Confusion reigns as taxes change

At the best of times taxes are confusing, so much so that most people hire an accountant to prepare them. This coming year should be a real doozy for the accountancy industry. Given the massive changes to the tax code that will go into effect next year, taxpayers are rightly concerned (and confused) on exactly what the rules will be and how they will impact their families. “Most (although not all) taxpayers would owe less under the new rules, according to analyses by various independent think tanks, including the Tax Foundation and the Tax Policy Center,” according to Charles Schwab and Co. In high tax states, lines are already forming at the local assessor’s offices. New York Governor Cuomo just signed an emergency executive order that urges counties in the state to send 2018 property tax bills now before the end of the year. That way, residents can pay next year’s taxes before the end of the year thereby still taking a tax deduction against their Federal tax bill. Money management firms across the country are also being besieged by clients who want to pay next year’s fees in advance in an effort to take advantage of that tax deduction before those too expire in 2018 under the new legislation. Phone lines to most accountancy firms ring busy and even office voice mails are full. Let’s start with your tax brackets. There are still seven tax brackets but the new legislation generally lowers rates across income levels. For a couple filing jointly, the new brackets will be 10% for taxable income up to $19,050, 12% on $19,050 up to $77,400, 22% on...

To roll, or not to roll your 401(k)

Rolling your 401(k) or 403(b) into an IRA can be a good idea for some savers but not for others. Here are some things to think about before you make a decision.   In my last column, I outlined some of the more obvious reasons for rolling over your retirement accounts: cost savings, larger selections of investment choices, more flexibility. I also discussed some of the cons against rolling it over: the ability to borrow against your 401(k), a lower age for beginning distributions from your 401(k) (55, versus 59 ½ for an IRA), the ability to delay minimum required distributions after 70 ½, if you are still working. This week, I want to focus on one of the greatest weaknesses of just about all employee tax-deferred retirement accounts. When the public and private sector came up with the concept of tax-deferred retirement accounts to replace pension funds, they forgot one extremely important detail. Pension funds for a company’s employees were managed by full-time professionals. That makes sense because managing retirement savings is a full-time job. Unfortunately, the government ignored that fact when they gave the responsibility of managing tax-deferred retirement savings to the worker. Few workers are qualified to do that. They are totally focused on the full-time job of making a living, getting ahead and providing for one’s family, as they should be. Even if they had the education, knowledge and skill to manage money, (which most don’t), they have few resources to do that job successfully. And as years of contributions have accumulated, many retirees now have hundreds of thousands of dollars (if not millions) invested...

Should you roll your 401(k) into an IRA?

Some retiring workers roll their 401(k) tax-deferred savings account into an Individual Retirement Account (IRA). There are good reasons to do so. But for those who are not retiring, the decision is not so clear cut. Here are some pros and cons to ponder. In my neighborhood, for example, a local company with over 300 employees is being acquired by another company from Chicago. As a result, the employees of the acquired company are being offered a choice: they can roll over their existing 401(k) into a new plan offered by the Chicago company, roll their 401(k) into an IRA, or just take the money out, pay taxes and spend it. Obviously, the last option is the worst choice. The tax bill on such a lump sum would be quite large and if the employee is not yet 55 years old, an additional 10% tax penalty would be levied on the money as well. So let’s assume that you are a rational human being who can see that option would be financial suicide. The two most obvious reasons to roll over your money into an IRA is that you suddenly have an entire universe of investment options to choose from instead of the typical 10-20 choices normally listed in a company 401(k) menu. The second reason is that you will have more control over your retirement funds. You may, for example, identify better performing funds with lower costs. If the markets take a tumble, you can step aside, rather than stay invested. Sometimes, you can also reduce costs, while at the same time improving your performance. Few 401(k)’s offer...

IRS changes tax rules for next year

As politicians squabble over tax reform and cuts, the Internal Revenue Service (IRS) continues to do their job. New tax provisions for 2018 are out and some of them may be of interest to you. Right now, there are seven marginal tax rates (soon to be three or four, if tax reform happens). Each tax bracket applies to a different income range. The highest tax rate (39.6%) will apply to all those who make $426,700, or $480,050 (married). The lowest rate, at 10%, would apply to those making $9,525 as an individual and $19,050, if married. You can review the other five brackets at your leisure by going to IRS.gov. The IRS has also increased the standard deduction to $6,500 (for singles) and $13,000 for married couples. That amounts to a $150 increase, and double that, if filing jointly. Your personal exemption also increases by $100 from last year and now phases out for those earning $266,700-$389,200 and ,if married, $320,000-$442,500. Single taxpayers whose adjusted gross income exceeds $266,700 ($320,000 if married and filing jointly), will now be subject to a limit on certain itemized deductions such as property tax deductions. The controversial Alternative Minimum Tax (AMT), which prevents high income earners from dodging individual income taxes, has also changed. The AMT exemption amount has increased from $54,300 to $55,400 for singles and begins to phase out at $123,100. For married couples, filing jointly, the new total is $86,200 from last year’s $84,500. The estate tax exclusion has also increased from $5.49 million to $5.6 million next year and the gift tax exclusion has increased by $1,000 to $15,000/year....

Two months has just been added to your social security retirement age

  If you are turning age 62 in 2017, I have some bad news. You are no longer eligible for full Social Security benefits at age 66. Instead, your full retirement benefits have shifted to age 66 and two months. By 2022, full retirement age will rise again and again until the age of 67 for everyone born in 1960 or later. “How did this happen?” you might ask. For the answer you have to look back thirty-four years to the Social Security Amendments Act of 1983. Back then, the Social Security Trust fund was running out of money (sound familiar?). The same politicians that were responsible for spending your hard-earned savings came up with a series of adjustments to extend the financial stability of the system for another 50 years. One of the provisions was to increase the Social Security full retirement age from 65 to 67. In order to soften the blow, the increase was to be phased in over time. Some Americans would be grandfathered in, while others would benefit from an eleven-year delay. The end result, after all the foot dragging, was those who happened to be age 22 or younger in early 1983–born in 1960 or later–would get screwed. Welcome to the American political system. The significance of this increase in the full retirement age is that for those thinking of taking benefits at age 66; you will be taking “early” retirement, resulting in a 1.1% reduction for starting payments two months before the new full retirement age. That means that the benefit reduction or penalty for taking early retirement increases from 25% to...

Tackling Taxes

President Donald Trump introduced a flurry of tax proposals last week. Tax reform, as well as tax cuts, was included in his plan. Give him an “A” for effort in tackling something that no politician has dared to do since Reagan. Naturally, depending upon your political views, critics will disparage his efforts, claiming it is yet another tax break for the rich. Others will approve of at least some of his suggestions. On the surface, his plan would significantly reduce the marginal tax rates, increase standard deductions, repeal personal exemptions, limit itemized deductions and let corporations and businesses expense new investment, but not deduct interest expense. His proposal would also cut taxes at all income levels. The biggest benefits would accrue to those who make the most money. Analysts estimate that if his proposal were passed as is Federal revenues would drop by $6.2 trillion over ten years. If you include interest costs over that decade, the country’s federal debt will rise by $7.2 trillion. The president originally campaigned on a 15% corporate tax rate, but upped that number to a 20% tax rate. It appeared that dropping it by the original 15% would be a budget buster. Still, that is a hefty reduction from today’s 35% (although few corporations actually pay that rate). One great idea is to allow a 25% tax rate for pass-through businesses. That would allow entrepreneurs that own their own businesses to pay a 25% tax instead of their personal tax rate. There is some controversy over exactly what kind of businesses could benefit from the pass-through rate. But since small businesses account for...