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ATRA’s Retirement & Estate Planning Impact

Posted by Mike Bonacorsi CFP®   |  Posted in February 20, 2013   |  No Comments

What changes did the fiscal cliff deal put into play starting in 2013?

Provided by Mike Bonacorsi, CFP®

The American Taxpayer Relief Act of 2012 brought major changes to federal tax law, and it profoundly impacted retirement and estate planning. Here is an overview of seven big changes particularly relevant to retirees and/or those approaching retirement age.

Federal income tax brackets were altered. Where we once had six tax brackets, we now have seven for the foreseeable future. In addition to the 10%, 15%, 25%, 28%, 33% and 35% brackets, we now have a 39.6% top bracket for individuals with incomes greater than $400,000 and married joint filers with incomes exceeding $450,000.1,2

Additionally, a health care surtax kicked in for high earners. In 2013, a 3.8% Medicare surtax will be levied on the lesser of either a) net investment income or b) the amount of MAGI exceeding $200,000 for single filers, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. MAGI is not simply your wages; it can also include bonuses, taxable interest, RMDs taken from a traditional IRA or an employer-sponsored retirement plan, “unearned” net investment income such as dividends or net capital gains, passive income from a partnership, and even rents and royalties.3

The Medicare payroll tax also rises 0.9% for employees after their MAGIs exceed the $200,000 individual threshold this year. Your employer will deduct 1.45% in Medicare payroll taxes from your paycheck up until that threshold, and 0.9% more from your paycheck once your wages surpass it. While individuals may have MAGIs of $200,000 or less, a married couple filing jointly may have a MAGI that surpasses the applicable $250,000 threshold, with the 0.9% surtax therefore applying.3

Federal estate tax laws were modified. Estate taxes have risen; we now have a 40% top estate tax rate and a $5.25 million individual exemption (which is indexed for inflation, of course).1,4

The big news here: the individual estate tax exemption remains portable. In other words, any unused portion of a $5.25 million individual exemption may be transferred to the surviving spouse at the death of the first deceased spouse.4

Taxes on investment income are higher for the wealthy. Capital gains and dividend taxes are still set at 0% for those in the 10% and 15% federal income tax brackets, 15% for filers in the 25%, 28%, 33% and 35% brackets, and 20% for those in the new 39.6% bracket. Previously, those in the highest tax bracket faced 15% capital gains and dividend taxes.4

IRA charitable rollovers have returned. Gone in 2012, they are back for 2013 (and could stick around for subsequent tax years). If you are an IRA owner who will be 70½ or older in 2013, you may arrange an IRA charitable rollover (technically called a Qualified Charitable Donation) of up to $100,000 this year. You do this by asking your IRA custodian to send the amount of the donation directly to the charity or qualified non-profit organization. You can thereby subtract the gifted amount from your adjusted gross income, and the donation can also count toward your RMD. (Don’t just take a distribution from your IRA and give the money to charity yourself – then the money will be taxed as regular income.)5

Roth conversion rules were expanded for workplace retirement plans. It is now easier to make an in-plan Roth rollover inside your 401(k), 403(b), or 457(b) plan – although so far, this option has been met with a shrug by most retirement plan participants who are eligible. (The retirement plan has to allow a Roth option in the first place.) The conversion is permissible at any age and may include all pre-tax salary deferrals. Any account balance so converted must be included in the income of the taxpayer in the year of the Roth conversion.6,7

The AMT was finally indexed for inflation. The irritating Alternative Minimum Tax has been permanently patched, and the patch is retroactive to the beginning of 2012, thereby saving about 34 million taxpayers from an AMT threat on their 2012 1040s. For 2013, AMT exemption levels are $51,900 for single filers, $40,400 for those married and filing separately, and $80,800 for joint filers and qualifying widowers.1,2

*401(k) account owners should considerthe tax ramifications, age and income restrictions in regards to executing a conversion from their 401(k) to a Roth IRA. The converted amount is generally subject to income taxation.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com                                                           www.MikeBonacorsi.com

Mike Bonacorsi is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Mike Bonacorsi LLC, a registered investment advisor and a separate entity from LPL Financial.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.irs.gov/uac/Newsroom/Annual-Inflation-Adjustments-for-2013 [1/11/13]

2 – www.irs.gov/pub/irs-drop/rp-13-15.pdf [1/11/13]

