taxes – Safe Retirement Income

July 26, 2018 by Tim Barton Leave a Comment

Avoid Probate Strategies

Probate = the Latin word for proving, which means that the estate probate process is the process by which your will is brought before a court to determine that it is a valid will. The courts charged with this responsibility are generally known as probate courts, which may supervise the administration or settlement of your estate.

Supervision of the estate settlement process by the probate court can result in additional expense, unwanted publicity and delays of a year or more before heirs receive their inheritance. The public hearings, delays, and cost of probate motivate many people to explore ways in which to avoid or minimize the impact of probating a will, including:

State Statute

Many states have made provision for certain estates to be administered without the supervision of the probate court, resulting in less cost and a speedier distribution to heirs. Assuming they meet the specific legal requirements.

A form of Property Ownership

The joint tenancy form of holding title to property allows ownership to pass automatically to the surviving joint tenant, who is usually the surviving spouse.

Transfer on Death

Many states have enacted Transfer on Death statutes that allow a person to name a successor owner at death on the property title certificate for certain types of property, including real estate, savings accounts, and securities.

Life Insurance

Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.

Lifetime Giving

Gifts are given during life avoid the probate process, even if made shortly before death.

Trusts

A “Totten” trust, which is a bank savings account held in trust for a named individual, can be used to pass estate assets at death outside of the probate process.
A revocable living trust, created during the estate owner’s lifetime, can be an effective way to avoid the expense and delay of probate while retaining the estate owner’s control of his or her assets before death.

Proper planning may serve to minimize the impact of the probate process on your estate and heirs.

Any potential method of avoiding probate, however, should be evaluated regarding its income and tax consequences, as well as its potential impact on the estate owner’s overall estate planning goals and objectives.

July 25, 2016 by Tim Barton Leave a Comment

Tips for Managing an Inheritance

Take your time. This is an emotional time…not the best time to be making important financial decisions. Short of meeting any required tax or legal deadlines, don’t make hasty decisions concerning your inheritance.

Identify a team of reputable, trusted advisors (attorney, accountant, financial/insurance advisors). There are complicated tax laws and requirements related to certain inherited assets. Without accurate, reliable advice, you may find an unnecessarily large chunk of your inheritance going to pay taxes.

Park the money. Deposit any inherited money or investments in a bank or brokerage account until you’re in a position to make definitive decisions on what you want to do with your inheritance.

Understand the tax consequences of inherited assets. If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Otherwise, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration.

Treat inherited retirement assets with care. The tax treatment of inherited retirement assets is a complex subject. Make sure the retirement plan administrator does not send you a check for the retirement plan proceeds until you have made a distribution decision. Get sound professional financial and tax advice before taking any money from an inherited retirement plan…otherwise you may find yourself liable for paying income taxes on the entire value of the retirement account.

If you received an interest in a trust, familiarize yourself with the trust document and the terms under which you receive distributions from the trust, as well as with the trustee and trust administration fees.

Take stock. Create a financial inventory of your assets and your debts. Start with a clean slate and reassess your financial needs, objectives and goals.

Develop a financial plan. Consider working with a financial advisor to “test drive” various scenarios and determine how your funds should be invested to accomplish your financial goals.

Evaluate your insurance needs. If you inherited valuable personal property, you will probably need to increase your property and casualty coverage or purchase new coverage. If your inheritance is substantial, consider increasing your liability insurance to protect against lawsuits. Finally, evaluate whether your life insurance needs have changed as a result of your inheritance.

Review your estate plan. Your inheritance, together with your experience in managing it, may lead you to make changes in your estate plan. Your experience in receiving an inheritance may prompt you to want to do a better job of how your estate is structured and administered for the benefit of your heirs.

