Do this now – 3 moves to make before the end of the year.

This year has gone by fast, take advantage of these three moves before the year is over.

Bunch your deductions.
Many of us are receiving our property tax bills now. Look at your projected income for next year, if you are expecting a raise or bonus, you may want to delay paying your 2017 property tax until January, then also pay your 2018 property tax next year. By bunching these two tax bills in one year, you will have a bigger deduction.
Harvest your gains.
If you currently are in a 10% or 15% tax bracket, you can take capital gains from investments and pay a 0% capital gains tax. You may also want to review your investments to see if you can match capital gains with capital losses, thus reducing the tax on the gains.
Hurricane Irma losses.
Most years, you can subtract $100 from your total hurricane losses, then subtract 10% of your adjusted gross income to get your deductible loss. In September, Congress approved legislation that waives the 10% AGI requirement. You will be able to write off losses over $500.

Don’t let these tax saving opportunities pass you by.

disclosures:http://www.hechteffect.net/?page_id=31

Will the ‘tax torpedo’ blow up your retirement? My CNBC interview.

Social Security may be a long-awaited retirement perk, but it’s not without its headaches and complications. (It is, after all, a government program, so that shouldn’t come as a complete surprise.) Retirees must manage their Social Security and other retirement income well if they hope to avoid the “tax torpedo.”

The tax torpedo is a name given to the unexpected way that Social Security can get taxed, depending on how much other income you have.

“It sneaks up on people,” said Justus Morgan, a certified financial planner with Financial Service Group. “The majority of folks don’t understand if or how Social Security can be taxed.”

Because the income amounts that are subject to tax aren’t indexed for inflation, more and more retirees will be ensnared in the tax torpedo in coming years.

Retirement is a taxing time

About half of retirees don’t need to worry about the taxation of Social Security benefits because their income is too low, according to the Congressional Budget Office.

But those with more income could have a portion of their Social Security taxed as they pass certain thresholds. Social Security isn’t taxed when provisional income is less than $25,000 for individuals ($32,000 for married couples filing jointly). When income is between $25,000 to $34,000 ($32,000 and $44,000 for married filing jointly), 50 percent of Social Security income is taxable. When provisional income is above those amounts, 85 percent of Social Security is taxable.

Provisional income is calculated by taking your modified adjusted gross income and adding half of the Social Security benefits received.

“Another shocker is that it’s all your sources of income, even income from tax-free bonds,” said CFP Nancy Hecht of Certified Financial Group. The tax torpedo typically comes at age 70½ , when the required minimum distribution from tax-deferred 401(k) plans and individual retirement accounts kicks in.

“I’ve had many of my clients pushed into a whole different tax bracket by having to take the RMD,” said Hecht. “Many of my clients will pay the same or more in retirement as they were paying while they were working.”

Consider the example of a single taxpayer whose taxable income puts her in the 25 percent tax bracket. She may think that withdrawing an additional $100 of income would increase her taxes by $25. But if she has hit the provisional income threshold, it could increase her income much more. In that case, an extra $100 would actually make $185 of income taxable because now she must include her Social Security, as well.

Now withdrawing $100 results in a $46.25 tax bill ($185 x 20 percent), resulting in a marginal tax rate 46.25 percent.

“It’s much more common for taxpayers at the lower- and middle-income tax brackets to get caught off guard by this,” said Morgan at Financial Service Group. “In many cases, higher-income taxpayers are already thinking about the impact of taxes on retirement.”

Consider your total tax burden

And there’s more bad news when your taxable income climbs too high. How much you pay for Medicare, the health insurance program for those 65 and older, depends on how much taxable income you have.

“Your Medicare premiums for Part B are based on modified adjusted gross income,” said William Meyer, founder and CEO of IncomeStrategy.com, a website the helps people maximize their sources of retirement income. “So if you withdraw too much of your IRA, you could increase your MAGI and that will affect the amount that you pay for Medicare.”

For single filers, Medicare Part B (the part that pays for doctor’s visits and services) costs $134 a month if MAGI is below $85,000, but it could run as high as $428.60 if it exceeds $214,000.

“It all needs to be coordinated, but people aren’t thinking about all of this together,” said Meyer.

Keeping the torpedo at bay

There aren’t too many options to lessen the sting of the tax torpedo for retirees who are already collecting Social Security and taking RMDs. Action must be taken years in advance to set up your income stream for maximum tax efficiency.

At the root of the tax-saving strategy is turning the conventional wisdom around retirement account withdrawals on its head. For many years retirees were advised to start their withdrawals with their taxable accounts while they allowed their tax-deferred pools of money to continue to grow. That way, they would have a bigger balance to draw on when it came time for RMDs.

The problem is that this strategy can create more taxable income than you want. Structuring withdrawals in a different way can keep less of your Social Security benefit from being taxed, said Meyer.

Instead, it might be better to structure withdrawals this way: Use your tax-deferred accounts in the early years of retirement, hopefully providing you with enough income so they do not need to tap Social Security until age 70, when benefits max out.

“For some people there’s just no avoiding the tax torpedo. They have to draw down their money because that’s what they’re going to live on.”
-Justus Morgan, certified financial planner with Financial Service Group
“Most people will be in a lower bracket early in retirement and before RMDs start,” Meyer said.

The idea is to push your taxable income into a lower tax bracket early on. “Not only will you get the ridiculously high 8 percent bump in Social Security for each year you wait to collect beyond full retirement age but you also drawn down your qualified accounts,” said Hecht of Certified Financial Group.

Then, when you must take RMDs, starting in the year you turn 70½, your account balance will be smaller and, therefore, your RMDs will be smaller. “Then when RMDs start, flip to the taxable account,” said Meyer of IncomeStrategy.com.

