understands the world of retail investing and communicates his thoughts in a manner meaningful to his readers. As an example, below is an excerpt from a recent CNN Money release based on a readers question “Should I hire a financial adviser to manage my retirement portfolio, and can I afford to?”

“The answer depends largely on how comfortable you are going it alone -- and how good a job you think you could do overseeing your finances without help from a pro.

Let's start with one key aspect of retirement planning: investing. As long as you're familiar with the concept of asset allocation and you're comfortable picking funds, you shouldn't have trouble building a diversified portfolio on your own.

And you can get plenty of assistance short of hiring an adviser: These days most 401(k) plans provide tools to help you assess your investing options and assemble an appropriate lineup for your age and risk tolerance.

You can also find plenty of guidance online.” ….

“The problem is, if you screw up, you can end up losing a lot more than you might save. In a recent study, benefit consultant Aon Hewitt and advice firm Financial Engines looked at the 401(k) returns of more than 425,000 savers from 2006 through 2010.

The findings: The median annual return of those who got professional help was almost three percentage points higher than the return for those who invested on their own, even after taking fees into account.

One reason for that performance gap is that the investors who flew solo were far more likely to be too aggressive or too conservative. Emotions also played a role: Do-it-yourselfers were more apt to cash out of stocks in the 2008 crash. As a result, their returns lagged substantially when the market rebounded in 2009.” …

“While you're saving for retirement, you have plenty of free tools to guide you, plus low-cost access to professional help through target-date funds. But as you near the end of your career, the stakes go up.”

Good advisors will do much more than just help with investment advice but also with distribution planning, tax planning, estate planning, and insurance planning to name a few. The benefit received from the advisor has to be greater than the cost paid. Just don't be penny wise but pound foolish.

Check out the full story at http://finance.yahoo.com/news/should-i-hire-a-financial-adviser-or-go-it-alone-.html

The Euro's Troubles

The excerpt below is from a keynote address gave in 2000 by "Uncle Milt" (or Milton Friedman as he's more commonly known). With all that is going on in Europe currently, it's not likely the question of whether the Euro is long-term sustainable will go away.

---

"The euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.

The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy.

On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise. The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification—tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now.

If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles."

—
Milton Friedman. Keynote address at "Revisiting the Case for Flexible Exchange Rates" Conference organized by the Bank of Canada, November 2000.
Available at http://www.bankofcanada.ca/wp-content/uploads/2010/08/keynote.pdf.

Interest Rate Curve Balls

Predicting interest rate movements correctly is hard. Predicting them for a living is harder still. But getting it wrong is nowhere near as painful as the experience of those who lose their own money based on someone's forecast.

A year ago, the Reuters news agency polled a group of people closer than just about any other community to those who actually decide rate movements. These were 16 money market dealers who do business directly with the US Federal Reserve.¹ The so-called primary dealers — banks or broker-dealers — are market makers for government securities. They consult directly with the US central bank and Treasury about funding the budget deficit and implementing monetary policy. So if you wanted an informed view about the interest rate outlook, these might be the people you would call on first, which is what Reuters did when it asked the dealers for their forecasts for Treasury bond yields three, six and 12 months ahead.

Back in late September 2010, the dealers came up with a consensus forecast for US 10-year Treasury note yields rising from 2.50 per cent to 2.70 per cent in three months, 2.80 per cent in six months and to 3.20 per cent by September 2011. So how did those forecasts turn out? Well, after three months, the yields had already surpassed the 12-month forecast at around 3.3 per cent. Another three months on, yields had topped 3.4 per cent, again well above forecasts. But then they started coming down again and by September 2011, were close to 2 per cent.

So the expert panel misjudged the trajectory for bond yields in terms of the magnitude of the increase in the first six months and then completely got the direction itself wrong in the subsequent six months.

Other revered market participants also misjudged the market. In February, the world's biggest bond fund PIMCO announced it had reduced its US government-related debt holdings from 22 per cent in December 2010 to just 12 per cent in January 2011, the lowest in two years. In March, PIMCO announced it had eliminated government related debt entirely from its flagship fund, saying that bond yields had reached unsustainably low levels given the scale of government debt obligations and the chance of a correction when the Federal Reserve ended its quantitative easing program.

But by August, PIMCO manager Bill Gross admitted he had made a mistake, telling the UK Financial Times that he felt like "crying in his beer", so badly had he misjudged the movement in bonds in 2011. "Do I wish I had more Treasuries? Yeah, that’s pretty obvious," Mr Gross told the FT.

None of this is to impugn Mr Gross' logic earlier this year in saying that the term risk of investing in government bonds was not worth the meager return. But as tends to happen with forecasts, events intervene and those who maintained an exposure to Treasuries in 2011 have enjoyed solid returns in the intervening months.

The chart above compares the relative yields of US Treasuries at various maturities in January this year versus more recently in September. You can see that the curve was relatively steeper earlier this year than it is now. The yield spread between the 10-year bond and the 1-year bonds was just over three percentage points in January. By September, this term premium had contracted to two percentage points. The change reflects news in the intervening period. Sentiment about the US economy has deteriorated in that time and investors have become more averse to taking term risk.

Put another way, when yields fall, prices rise. So those whose net exposure was relatively longer earlier in the year have enjoyed a capital gain that was not available to those who took a bet against Treasuries early this year.

Research has shown there is a reliable relationship between current term spreads and future term premiums. So wider yield spreads predict larger term premiums, while narrower yield spreads predict smaller term premiums. This is why a variable maturity approach, varying the allocation towards short-term and intermediate bonds depending on the shape of the yield curve, is warranted.

The advantage of this approach is that only information available in the market at the present time is used. There is no need for forecasts, which can come undone as events and circumstances change.

The bad news is that financial markets have a tendency of sending even the most well informed and respected forecasters a curve ball. The good news is that you don’t have to take those sorts of risks if you don’t want to.

Best Regards,

Kevin Kroskey, CFP, MBA

1. POLL: Rising Bond Yields Constrained by QE, Reuters survey, Sept 28, 2011

Assessing the American Jobs Act

Will Congress pass it? What difference could it potentially make?

On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.

What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.

1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.^2,3

How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).^1,4

The bill isn’t set in stone yet. Though the House Republican leadership likes the essence of the plan, it may seek major alterations.

In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”⁴

Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.

                                                                                                                  

What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. While of course others see an upcoming object lesson in failed Keynesian economics. 

• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”^5,6

As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some strides.


Regards,


Kevin Kroskey, CFP, MBA

Citations.

1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
7 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]     

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