May 26, 2016 by Tim Barton Leave a Comment

2016 Qualified Plan Contribution/Benefit Limitations

2016 Qualified Plan Contribution/Benefit Limitations:

Type of Plan	Maximum Deductible 2016 Contributions/Benefits (only the first $265,000 of compensation can be used in applying these limits)
Money Purchase Pension Plan	Annual additions cannot exceed the lesser of 100% of the participant’s compensation or $53,000.
Profit-Sharing Plan	Annual additions to individual plan participants cannot exceed the lesser of 100% of the participant’s compensation or $53,000.
401(k) Plan	Employer contributions: Up to 15% of covered payroll. Elective employee deferrals: $18,000 ($24,000 if age 50 or older) Allocation limits: Total of employer contributions and elective employee deferrals cannot exceed the lesser of 100% of a participant’s compensation or $53,000.
Simplified Employee Pension (SEP) Plan	Annual additions cannot exceed the lesser of 25% of the participant’s compensation or $53,000.
SIMPLE Plan (401(k) or IRA)	Maximum annual salary reduction deferral: $12,500 ($15,500 if age 50 or older)
Target Benefit Pension Plan	Annual additions cannot exceed the lesser of 100% of the participant’s compensation or $53,000.
Defined Benefit Pension Plan	Benefit provided cannot exceed the lesser of 100% of the average of the participant’s highest three consecutive years of compensation or $210,000.
Tax-Sheltered Annuity	Maximum annual salary reduction: $18,000 ($24,000 if age 50 or older)
Section 457 Plan	Maximum annual deferral: $18,000 ($24,000 if age 50 or older)
NOTE:	Withdrawals from a qualified plan prior to age 59-1/2 may be subject to a 10% early withdrawal penalty, as well as taxation.

Are you taking full advantage of the power of tax deductions and tax-deferred accumulations in your retirement planning?

May 25, 2016 by Tim Barton Leave a Comment

2016 Gross Income Adjustments

What Adjustments to 2016 Gross Income Are Available?

Once total or gross income from all sources has been determined, certain adjustments to income are available. These adjustments amount to a reduction in gross income and generally are granted to achieve tax fairness or in recognition of a desirable social objective. Adjustments to income are available regardless of whether a taxpayer itemizes deductions or takes the standard deduction.

The available adjustments to income include:

IRA Contributions	Eligible individuals can contribute and deduct up to $5,500 to an IRA; $11,000 for an eligible married couple, even if one spouse has no earned income. For workers age 50 and older, the IRA contribution limit is $6,500 for 2016.
Education Savings Account Contributions	Subject to income limitations, up to $2,000 per beneficiary (generally a child under age 18) per year may be contributed to an Education Savings Account and deducted; subject to income limitations.
Student Loan Interest Deduction	Up to $2,500 of the interest paid in 2016 on a loan for qualified higher education expenses may be deducted, subject to income limitations.
Health Savings Account Deduction	Contributions to a Health Savings Account, up to specified maximums, may be deducted.
One-Half of Self-Employment Tax	Self-employed taxpayers generally deduct one-half of their self-employment tax, as determined on Schedule SE.
Self-Employed Health Insurance Deduction	Self-employed taxpayers can deduct 100 percent of the health insurance premiums (including long-term care insurance premiums) they pay for themselves, their spouses and dependents.

May 19, 2016 by Tim Barton Leave a Comment

Capital Gains & Dividend Taxation

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) provided capital gains tax relief for long-term capital gains realized after May 5, 2003 and extended capital gains tax rates to qualified dividends, beginning with dividends paid by corporations to individuals in 2003, but only through December 31, 2008. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), signed into law in May 2006, extended the lower JGTRRA capital gains and dividend tax rates through December 31, 2010. The 2010 Tax Relief Act further extended the favorable tax treatment through December 31, 2012. The American Taxpayer Relief Act of 2012 made permanent the lower capital gains and dividend tax rates for all but higher-income taxpayers.

