Effects of Divorce
December 19, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
I just read a really interesting article in the Journal of Financial Planning. After divorce, the income of each spouse falls. On average, the income of the woman declines by 27%. The average income of the man declines by about 10%. The stats for both parties are positively affected by the presence of a significant other (parents, close friend, boyfriend/girlfriend) and by increased education. Children in the home affect women more than men, but the income effect of children is not as great as you might expect.
No one wants to have divorce happen. But this article really underscores the importance of having detailed analysis of the financial aspects of a divorce to ensure that the separation is equitable. And especially for women, the importance of taking charge of your financial situation whether single, married or divorced.
How much financial aid?
December 5, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
You can now get an estimate of how much financial aid your child will qualify for before you actually apply. The U.S. Department of Education offers an online financial aid tool to help families better prepare for the cost of college. Called the FAFSA4caster (catchy, isn’t it?), it’s modeled on the government’s official aid application, the FAFSA (Free Application for Federal Student Aid). The tool examines a family’s financial data and estimates how much aid a student might expect to get. To use the tool, visit www.fafsa4caster.ed.gov.
- Social Security numbers
- Federal tax information or tax returns, including W-2 information
- Information on savings, investments, and business and farm assets
- Records of any untaxed income (such as Social Security or welfare benefits)
To get as accurate an estimate as possible, you should answer all the questions on the tool, even if you have to estimate or guess.
Using the FAFSA4caster isn’t exactly a quick process, but when you’re ready to apply officially for federal aid, the FAFSA4caster will automatically transfer all of your data (that’s password protected and saved securely) to your online FAFSA application, saving you the hassle of keying in all your information again. And, if your financial circumstances change, you’ll get the opportunity to update any answers on the FAFSA that you originally submitted on the FAFSA4caster.
By providing an advance estimate of federal aid eligibility, the FAFSA4caster can help you forecast how much money you and/or your child may need to come up with to meet college costs–information that can also come in handy in the college selection process. By having an idea of the numbers ahead of time, you can help minimize unwelcome surprises. You can also work with your child sooner rather than later to fill the gaps between financial aid and the cost of their desired school.
Annuities: Retirement Income Option
December 5, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Everyone like a guarantee. Unfortunately, in the financial services industry they’re few and far between. And those that are available often come with a steep price — if you can even figure out what the price is.
- Life only. Payments continue during your lifetime, but stop at your death.
- Period certain. Payments are made for a fixed period of time (e.g., 5, 10, 15, 20 years). If you die prior to the end of the chosen period, your beneficiary will continue to receive payments for the remainder of the fixed period.
- Life with a period certain. Payments are made for the rest of your life or a minimum period of time. If you die prior to the end of the minimum payment period, the beneficiary you name in the annuity will receive the payments for the remainder of the period certain, but no longer. If you outlive the period certain, payments will end at your death.
- Joint and survivor. Payments are based on the lives of two people, typically you and your spouse. When either of you dies, payments continue to be made to the survivor. This option can also be combined with a period certain option, in which case payments will continue until both of you have died or for the minimum period of time you select, whichever is longer.
- Installment refund/cash refund. If you die prior to receiving at least the return of your investment in the immediate annuity, your beneficiary will receive an amount equal to the difference between what you invested and what you received. Your beneficiary will receive this amount in either a lump sum (cash refund) or periodic payments (installment refund).
The amount of each SPIA payment you get can be affected by the payment option you select. For example, a 60-year-old man who invests $100,000 in an immediate annuity may receive annual payments of $7,260 for the life only option, $6,696 for life with a period certain of 20 years, or $7,920 for a fixed period of 20 years. (This example is for illustration purposes only and does not reflect actual insurance products or performance, nor is it intended to promote a specific company or product.)
December 2008 Newsletter
December 5, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The December Newsletter is now available.
Click here to view the newsletter.
Year End Tax Planning Techniques
December 3, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Many tax provisions that had already expired or were scheduled to expire at the end of the year were extended as part of the Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008. Included in the list of extended provisions is an additional one year alternative minimum tax (AMT) “patch,” eliminating a level of uncertainty that would otherwise have plagued many individuals as they reviewed their year-end tax situation. As always, year-end presents both an opportunity and a challenge when it comes to tax planning. But keep in mind that the window of opportunity for many taxsaving moves closes on December 31.
The basics: timing is everything
Year-end tax planning is as much about the 2009 tax year as it is about the 2008 tax year. There’s a real opportunity for tax savings when you can predict that you’ll be paying taxes at a lower rate in one year than in the other. If that’s the case, some simple year-end moves can pay off in a big way.
Unless you think you’ll be in a higher bracket next year, look for opportunities to defer income to 2009. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Similarly, you may be able to accelerate deductions into 2008 by paying some deductible expenses such as medical expenses, interest, and state and local taxes before year end.
Delay income / Accelerate deductions
- Delay collection of business debts, rents, and payments for services (if you use the cash method of accounting)
- Defer compensation/year-end bonus if possible
- Defer sale of capital gain property or take installment payments instead of lump-sum payment
- Postpone retirement plan distributions that aren’t required
- Make next year’s charitable contribution this year instead
- Pay medical expenses that are due in January before the end of the year
- Prepay deductible interest and property tax
- Make first quarter installment payment of state estimated tax in December
- Accelerate alimony payments
AMT: What you don’t know could hurt you
If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers, like deferring income and accelerating deductions, can actually hurt you. The AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end moves. For example, if you’re subject to the AMT in 2008, prepaying 2009 state and local taxes won’t help your 2008 tax situation, but could hurt your 2009 bottom line.
