Q: I’d like to move a portion of my RMD this month directly to my church. It is my understanding that the direct move to a qualified charity can reduce the modified income used by the Social Security Administration in determining Medicare taxes. Is this correct?
A: Yes, this is correct. All we have to do is get the Tax ID number for your Church, then, we can send your RMD directly to them. What a wonderful way to avoid taxes!
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Q. I will be receiving a large (6 figures) gift from someone; do I have to pay the gift tax?
A: The person who makes the gift files the gift tax return, if necessary, and pays any tax. If someone gives you more than the annual gift tax exclusion amount $14,000, the giver must file a gift tax return. You will have to pay any capital gains tax that the funds earn once you have invested the gift.
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I know many people that cannot function at all without their premium coffee first thing in the morning. There are many other little things that we buy regularly that we can make ourselves at a much lower expense but don’t. So I ask; what are you willing to give up so you can have a more secure future? Let’s take the coffee as an example.
If you buy a premium coffee each day you are probably spending close to $4 per drink. If we just look a 5 day work week, that’s $20.
If you were to save and invest that $20/week and earned 4% on that savings, at the end of 15 years you would have $19,752.86. That’s a lot of coffee!
I challenge you to do two things:
First, just for two weeks pay cash for everything and get a receipt for every thing you buy. You will be surprised at how much money you spend per week without a thought about it.
Second, pick one item you are willing to give up for the sake of your future. It will hurt for about six weeks, and then you will not even miss that item as you watch your nest egg grow.
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We have all heard about the 4% rule, that is, when you begin your retirement you withdraw 4% of your account value annually to maintain your lifestyle and adjust the withdrawal amount up annually to match inflation. There have been many arguments as to why this rule is obsolete. Another way to prepare for paying yourself from your retirement nest egg is to establish your ceiling and floor.
Here is how this concept works:
You begin with an initial level of spending and then, depending on how much your nest egg’s value increases or decreases, adjust withdrawals up or down within bounds you set, say, reducing the current year’s withdrawal by no more than 2.5% from the previous year’s withdrawal and increasing it by no more than 5%.
I like this method of withdrawal better than the 4% rule because it forces you to review your portfolio annually and readjust your withdrawals.
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Q: I have heard conflicting information on what the Social Security Administration looks at to calculate my benefit. Is it 35 years of working or is it my 35 highest earning years that is used for the calculation?
A: Your Social Security benefit will be based on your best 35 years of earnings. If you do not have 35 years of earnings, the Social Security Administration will use zero earnings for those gaps.
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IRA’s have been around for a long time and are widely used for retirement savings. Here are three common snafus that a lot of people make:
1. Having too many accounts. I had a client that established a completely new IRA each year he made him contribution. When we met and he asked me to take over management of his massive number of IRA accounts, they had numbered 20. I transferred all of the small IRA’s into IRA’s have been around for a long time and are widely used for retirement savings. Here are three once manageable account.
2. Using the wrong investment mix. Recently, I have been meeting a number of 20 somethings that want to start investing; they are a bit gun-shy and are very concerned about preserving principal. They are at the age where a portfolio that is weighted more towards equities vs. income is prefect. The greatest asset they have is time. Generally, with a long time horizon to invest, equities prevail.
3. Waiting too late to start your IRA. I am not referencing age; I am referencing the calendar year. If you make your deposits to your IRA in the beginning of the year, you take advantage of the great assets I just mentioned – time. Make your contributions in January vs. April, over the years the extra 3 months of tax-deferred compounding will make a difference to your retirement.
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I have a client that is in her late 50’s and a widow. Recently, she gave me a check made out to an investment company to add to her account and I noticed that the names on the account were hers and her 28 year old son. I told her that her next stop from my office needed to be at her bank. She has to remove his name as a co-owner of the account right away. I told her she could add him as a signer on her account, and she should add the “Payable on death” designation to the account.
Here is the reason you do not want to be joint owners on any financial accounts with your kids:
If her son had caused an accident and was sued, her assets may be subject to the suit and taken for a settlement.
If her son were to walk from a debt, she may be held liable.
If her son suffers a catastrophic illness and racks up huge medical bills, she could be on the hook for those bills.
I know my client just wanted someone to have access to her account in an emergency and she now knows there is a better way to accomplish that.
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We always hear of wacky things that people try to deduct from their taxable income – these happen to be deductions that, surprisingly so, worked.
When I was in high school, I was trying to decide between art school and business school. I decided I did not want to be a starving artist – who knew that if I went down that path, I could have this deduction:
If you are a “performing artist,” you may be able to deduct your business expenses if you have at least two employers. If each has paid you at least $200, and your expenses are 10% of what you make, you can take a deduction if your AGI is less than $16,000.
Are you a cat lover? This may work for you;
A couple bought cat food for feral cats that congregated at their junk yard. The cats help keep the rat and snake population down, making the junk yard safer for customers. The couples argued this before the IRS and were allowed to keep the deduction.
In this case, beer and gasoline do go together:
A gas station owner offered free beer with a fill-up. The owner’s sales increased a lot and in Tax Court the owner argued successfully that the cost of the beer was a business expense.
You can get creative, to a point with your deductions, but make sure you consult a tax professional if you will be pushing the envelope with your own wacky deduction.
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