3 – www.fidelity.com/viewpoints/personal-finance/new-medicare-taxes [1/4/13]

4 – blogs.wsj.com/totalreturn/2013/01/02/what-the-new-law-means-for-taxpayers/ [1/2/13]

5 – www.forbes.com/sites/deborahljacobs/2013/01/02/fiscal-cliff-deal-allows-giving-ira-assets-to-charity/ [1/2/13]

6 – www.jdsupra.com/legalnews/summary-of-income-tax-provisions-in-the-48632/ [1/8/13]

7 – www.jdsupra.com/legalnews/new-law-expands-in-plan-roth-401k-co-03075/ [1/10/13]

      

IF INTEREST RATES RISE, WHAT HAPPENS TO BONDS?

Posted by Mike Bonacorsi CFP®   |  Posted in February 19, 2013   |  No Comments

Investors in longer-term Treasuries could see some rocky road ahead.

Presented by Mike Bonacorsi, CFP®

How long can it last? The Federal Reserve has said that it will do what it can to keep interest rates low, but these efforts cannot stem the tide forever; it’s inevitable, at some point, that interest rates will rise and diminish bond prices. The only question is: when and how much? 1

A fifth year of easing has left some of the decision makers at the Fed thinking it’s time to reverse gears; the minutes of a December meeting cited “several” policymakers wanting to raise interest rates sooner rather than later. Considering how long and open-ended the easing period has been, this caused a slight decline in the stock market.2

The Fed’s easing is tied to the unemployment rate. The U.S. has made great strides in improving the economy and helping people find jobs; the December 2012 reckoning has unemployment at 7.8%, down from October, 2009’s high water mark of 10.2%. The official Fed policy is to continue the easing until unemployment reaches a more comfortable 6.5%; this is roughly where we were at in 2008, as the financial crisis emerged. While we’re getting closer to this goal all of the time, 6.5% could take a year or more to reach.2,3

In the short term, meaning the next few months, the bond market climate may not change. The question is: what happens when it does?

Are bond investors going to pay for it? At some point, interest rates will rise again; bond market values will fall. When that happens, how many bond owners are going to hang on to their 10-year or 30-year Treasuries until maturity? Who will want a 1.5% or 2.5% return for a decade? Looking at composite bond rates over at Yahoo’s Bond Center, even longer-term AAA corporate bonds offered a 2.5%-4.15% return in the first part of January.4

What do you end up with when you sell a bond before its maturity? The market value; if the federal funds rate rises 3%, a longer-term Treasury might lose some of its market value as a consequence.

This risk aside, what if you want or need to stay in bonds? One avenue may be to exploit short-term bonds with laddered maturity dates. The trade-off in that move is accepting lower interest rates in exchange for a potentially smaller drop in the market value of these securities if rates rise. If you are after higher rates of return from short-duration bonds, you may have to look to bonds that are investment-grade but without AAA or AA ratings.

If you think interest rates will rise in the near future (to the chagrin of many bond investors), exploiting short maturities could position you to get your principal back in the short term. That could give you cash which you could reinvest in response to climbing interest rates. If you really think bond owners are in for some pain in the coming years, you could limit yourself to small positions in bonds.

Appetite for risk may displace anxiety faster than we think. Why would people put their money into an investment offering a 1.5% return for 10 years? In a word, fear. The fear of volatility and a global downturn is so prevalent this spring that many investors are playing “not to lose.” Should interest rates rise sooner than the conventional wisdom suggests, owners of long-term bonds might find themselves losing out in terms of their portfolio’s potential.

*Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Mike Bonacorsi is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Mike Bonacorsi LLC, a registered investment advisor and a separate entity from LPL Financial.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/09/19/rough-waters-ahead-for-bond-funds  [9/19/12]

2 – usnews.com/news/blogs/rick-newman/2013/01/04/interest-rates-wont-rise-as-much-as-wall-street-fears  [1/4/13]

3 – ncsl.org/issues-research/labor/national-employment-monthly-update.aspx  [1/4/13]

4 – finance.yahoo.com/bonds/composite_bond_rates [1/28/13]

Common Deductions Taxpayers Overlook

Posted by Mike Bonacorsi CFP®   |  Posted in February 14, 2013   |  No Comments

Make sure you give them a look as you prepare your 1040.