Long-Term Capital Gains and Dividend Tax Rates

A capital gain results when an asset is sold or exchanged for more than its cost basis. Capital gains realized on assets held for one year or less are short-term capital gains and are taxed at ordinary income tax rates. Long-term capital gains resulting from the sale or exchange or an asset held more than one year, however, receive more favorable tax treatment.

2015 Tax Brackets	2015 Tax Rate
10%, 15%	0%
25%, 28%, 33%, 35%	15%
39.6%	20%

Medicare Contribution Tax

Higher-income taxpayers are subject to a 3.8% Medicare contribution tax on unearned or net investment income, which includes interest, dividends, rents, royalties, gain from disposing of property, and income earned from a trade or business that is a passive activity. The tax applies to single taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and to married taxpayers filing jointly with a MAGI in excess of $250,000.

May 17, 2016 by Tim Barton Leave a Comment

Another Role for Life Insurance…

The Wealth Replacement Trust

The Problem:

There can be significant tax advantages in giving appreciated assets to a charity. Examples include real estate and securities. If you were to sell an appreciated asset, the gain would be subject to capital gains tax. By donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.

For example, Donor A purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If she sells the stock, Donor A must pay capital gains tax on the $75,000 gain. Alternatively, Donor A can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.

When a donor makes substantial gifts to charity, however, the donor’s family is deprived of those assets that they might otherwise have received.

A Potential Life Insurance Solution:

In order to replace the value of the assets transferred to a charity, the donor establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on the donor’s life in an amount equal to the value of the charitable gift. Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, the donor makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At the donor’s death, the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.

April 30, 2016 by Tim Barton Leave a Comment

Estate Planning Quiz

figuring an answer

	True	False
1. The unlimited marital deduction postpones the payment of federal estate taxes.	[__]	[__]
2. A married couple can give any individual up to $28,000 in gifts tax-free in 2016.	[__]	[__]
3. Federal estate taxes must be paid in cash, generally within nine months of death.	[__]	[__]
4. Federal estate tax rates are progressive, meaning that they increase with the size of the estate.	[__]	[__]
5. Your estate may have to pay state inheritance taxes.	[__]	[__]
6. If you die without a will, state intestacy laws will determine who inherits your property.	[__]	[__]
7. The federal estate tax is payable only if your taxable estate exceeds the unified credit equivalent, which is $5,450,000 in 2016.	[__]	[__]
8. The marital deduction does not apply to property you bequest to someone other than your spouse.	[__]	[__]
9. An estate can be taxed at a rate as high as 40%.	[__]	[__]
10. Various estate planning techniques and tools can be used to reduce estate taxes.	[__]	[__]

All of these statements are true.

If you answered seven or more correctly, you have a good foundation of knowledge upon which to build your estate plan. Regardless of how many you answered correctly, the time to begin planning your estate is today, before it is too late to make important decisions about the accumulation, preservation and distribution of your assets.

January 12, 2016 by Tim Barton 35 Comments

Winners of $1.4 Billion Lotto: What now? How to get your money?

Once the initial euphoria wears down and you are “Snoopy Danced” out. Sorry I have no idea how long that takes. The moment will come when you have to make some decisions about how to receive your lottery winnings.

Everyone seems to assume the winner or winners, (yes brace yourself you are likely going to have share the jackpot with other winners) will take the jackpot as a lump sum. The biggest winner of all is government at all levels. Each state involved gets a cut of the ticket sales and the state or states where the jackpot winners live get to tax the jackpot. Yesterday State Senator Tim Carpenter (D) WI put out a press release about his plans for spending the estimated $65,790,000 tax windfall if a Wisconsin resident won the $1.4 billion. This windfall of state income tax pales in comparison to federal tax take at 39.6% ($343,728,000).

If the winner is a Wisconsin resident who decides to take the estimated lump sum payout $868,000,000 they would realize a net after tax payment of $458 million ($458,482,000.) This is only 33% of the $1.4 Billion. That’s right if a winner takes the jackpot in a lump sum they only get a check for 33% of the winnings. Of course that is still a life changing amount of money.

