August 2010 Personal Finance Newsletter
August 13, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The August 2010 personal finance newsletter is now available. It includes information on how college scholarships are taxed, how the new healthcare law affects Medicare drug plans, and, as always, an investment market update. Enjoy! Click here to view the newsletter.
April 2010 Monthly Newsletter
April 15, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The April 2010 monthly newsletter is now available. It includes information on how the new healthcare law may affect you as an individual and new student loan and financial aid provisions. Also covered are an investment market update and a discussion on the merits of dollar cost averaging to make investments vs. lump-sum investing. Please click here to view the full newsletter.
New Health Care Law Highlights
April 2, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re like me, you found it challenging to keep up with the provisions of the health care bills as they worked through the legislative process. But now that the bill is law, it’s helpful to understand how it may affect your individual situation and any changes that need to be made to your financial plan as a result. An overview of some of the most significant provisions:
For individuals
- U.S. citizens and legal residents will be required to have health insurance by 2014, with some exceptions. Those without insurance will face a tax penalty of as much as 2.5% of taxable income.
- Existing employer-sponsored health insurance plans will be allowed to remain essentially the same except the plans will be required to extend dependent coverage to qualifying children through age 26, lifetime limits (and eventually, annual dollar limits) on coverage must be eliminated, waiting periods for coverage cannot extend beyond 90 days, and insurers will not be able to deny coverage or charge higher premiums to people based on their health status and gender.
- Medicaid eligibility will be expanded to include individuals under age 65 whose income is less than 133% of the Federal Poverty Level.
- For families with incomes up to 400% of the Federal Poverty Level, tax credits and subsidies will be available to purchase health insurance through state-run exchanges, and to offset out-of-pocket costs.
- Contributions to a health flexible spending account will be limited to $2,500 per year. Reimbursements from health FSAs and HRAs for over-the-counter drugs will be restricted, and tax-free reimbursements from HSAs and Archer MSAs for over-the-counter drugs will not be allowed, while the tax on HSAs and Archer MSAs increases for distributions not used for qualified medical expenses.
- A rebate of $250 will be available to Medicare Part D (drug coverage) beneficiaries who reach the coverage gap (donut hole) and the coinsurance rate for costs within this gap are gradually reduced to 25%.
- Adults with pre-existing conditions will be able to purchase coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions.
- A national program will be established to provide limited reimbursement for long-term care expenses for individuals who participate by contributing to the program’s cost through voluntary payroll deductions.
For employers
- Employers with 50 or more employees that do not offer health insurance coverage will generally have to pay a premium tax of up to $2,000 per full-time employee.
- Employers with more than 200 employees must automatically enroll employees in health insurance plans from which employees may opt out.
- Employers providing health insurance must offer a voucher to qualifying employees to purchase insurance through an exchange.
- Qualifying small employers may receive a tax credit for providing health insurance to employees.
Tax changes
- The threshold for itemized deductions for qualified medical expenses will be increased from 7.5% of adjusted gross income (AGI) to 10% of AGI, though a temporary exception will be maintained for those 65 and older.
- The tax for Medicare Part A (hospitalization coverage) is increased 0.9% for individuals with earnings exceeding $200,000, and for couples with joint earnings greater than $250,000. Also, high-income taxpayers will be subject to a surtax of 3.8% on unearned income, such as capital gains, dividends, annuities, and rental income.
- The law imposes a 10% tax on the amount paid for indoor tanning services.
As provisions go into effect and more details become known, it will be important to update your investments and insurance plans to minimize your tax burden, get the most insurance for your money, and stay in compliance with the law.
March 2010 Newsletter
March 9, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The March 2010 Newsletter is now available. It includes an investment market update, Part II in my series on how to tap into your home equity in retirement, considerations in evaluating an early retirement offer, information on 2009 tax deduction for 2010 Haitian relief contributions, 2011 tax rate proposals found in the federal budget, credit card act provisions, and a reminder on the deadline to take advantage of the home buyers credit. Click here to read it.
January 2010 Newsletter
January 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The January 2010 newsletter is now available. Beginning in 2010, it will be published the second week of each month. This month’s newsletter includes a brief 2009 market update, an update on the estate tax for 2010, how to conduct a home inventory, and more. Click here to read it.
Buying a home to cash in on home buyers tax credit?
November 12, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
You may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also. For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income. A deduction, depending on which tax bracket you’re in, saves you between 10% and 35% of the deduction. The credit saves you 100% of the credit amount. The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?
Yes, this is a good idea. If it’s just a question of changing your timing by a few months to take advantage of the tax credit and there aren’t other substantial costs with the change, that makes all the sense in the world.