Provided by Mike Bonacorsi, CFP®

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit (as was the case when some filers ignored the Making Work Pay Credit), you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work in 2012? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job in 2012, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence in 2012, you can take a deduction for job-related moving expenses even if you don’t itemize.1

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

Health insurance & Medicare costs. About 7% of us pay health coverage costs out of pocket. If you are in that 7%, you may write off 100% of your premiums as an adjustment to your business income per the Small Business Jobs Act of 2010. That write-off privilege extends to you, your spouse and 100% of your dependents.2,3

Some small business owners have qualified for Medicare. If you are one of them, and you and/or your spouse aren’t eligible for coverage under an employer-subsidized health plan, then you may deduct premiums paid for Medicare Part B, Medicare Part D and Medigap policies. You don’t have to itemize to get this deduction, and the 7.5%-of-AGI test for itemized medical costs isn’t relevant to this.1

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid in 2012 per the fiscal cliff bill passed into law on January 2.1

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter in 2012? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

Education & training expenses. Did you take any classes related to your career in 2012? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs. Even certain periodical subscriptions may qualify for such deductions.2

Eating out on business. The cost of a business lunch, breakfast or dinner – or a lunch, breakfast or dinner associated with business development – qualifies for an itemized deduction.2

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile for 2012, and tolls and parking fees qualify as well).1

Superstorm Sandy losses. The IRS allows filers living in federally declared disaster areas to file casualty claims for the year in which the disaster occurred, and the flexibility to amend the previous year’s return. This means that you can deduct 2012 casualty losses on either your 2011 or 2012 federal tax return.4

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs  and take a 2012 mileage deduction ($0.555 per mile plus tolls and parking fees).1

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $35,000 in death taxes, you can deduct that $35,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $17,500 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on. If you withdrew such inherited assets in 2012, you have the opportunity to claim the appropriate deduction for the 2012 tax year.1

And now, some opportunities for quasi-deductions that often go overlooked…

The child care credit. If you paid for child care while you worked in 2012, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

Parents as dependents. If you have parents whose taxable incomes are underneath the $3,800 personal exemption for 2012 and you pay more than half of their support, they might qualify as dependents on your federal return even if they live at a different address.4

Filing status shifts. Are you a single filer? Do you have a relative or one or more children who qualifies as a dependent? If so, you could change your filing status to head of household, which could save you some tax dollars.4

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)1

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.kiplinger.com/article/taxes/T054-C000-S001-the-most-overlooked-tax-deductions.html [1/3/13]

2 – money.msn.com/tax-tips/post.aspx?post=382d5150-a740-4f31-b091-4711dc07bafc [1/18/13]

3 – vaperforms.virginia.gov/indicators/healthfamily/healthInsurance.php [1/23/13]

4 – www.cnbc.com/id/100400925 [1/23/13]

 

BUILDING AN EMERGENCY FUND

Posted by Mike Bonacorsi CFP®   |  Posted in February 13, 2013   |  No Comments

Creating a financial cushion for stressful times.

Presented by Mike Bonacorsi, CFP®

How would you respond to sudden financial demands? We all define “emergencies” differently, but we are not immune to them. How can we plan to stay afloat financially when they occur?

Most households are not financially prepared for an emergency – not even close. A recent study from the National Foundation for Credit Counseling found that 64% of Americans had less than $1,000 in funds earmarked for a crisis.1

While the recession did its part to siphon emergency funds from families, attention must be paid to rebuilding those funds. It may be difficult; it may be inconvenient. That doesn’t make it any less of a priority.

Emergencies tend to be linked to long-term debt. Having a designated emergency fund can help you attack that debt. When most people think of financial emergencies, they think of medical problems and burdensome costs that their insurance won’t fully absorb – but there are other paths to long-term debt, such as a sudden layoff, a natural disaster, a family issue with financial underpinnings or even an abrupt need to move to another metro area, for whatever reason.

How large should the fund be? You decide. An old rule of thumb is six months of net income or six months of expenses. If you are snickering or laughing out loud at your chances of saving that much, you aren’t alone. If your prospects of building a five-figure emergency fund seem remote, try to create one equivalent to two or three months of net income. Any amount is better than none.

How do you do it without hurting your standard of living? Few of us have a lump sum we can just reassign for emergencies. So consider these subtle savings opportunities.