But not everyone is able to take advantage of those strategies, especially people who don’t have a combination of tax-deferred, taxable and tax-free accounts.

“For some people there’s just no avoiding the tax torpedo,” said Morgan at Financial Service Group. “They have to draw down their money because that’s what they’re going to live on.”

— By Ilana Polyak, special to CNBC.com

 

disclosures:http://www.hechteffect.net/?page_id=31

3 “Must do’s” before the end of this year.

This time of year gets so busy preparing for all of the upcoming holidays. We spend hours on our guest lists, gift lists, and decorations. I have 3 financial things you must do before the end of the year.
1. Rebalance your portfolio. There have been a lot of investments that have grown this year, you need to rebalance to be able to keep those gains and stay in line with your risk tolerance.
2. Don’t forget to take your Required Minimum Distribution. If you miss this withdrawal, you will pay a 50% penalty.
3. Review and adjust your budget. I am assuming that you have a budget – if not – make one right now! Did you end up spending more in some areas vs. others? Did you pay off a debt? You need to review and adjust your budget annually to stay on track with your short and long term goals.

Set yourself up for a successful 2018 by attending to these “must do’s”

disclosures:http://www.hechteffect.net/?page_id=31

It’s my first – what do I do?

Q: I turned 70 & 1/2 this year and have to take my first RMD (Required Minimum Distribution), I still work and contribute to my 401(k). Where do I have to take the withdrawals from?
A: This is a milestone birthday for taxes and retirement planning. Here is what you need to know:
If you have a Traditional IRA account you need to withdraw 3.65% of the 12/31/16 balance from the IRA and pay tax on the amount withdrawn. Congrats on still working, that gives you a bit of an RMD break. For those still working after 70 & 1/5 years of age and contributing to your 401(k) accounts, you need not withdraw from the 401(k).

disclosures:http://www.hechteffect.net/?page_id=31

Don’t’ be a grumpy old man.

Do you remember the 1993 movie “Grumpy old men?” It was about a couple of retired guys that spent most of their retirement bickering with each other and fishing. You would think that a story about lifelong friends spending their retirement years on the water would be nice, but they were grumpy because the only thing they had to do was fish and fight. A successful retirement takes more than money, it takes purpose.
Most pre-retirees as concerned about not having a regular schedule and things to do vs. having enough money. Many retirees worry that they will not be able to fill their days or feel that they still have a purpose in life. A big part of retirement planning is what you will do in the 25 or more years you still have to live + making sure that you have planned financially.
If you plan diligently for your retirement dollars and time, it will be a retirement that is enjoyable.

disclosures:http://www.hechteffect.net/?page_id=31

Under these circumstances, it is o.k. to tap into your 401(k).

If you have been impacted by Hurricane Irma and are short on cash, this may be the one time to use your 401(k) as a piggy-bank. Storm victims will be allowed to tap into their 401(k) accounts under the hardship withdrawal rules if they have been affected by flooding and destruction by the hurricane. Additionally, the IRS is waiving the 6 month ban on making new contributions to your 401(k) that typically go with a hardship withdrawal. Distributions must be made no later than January 31, 2018.
This is an example of how the IRS can be your friend in a time of need.

disclosures:http://www.hechteffect.net/?page_id=31

What’s your emergency?

With what we have gone through recently due to the weather, most of you know how important it is to have a readily available emergency stash, at least I hope so. We lost power for over a week, so having cash on hand allowed us to go shopping for food that could be prepared on the grill or eaten right away, as well as getting gas and other essentials. Sadly, over half of Americans polled by the Federal Reserve in a recent query said they don’t even have $500 in an emergency fund.
We are becoming a nation of spenders who no longer save. Money has become a card you stick in a machine to get a product, and maybe, not get a receipt so you can actually see how much you are spending. If we are not keeping track of the small stuff, how are we ever going to handle an emergency?
I have written a few times in the past about having an emergency fund. I cannot tell you how much is the correct amount to have available in cash for your emergency, but I can tell you to have the cash!
As you look back on the impact the hurricane Irma has had on your lifestyle, please put together your emergency stash. After that, your emergency will be no big deal from a financial standpoint.

disclosures:http://www.hechteffect.net/?page_id=31

Did you jump the gun?

Did you jump the gun?
Whenever I meet with someone that says they are ready to retire, I ask them what they will do with their time. If the person starts rattling off a list of things they have to, and want to do, I don’t worry. If I get a blank stare, I worry that they may jump the retirement gun. Here are a few sign that you have retired too soon:

You are bored.
Boredom is a bad thing. I have seen clients spend too much money, gain a lot of weight, and start showing dementia like symptoms out of boredom. 30% of those who retire early, wish they could go back to their old careers. Consider your temperament when potentially dealing with hours of free time.
You don’t qualify for Medicare.
We all know the state of health care today is in flux. For many, premiums and/or out-of-pocket expenses are going up at an alarming pace. If you retire before age 65, you may have a COBRA policy for 18 months, then you will have to go on the exchange and get an individual health insurance policy. Navigating the choices and expenses can drive a person crazy. You must consider how potentially high health insurance costs will impact your retirement resources.

You are withdrawing Social Security benefits early.
Plain and simple: you will take a permanent cut in your Social Security benefit by drawing prior to full retirement age. Let’s say you retire at age 63 and start drawing Social Security benefits. You will take a 20% cut in your benefit for the rest of your life.

Before you pull the trigger, please discuss your retirement plans with your spouse or partner, then, hire a Certified Financial Planner™ professional to provide you with a comprehensive retirement plan that will compare retiring early or at full retirement age.

disclosures:http://www.hechteffect.net/?page_id=31