If you weren’t planning to purchase a home already, should this credit motivate you to take action?
Definitely not. If you weren’t planning to buy a home and aren’t financially ready for the purchase, this tax credit doesn’t significantly change that math.
For existing home owners, the costs of a move are too high to even come close to being offset by this credit. Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn’t significantly change whether home ownership is right for you. Yes, the $8,000 is a nice bonus. But it’s a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit. The mortgage is just the beginning of the cost of home ownership – consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment. There’s also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it’s up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan. The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children’s college. But the credit shouldn’t tempt you to make a decision that will end up hurting you financially long-term. Make sure your math includes the long-term total cost of your move!
2009 Year-End Tax Planning Checklist
November 4, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Reviewing your tax situation for the year when you still have time to do something about it is always a good idea. You have many more options to affect your tax liability by acting before the year ends. This year, it’s still important to review all the regular opportunities available every year, but we also have many unique opportunities for 2009 that can save you additional money.
Some of the standard areas to consider
If you think your tax bracket next year will be the same or lower than your tax bracket this year, look for opportunities to defer income to 2010 and accelerate deductions. However, if you are subject to the Alternative Minimum Tax, give this special analysis because these actions don’t always work to your benefit with the AMT.
Max out employer retirement plan contributions before year end — $16,500 for a 401(k), plus an extra $5,500 for those 50+ before December 31. Make IRA contributions prior to April 15.
If you are self-employed, set up a retirement plan if you haven’t already done so.
Review the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little or too much for this year. Don’t forget that you can set aside amounts to get tax-free reimbursements for over-the-counter drugs.
If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2009.
Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding before year-end.
You may wish to realize losses in your investment portfolio. Up to $3,000 can be deducted from your income each year.
You can save gift and estate taxes by making gifts within the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The limit applies to each person, so a married couple can give $26,000 total to each person.
Some of the special consideration for 2009
Required Minimum Distributions suspended for 2009 — If you already took an RMD for 2009, you may be able to roll over the RMD to the same (or to a different) IRA or eligible retirement plan–you generally have until the later of 60 days from the time you took the distribution or November 30, 2009.
Roth IRA 2010 conversions – It’s worth looking ahead to 2010 when special rules will apply to Roth conversions. These rule changes might influence your actions now by planning to defer deductions to offset future taxes or by making non-deductible traditional IRA contributions now in anticipation of converting them later. Click here to read my blog post on 2010 Roth conversions.
Depreciation rules for 2009 allow an additional 50% first-year depreciation deduction for qualifying property purchased for use in your business on or before December 31. In lieu of depreciation, Section 179 deduction rules allow for the deduction, or “expensing,” of up to $250,000 of the cost of qualifying property placed in service during 2009. Currently, that limit is scheduled to drop to $125,000 (adjusted for inflation) in 2010.
A tax credit of up to $8,000 is available in 2009 for qualified first-time homebuyers (only homes purchased before December 1, 2009, qualify).
The first $2,400 of unemployment compensation received in 2009 is excluded from income for federal income tax purposes.
If you itemize deductions, 2009 is the last year you’ll have the option to deduct state and local sales tax instead of state and local income tax (as the law currently stands).
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 for 2009, the last year this deduction will be available (as the law currently stands).
The temporary deduction for sales and excise tax relating to the purchase of a qualified new automobile, light truck, or motorcycle applies to vehicles purchased through December 31, 2009.
The above-the-line (maximum $4,000) deduction for qualified tuition and related expenses expires at the end of 2009, as does the above-the-line deduction for up to $250 in out-of-pocket classroom expenses paid by educational professionals.
Individuals age 70½ or older have only until December 31, 2009, to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity, without including the distribution in income.
Special considerations for high income earners
Many expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less advantageous. Long-term capital gains rates could go up as well, so it may make sense for some to accelerate substantial profits into this year instead of a few years down the road. It also makes sense to proceed with caution in any Roth conversion strategy to determine the most advantageous year or years to pay the conversion tax. This decision can be delayed until you file your 2010 taxes by which time hopefully there will be more clarity on this issue.
There is some good news for high-income earners. There will no longer be an income based reduction of most itemized deductions, and there also won’t be a phase-out of personal exemptions. Traditional IRA to Roth IRA conversions will also be allowed regardless of a taxpayer’s income.
Consult your tax advisor
With all of the items on this checklist, there are potentially many nuances and additional rules not listed here. It’s important to consult with your tax advisor prior to implementing any of these suggestions.