The Emergency Economic Stabilization Act brought the latest in a long series of temporary “fixes” for AMT, but this patch (which includes increased AMT exemption amounts), expires at the end of the year. It’s likely that a more permanent solution will be implemented next year, but the specifics of such a permanent solution are uncertain.
There’s also good news for many who have been subject to AMT in prior years, particularly those caught in the AMT web as a result of exercising incentive stock options in the past. The Stabilization Act makes the calculation of the AMT refundable credit amount more taxpayer-friendly (through 2012), and eliminates the phase-out of the refundable credit amount for individuals with higher adjusted gross incomes. The Act also provides for an abatement of outstanding tax balances owed as of October 3, 2008, attributable to the AMT treatment of incentive stock options. The bottom line? Consider carefully your AMT situation for 2008 in light of the recent changes.
IRA and retirement plan opportunities
Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2008 income. Contributions you make to a Roth IRA (assuming that you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2008, but qualified Roth distributions are completely free from federal income tax–making these retirement savings vehicles very appealing.
For 2008, the maximum amount that you can contribute to a 401(k) plan is $15,500, and you can contribute up to $5,000 to an IRA. If you’re age 50 or older, you can contribute up to $20,500 to a 401(k) and up to $6,000 to an IRA. The window to make 2008 contributions to your 401(k) closes at the end of the year, while you can generally make 2008 contributions to your IRA until April 15, 2009.
For some, it may make sense to think past 2008 and 2009: If you qualify, consider whether it makes sense to convert some or all of your traditional IRA assets to a Roth IRA. Funds that you convert, to the extent that the funds represent investment earnings and deductible contributions, are considered taxable income. Nevertheless, the potential future tax benefit could outweigh the current tax bill.
New and extended provisions
The Emergency Economic Stabilization Act also extended several popular provisions that had expired or were set to expire. To the extent that they apply to you, be sure to factor these items into your year-end analysis:
- For 2008 and 2009, you’ll continue to have the option to deduct state and local general sales tax (instead of state and local income tax) on your Schedule A.
- The above-the-line deduction (maximum $4,000 deduction) for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals, are also extended through 2009.
- Taxpayers age 70½ or older now have through 2009 to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity, without including the distribution in income.
- Beginning this year (and continuing for 2009 as well), individuals who do not itemize deductions are able to claim an additional standard deduction of up to $500 ($1,000 for married couples filing jointly) for real estate property taxes paid.
Energy efficient home improvements
A credit of up to $500 for the purchase of energy efficient home improvements (e.g., insulation, exterior windows and doors) and energy efficient property (e.g., qualified furnaces) expired at the end of 2007.
The Emergency Economic Stabilization Act reinstated the credit, but only for property placed in service during 2009. While limited in scope–for example, the credit is capped at $200 for windows, and $150 for qualified furnaces–the credit offers an opportunity for savings. If you’re eligible for the credit, and plan on making a qualifying improvement or purchase, waiting until 2009 to do so might make sense in order to qualify for the credit.
2009 Key Numbers
December 3, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
This document is a really handy reference. If you look at your finances on any sort of ongoing basis, you may want to print it out and keep it on your desk. It has everything from tax brackets to retirement plan limits, mileage deduction amounts, adoption credits, phase-outs, education tax credits, social security info, medicare premiums, and lots more. Enjoy! 2009-key-numbers
New help for college funding
December 3, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Student loans staged a disappearing act in 2008, as the credit crisis drove some lenders out of the student loan market and forced others to become more selective. But the Higher Education Opportunity Act, which became law in August, contains several provisions that will help families and students better manage the high cost of college. These will be phased in during 2009 and in future years. Some highlights:
- Individuals who have worked for at least ten years in certain public service occupations (e.g., teachers, nurses, law enforcement officers, firefighters) may qualify to have their federal student loan debt forgiven (up to $10,000)
- Colleges will be encouraged to control price increases, and textbook publishers will be required to provide complete retail price information and sell unbundled versions of textbooks to help control costs
- The maximum Pell Grant will increase from $5,800 to $9,000 per academic year, and will be available year-round
- The federal student aid application (FAFSA) will be streamlined, making it easier to apply for financial aid
Expanded education benefits for the military
August 1, 2009, marks the debut of a new GI bill, which has been hailed as the first major expansion of education benefits for the military since World War II. Active duty servicemembers (including members of the Guard and Reserve) may be eligible for the new program. Education benefits will be payable for up to 36 months, and will cover tuition costs and fees. Eligible veterans may also receive a monthly stipend for books and supplies, and a monthly housing allowance. In some cases, benefits may even be transferable to spouses and dependent children. You can find more information on the Department of Veterans Affair’s website, www.gibill.va.gov.
Free Seminar, Jan. 5: Retirement Savings
December 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Where: Keller Public Library (640 Johnson Rd., Keller, TX)
When: Monday, January 5, 2009, 6:30 to 8:00 p.m.
Limited Space. Reservations Recommended. Call (817) 743-4840 to reserve your seat.
Figure out how much you need to save for retirement. Take a realistic look at your progress, and get the tools to build a solid plan and the peace of knowing you’re taking care of this important part of your future. Presented by: Jean Keener
See all Seminars where I’m speaking here.