Michigan Estate Planning Blog

Six Tax-Saving Tips For Retirement

Proper planning is all about thoughtful planning for the now, for the later, and for the “after I’m gone” stages of life. So be diligent about your everyday finances, and plan for your final estate since you never know “when.” While you are at it, also consider your retirement and end-of-life finances. To keep things on an even keel it pays to consider taxes in structuring your late-in-life finances, and even more so to limit those taxes. There are a lot of variables in play when it comes to budgeting for retirement, to include ever lengthening life-spans and ever increasing medical bills. No one said it would be easy. One variable you will not want to ignore is taxes and how they will affect you. For some advice on how to make the finances last, and how to preserve wealth both for yourself and your heirs, be sure to read a recent article in Morningstar titled “6 Ways to Curb Taxes in Retirement.” The six ways? Roughly: Tip 1: Diversify Your Assets by Tax Treatment Tip 2: Consider a Roth Conversion--Even in Retirement Tip 3: Get Savvy With RMDs Tip 4: Mind State Taxes, Too Tip 5: Bundle and Time Your Deductions Tip 6: Avoid the 'Tax Torpedo' [i.e. Social Security tax payments] After you have read the original article, consider your own finances, or those of your elderly loved ones. Retirement is an important stage in life and one requiring careful financial planning so you do not outlive your money. Taxes are a major threat to your retirement financial security. How do your end-of-life finances coordinate with your plans for your estate? That is the next question, of course.

Reference: Morningstar (March 1, 2014) “6 Ways to Curb Taxes in Retirement”

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SMALL BUSINESS / SBA FUNDING

If you are a small business owner, you may be pleased to learn that the Small Business Administration (SBA) dodged the budget-bullet last week. Despite bantering about a number of potential cuts, in the end, House and Senate negotiators agreed to restore the SBA appropriation to $433 million. The compromise spending bill includes a cut of 7 to 8 percent on total non-military discretionary spending. The SBA emerged, however, largely intact. Also, the business loan guarantee programs, which are financed through a separate account, also retained its 2010 funding of $236 million. Short-term, it looks like the SBA is still in business (in pun intended). But budget cuts and debt-reduction remain hot political topics. The Republican House already has made its intents known, suggesting cuts of $100 million from the SBA. President Obama also proposes to strip $28 million from the agency for 2012. If you were thinking of turning to the SBA for assistance in expanding your small business, you may be well-advised to move sooner rather than later.

Link: http://boss.blogs.nytimes.com/2011/04/12/s-b-a-spared-in-2011-spending-deal/?ref=smallbusiness

 From The New York Times Online (April 12, 2011) “SBA Spared in 2011 Spending Deal”

ESTATE PLANNING / PERSONAL FINANCE

From Smart Money (Jan 5, 2011), “Financial Aid and Taxes: What You Owe” Fortunately, a surprisingly high percentage of students at many schools receive at least some financial aid, and your child's chances may be better than you think. So if your child cashes in, what are the tax implications? If you are parent whose children have not yet started college, you may be shocked when the college-search begins, and the associated costs become clear. Costs to attend some colleges are approaching astronomical levels. Thankfully, there is a good amount of information out there if you know how to find it. If you’re ahead of the game and planning early, you might take advantage of planning articles like this or a recent review of 529 College-Savings Plans put out by Morningstar Advisors. But for those already in the thick of it – with children attending college now -- here is some advice from a recent Smart Money article about financial aid and taxes; just how do taxes play out on financial aid money? First, it depends on the nature of the aid: is it gift aid or is it offered as the payment for work? Gift aid is essentially that money which the student doesn’t need to work for, including “scholarships,” “fellowships,” “grants,” “tuition discounts,” or “tuition reductions.” This money is not taxed so long as the recipient is eligible for a degree (including graduate degrees), the money is demonstrably going toward expenses (if it comes in the form of funds), and the associated costs are demonstrably higher than the received aid (and the recipient incurs those costs in the same time-period.) Any leftover gift aid, however, is taxable. If the aid comes in the form of payment for work, as in the federal work-study program or in teaching assistance for the university, then the aid is also taxable, at least in principle. Receiving taxable financial aid doesn't necessarily mean owing anything to the IRS. Here's why: A student who is not a dependent can offset taxable income with his personal exemption – $3,650 for 2010; $3,700 for 2011 – and his standard deduction – $5,700 for 2010; $5,800 for 2011 (assuming the student is unmarried). So a non-dependent student would not owe any federal income tax if his income from taxable sources was $9,350 or less for 2010 or $9,500 or less for 2011. If your child is still your dependent, he is not entitled to a personal exemption deduction (you claim it on your return). But his or her standard deduction will still shelter up to $5,700 of earned income in 2010 (or up to $5,800 in 2011). Finally, if you don't claim your child a dependent on your return, he or she can probably reduce or eliminate any federal income tax bill by claiming the American Opportunity tax credit (worth up to $2,500) or the Lifetime Learning tax credit (worth up to $2,000).

Link:  http://www.smartmoney.com/personal-finance/taxes/does-your-child-owe-taxes-on-financial-aid-1294162977387/?page=all

 

Roth IRA Roulette

The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could do them. But if you are among the many who took advantage last year, there's more to the story. -- Smart Money

If you are among the many who converted a traditional IRA to a Roth in 2010, you have some big decisions to make this year. The Tax Guy, Bill Bischoff at Smart Money recently outlined the most important ones.

When should I report the income from a 2010 conversion? The benefit of a Roth IRA is paying the tax upfront rather than when you withdraw the funds during retirement, thus locking in a known tax rate. Now, though, you still have to choose whether to report that income during 2010, or elect to spread it out evenly in 2011 and 2012 (50/50.) For most, stretching it out will be the best option. Still, for some it might be better to report it all in 2010, for instance if last year was a particularly bad year in terms of income, and you expect the next two years to be much better – bumping you into a higher bracket.

Should I reverse that conversion? Maybe. It will depend upon your individual circumstances, but at any rate you can postpone your decision until October 17^th – extended tax filing deadline  – and you could always simply “re-characterize” your IRA back into a traditional one, avoiding the tax if that is no longer the best option. (For example, if your Roth IRA takes a dive early in the year, since you’d still be paying taxes on the conversion amount that you’ve also lost.)

            Should I opt to extend my 2010 return? The short answer is YES. As long as you file for your extension by April 18, you will have until October 17^th to make final decisions about your 2010 Roth conversion. By October, you’ll have a better handle on whether you should reverse your conversion, declare the income and pay the tax in 2010, or spread it out over 2011 and 2012. Extending also makes it much simpler should you decide to reverse the conversion – you won’t have to file an amended return.

 

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