Roth IRA Conversion Overview
September 14, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
Through 2009, converting an IRA from a traditional IRA to Roth is only available for those with household incomes under $100,000. Beginning next year, that changes. However, a lot of people aren’t aware of the upcoming changes — according to Financial Planning magazine, only 42% of advisor clients were aware of the new Roth IRA conversion opportunity. I will be doing a series of blog posts over the next couple of weeks giving you the details on this opportunity and some examples of who should consider this strategy. Of course, everyone’s situation is unique and these posts are for informational purposes only, so you should only make the decision after consulting with your own financial advisor.
First, why would you want to convert?
Funds withdrawn from a traditional IRA are subject to regular income tax. Funds withdrawn from a Roth IRA (both contributions and earnings) after age 59 1/2 and after you’ve owned the IRA for 5 years are federal income tax-free. By converting from a traditional to Roth IRA, you are paying taxes sooner rather than later on your IRA balance. This strategy allows your post-conversion earnings to avoid taxation altogether and to have potential tax savings on the contributions if your tax rate goes is higher in the future. It also gives you greater flexibility on when you use the funds because Roth IRAs do not have required minimum distributions. For some people, using this strategy can create a larger pool of after-tax retirement income and help with estate planning.
If you’d rather watch a video than read about the Roth IRA changes, this video comes from a service I subscribe to and provides a good overview of the conversion opportunity. Let me know what you think!
Roth IRA Conversion Video
Education Funding Recap
August 10, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The world of higher education has received some attention in Washington this year. I’ve done several posts on the topic, but wanted to offer this summary of both what’s passed and what’s proposed in the budget for FY 2010.
The American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law by President Obama in February. This legislation, along with President Obama’s proposed budget for FY 2010, contains several provisions related to higher education.
Hope credit
The Hope credit is a tax credit for college tuition and related expenses. ARRA changed the Hope credit significantly. For 2009 and 2010, the Hope credit is renamed the American Opportunity tax credit and can be worth $2,500 per student per year, up from $1,800. (President Obama’s FY 2010 budget blueprint proposes making the credit permanent.) In addition, the credit now applies to the first four years of a student’s post-secondary education, provided he or she attends at least half-time (previously, the credit applied only to the first two years of college). And the income limits for qualifying have been increased:
- A full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 (previously $50,000) and joint filers with a MAGI below $160,000 (previously $100,000)
- A partial credit is available to single filers with a MAGI between $80,000 and $90,000 (previously $50,000 and $60,000) and joint filers with a MAGI between $160,000 and $180,000 (previously $100,000 and $120,000)
Other points to note about the new credit:
- The credit may be claimed against an individual’s alternative minimum tax liability
- Up to 40% of an individual’s allowable credit may be refundable
- For purposes of the credit, the definition of “qualified tuition and related expenses” is expanded to include course materials
- By increasing both the amount of the credit and the income limits to qualify for it, and by expanding the availability of the credit to all four years of college, the federal government has put the focus on helping traditional college students pay for college. (Congress did not increase the amount of the Lifetime Learning credit, which is geared more toward occasional courses taken by students who are enrolled in school less than full-time.)
Qualified expenses and 529 plans
ARRA has expanded the definition of “qualified higher education expenses” for 529 plans to include expenses paid or incurred in 2009 or 2010 for computer technology, equipment, and Internet access, provided they are used by the 529 plan beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. This means you can take a tax-free withdrawal from your 529 plan to pay for these items. (Previously, a computer had to be required by the college in order to be considered a qualified education expense.) This carve out for computer-related expenses is similar to the existing provision for K-12 computer expenses currently allowed by Coverdell education savings accounts.
Pell Grants
ARRA increased the maximum Pell Grant to $5,350 for 2009/2010 and to $5,550 for 2010/2011. President Obama’s FY 2010 budget proposes making the Pell Grant program a mandatory spending program with automatic increases tied to the Consumer Price Index.
Federal Family Education Loan program
President Obama’s 2010 proposed budget seeks to eliminate the Federal Family Education Loan program in 2010. If it passes, all student loans would be made through the federal government’s Direct Loan program.
Financial aid
According to www.whitehouse.gov, President Obama wants to simplify the federal financial aid application process by eliminating the current FAFSA application and allowing families to apply by simply checking a box on their tax form, authorizing their tax information to be used. Stay tuned to see whether this major time-saving objective will happen in 2010.
July 2009 Newsletter
July 1, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The July 2009 newsletter is now available online. It reviews some blog information on FDIC insurance limits, establishing an emergency fund, and down market estate planning opportunities. It also covers new information on whether or not you should refinance your mortgage and considerations in diversifying your investments. Click here to read it.