Almost all financial advisors, lawyers, accountants, bankers and other investment advisors tell the winner to take the lump sum because they will quickly make back the annuity reduction and tax bite. A client with $458 million is big in the financial and legal industry. Inside they are referred to as whales or elephants. So it’s hard for many advisors to tell this potential client to take the larger $1.4 Billion as an annuity payment over 30 years.

Annual annuity payment is about $46.7 million ($46,666,666) State and federal tax each year is $22,049,999 this nets the winner $24.6 million ($24,616,667) after taxes each year for 30 years. That is a seriously nice income payment which would leave a substantial amount to invest each year after all the celebratory spending. Best of all the winner will receive a total $738,500,000 compared to $$458 million net lump sum.

Advantages of annuity payments

Minimize taxes
Guarantees $24.6 million income for 30 years
No investment risk, all investments come with the risk of loss.
Helps prevent fraud
Spend thrift tendencies will not wipe out winnings in one year

One of the biggest arguments against an annuity is “your money is tied up.” Wrong. Not these days. There are investor groups who buy annuities. They compete against each other because an annuity income is valuable. If a winner changes their mind later and wants a lump sum for whatever reason they can sell the annuity payments to the highest bidder. In the current economic conditions this would net the winner about 15-20% more than taking the lump sum payment immediately from the Powerball lottery.

A winner has 180 days to claim the Powerball before their ticket expires. Winner has 60 days from the date of their ticket claim to chose the lump sum. Then the annuity payment is mandatory and there is no changing that from the lottery. Historically only a handful of winners take the annuity option leaving a pile of cash on the table. If many of these had waited 61 days they could have sold their annuity and had more money in their account.

How to stay anonymous:

Good luck with that. These days it’s impossible to keep secrets. Thanks to the internet and other technology society gets more and more transparent everyday. So even in the handful of states have laws to allow jackpot winners to stay anonymous they’ll be found out. Most states require winners to go public.

Changing your name to claim the prize and then changing back again will not work. All states forbid changing a name when fraud is intended. If a state requires disclosure of the winner and they change their name… Sure looks like a fraud. No reason to go there. Many states require name changes be published in the local newspapers for a period of time. Where are newspapers published these days? Online.

No hope of anonymity so it’s best to make plans to deal with your rock stardom should fate see fit to pick you. And that will be the topic of a future post.

January 6, 2016 by Tim Barton Leave a Comment

2015 and 2016 Federal Income Tax Rate Tables for Individuals

Welcome to Tax Year 2016. To prepare for the upcoming tax preparation season download these handy PDF Federal Income Tax Rate Tables for Individuals.

2016 Federal Income Tax Rates for Individuals

2016 Federal Tax Digest

The 2016 Tax Digest Includes:

Income tax rates, deductions, credits.
Kiddie tax, child tax credit
E education deductions and credits
Social Security/Medicare
Retirement Plan Contribution/Benefit Limits

2015 Federal Income Tax Rates for Individuals

2015 Federal Tax Digest

The 2015 Tax Digest Includes:

Income tax rates, deductions, credits.
Kiddie tax, child tax credit
E education deductions and credits
Social Security/Medicare
Retirement Plan Contribution/Benefit Limits

December 30, 2015 by Tim Barton Leave a Comment

What Is the Marital Deduction?

The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit. The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer. However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.

The 2010 Tax Relief Act, however, provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012. The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse (the equivalent of $5,000,000 as adjusted for inflation; $5,450,000 in 2016). As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques. Property transferred to the surviving spouse in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse.

If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,450,000 in 2016 as adjusted for inflation) or the unused exclusion of the last deceased spouse.

What Requirements Apply to the Marital Deduction?

To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of the U.S. at the time of death.

In addition, the property interest:

Must be included in the decedent’s gross estate,
Must pass from the decedent to his or her surviving spouse
Cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).