> You could pay cash whenever possible, opening the door to incremental savings that credit card companies would otherwise take from you. A few dozen bucks can become a few hundred bucks, then a few thousand bucks over time. Incidentally, in a nationwide survey conducted by Chase Blueprint and LearnVest, 31% of people polled cited credit card debt as a major barrier to achieving financial objectives. The credit card debt carried by this 31% averaged about $5,000. Clearly, living on credit cards will thwart your effort to build a rainy day fund.2

> You could vow not to spend frivolously, thereby retaining money you might be tempted to throw away on impulse.

> You could sell stuff – stuff somebody else, maybe down the street or across the country, might want. Incidental shipping and handling costs could seem irrelevant next to the cash you generate.

> You could arrange direct deposit or start a seasonal savings account. The psychology behind both moves is simple: you are less likely to spend money if it doesn’t pass through your wallet.

Here’s how not to do it. Try to avoid building a crisis fund through self-defeating methods. For example:

> Don’t start an emergency fund with a loan. Do it with your own accumulated savings, bonus money from your job performance, royalties – whatever the origin, use money you have made or and/or saved yourself, not money you have borrowed from lenders or relatives.

> Don’t do it using payday loans or cash advances. High-interest short-term loans and cash advances on credit cards are often pitched as rescues to struggling households. Thanks to their absurd interest rates, payday loans are not financial “life rafts” by any means. Cash advances on credit and debit cards come with disproportionately high fees. Sadly, people who go in for these loans and advances once commonly go in for them again.

> Don’t refrain from paying certain bills. Let’s say that you have eight debts you have to pay per month. If you only pay three of them each month and carefully alternate which debts get paid down, can you create an emergency fund with the money you avoid paying? Well, yes – but you may imperil your credit rating in the process.

If you don’t have a designated emergency fund, you can build it up in the same way that you probably invest: a little at a time, with relatively little impact on your lifestyle. It can be done. It should be done.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.learnvest.com/knowledge-center/5-ways-to-start-an-emergency-fund/ [8/14/12]

2 – www.foxbusiness.com/personal-finance/2012/11/01/seven-reasons-why-need-to-create-emergency-fund-now/ [11/1/12]

 

 

IRA ROLLOVERS FOR LUMP SUM PENSION PAYOUTS

Posted by Mike Bonacorsi CFP®   |  Posted in February 12, 2013   |  No Comments

Give those dollars the opportunity for further tax-deferred growth.

Presented by Mike Bonacorsi, CFP®

A big payout leads to a big question. If you are taking a lump sum pension payout from your former employer, what is the next step for that money? It will be integral to your retirement; how can you make it work harder for you?

Rolling it over might be the right thing to do. If you don’t have substantial retirement savings, that lump sum may be just what you need. The key is to plan to keep it growing. That money shouldn’t just sit there.

Even tame inflation whittles away at the value of money over time. Most corporate pension payments aren’t inflation-indexed, so those monthly payments eventually purchase less and less. Lump sums are just as susceptible: if you receive $100,000 today, that $100,000 will buy 50% less by 2028 assuming consistent 3% inflation (and that is quite an optimistic assumption).1,2

Putting it in the bank might cause you some financial pain. If you just take your lump sum payout and deposit it, all that money will be considered taxable income by the IRS. (There are very few exceptions to that rule.) Moreover, you won’t get the whole amount that way: per IRS regulations, your employer must withhold 20% of it.2,3

Don’t you want to postpone paying taxes on those assets? By arranging a rollover of your lump sum distribution to a traditional IRA, you may defer tax on those dollars. You can even defer tax on a distribution already paid to you if you roll over the taxable amount to an IRA within 60 days after receipt of the payout.3

In doing so, you are keeping those assets in a tax-deferred account. They can be invested as you like, and that money will not be taxed until it is withdrawn. (You may only transfer a lump sum distribution from a company pension plan into a traditional IRA – you may not transfer it to a Roth IRA.)4

If you are considering taking a lump sum payout, make sure you position that money for additional tax-deferred growth. Talk to a financial professional who can help you with the paperwork and get your IRA rollover going.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2012/09/01/pf/expert/pension-payments.moneymag/index.html [9/1/12]

2 – www.kiplinger.com/article/retirement/T037-C000-S002-pensions-take-a-lump-sum-or-not.html [9/11]

3 – www.irs.gov/taxtopics/tc412.html [1/4/13]

4 – www.fool.com/retirement/manageretirement/manageretirement2.htm [1/21/13]

 

 

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