Category First Time Home Buyers

Plan Now for Long-Term Care

In early June, a 102-year-old South Carolina woman made headlines with her secret to a long life: minding her own business. While most of us probably won’t live that long (or resist the temptation to be nosy), modern medicine has increased the likelihood that we’ll live well into our nineties. But living longer also raises a daunting question: Will you need long-term care, and if so, how will you pay for it?

More than two-thirds of 65-year-olds will need some type of long-term care in their lifetime, according to the Administration for Community Living, a division of the U.S. Department of Health and Human Services. The cost of long-term care can deplete even a well-funded retirement savings plan: According to the 2020 Genworth Cost of Care Survey, the median cost of a private room in a skilled nursing home exceeds $8,800 a month. And the cost varies depending on where you live. A typical private room in New York costs about $12,930 (according to the Genworth survey), compared with about $7,600 in Tennessee. (To get an idea of how much you would need in each state, check the Genworth Cost of Care Survey.)

Many Americans mistakenly believe that Med­icare will cover their long-term care. Medicare Part A may cover care that is deemed medically necessary at a certified skilled nursing facility for up to 90 days, but if you need custodial care for a condition such as dementia, Medicare won’t cover the costs.

Long-term-care insurance provides benefits in the event you need help with at least two “activities of daily living”—bathing, getting dressed or eating, for example—for more than 90 days. (Some policies will kick in at 60 days or less, but you’ll pay higher premiums.) Most policies will pay for care in your home or at a long-term-care facility, and some will pay for your transportation to a doctor’s appointment.  

A long-term-care policy could give you peace of mind, but the cost is steep. Premiums are expensive and are continuing to increase, due in large part to the rising cost of care and historically low interest rates. These premiums, as well as returns from fixed-income investments, cover the cost of long-term-care insurance. But many policies were designed 30 years ago, when interest rates on U.S. Treasuries were much higher than they are today, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI). For a single percentage point decline in interest rates, an insurer needs to raise premiums 10% to 15%, he says. If rates rise significantly, premiums could decrease, but that’s unlikely anytime soon.

Costs aside, you have to deal with the uncertainty of your long-term needs. You or your spouse may not require care at all or only for a short period of time.

Determining whether insurance is right for you depends on whether you have enough money to self-insure and what’s best for your family. If you can’t afford to pay for long-term care, family caregivers could be forced to cut back on work hours or quit their job to take care of you, jeopardizing their own retirement security. In a recent survey by Fidelity Investments, 28% of respondents left their job due to caregiving responsibilities. Of those who eventually went back to work, more than one-third said their earnings declined.

Can you self-insure?

If you have suf­ficient assets, you may choose to self-insure, which means any long-term-care needs you have will be paid out of your own coffers. “If someone has over $1 million in liquid assets, then they could probably self-insure, provided they were willing to spend it all for their own care,” Slome says. If you’re married, he ups the number to $2.5 million.

When you self-insure, you’re basically betting that you won’t require a prolonged stay in a nursing home—and it’s not a bad bet. According to the Administration for Community Living, most people who go into a nursing home stay for less than 12 months. Instead, you are more likely to rely on in-home care. It costs about $4,600 a month for one or more caregivers to provide 44 hours a week of in-home care, according to the Genworth Study.

Mari Adam, a certified financial planner with Mercer Advisors, in Boca Raton, Fla., suggests sitting down with a financial planner to figure out how much you’ll have in savings to cover long-term care. You’ll typically include funds in your traditional and Roth IRAs, 401(k) plans, taxable accounts, Social Security, and any pension income.  

Your home is also part of the equation when calculating whether you can self-insure. If you’ve built a substantial amount of home equity, you can downsize to a smaller place. If you eventually need to move to assisted living or a nursing home, you may be able to use proceeds from the sale of your home to cover the costs. If you don’t want to sell your house, a home-equity line of credit or a reverse mortgage is also an option. (Here’s more on how to tap your home equity.)

If you’re enrolled in a high-deductible health insurance plan, you can also harness the tax-saving power of a health savings account (HSA) to pay for some of your long-term-care costs. Contributions are pretax (or deductible if you set up an HSA on your own), earnings are tax-free, and distributions aren’t taxed if you use them to pay for qualified medical expenses. Plus, you can keep your account after you stop working and take tax-free withdrawals for medical expenses in retirement, including any long-term-care costs. To qualify for an HSA, your 2021 health plan must have at least a $1,400 deductible for self-only coverage or $2,800 for family coverage. You can contribute up to $3,600 if you have self-only coverage or up to $7,200 if you have family coverage. If you’re 55 or older at the end of the year, you can contribute an extra $1,000 in catch-up contributions. Once you enroll in Medicare, you’re no longer allowed to contribute to an HSA, but the money continues to grow until you’re ready to use it.

You can also use money from your HSA tax-free to pay long-term-care insurance premiums, with the maximum annual tax-free amount based on your age. If you’re age 40 or younger, you can withdraw up to $450 tax-free from an HSA in 2021 to pay the premiums; if you’re 41 to 50, you can take out $850; if you’re 51 to 60, $1,690; if you’re 61 to 70, $4,520; and if you’re 71 or older, $5,640. If you and your spouse both have long-term-care policies, you can each use money tax-free from your HSA to pay premiums, up to the maximum for each of you based on your ages by the end of the year. These limits increase slightly each year to adjust for inflation.

The case for insurance

Once you have run the numbers, you may conclude that you can handle the cost of long-term care. However, if you’re married, you may still want to consider buying a long-term-care insurance policy, Adam says. The risks are higher that at least one spouse will require long-term care, and those costs could exhaust your combined savings, leaving the other spouse with no resources.

A 55-year-old couple can expect to pay $2,100 a year for a typical policy with an initial benefit pool (the pot of money the insurance company will pay out) for each spouse of $165,000 to cover adult day care, home aide services, assisted living and nursing home costs. If that seems like a high price to pay for something you may never use, there are ways to trim the cost.

Married couples can reduce what they pay in the long run by buying a shared benefit plan, which allows spouses to pool their benefits. If one spouse exhausts his or her benefits, then he or she can tap the other spouse’s share. To get the best value, both spouses need to apply for the same amount of benefits—for example, three years at $200 a day—and then add a shared benefits rider. Plus, depending on the carrier, both spouses can get a discount of between 15% and 30% on their premiums if both buy a policy with the same company, according to Bill Dyess, a long-term-care expert and insurance broker in Boca Raton. However, even if just one spouse buys a policy, the insurance company is likely to provide a 10% to 15% premium discount because married people are less likely to go into a nursing home than single people.

You can also save money by skipping the inflation rider. While these riders will help you keep up with the rising costs of long-term care, they can double your premiums, Dyess says. For example, if a 55-year-old man bought a traditional policy with a benefit pool of $165,000 and he wanted to add a 2% inflation rider, he would pay $1,750 in annual premiums, compared with $950 for a policy without a rider, according to data from the AALTCI. A 55-year-old woman would pay $2,815 instead of $1,500.

Buying a policy when you are in your forties or early fifties will also decrease the cost of premiums (although you’ll be paying for them over a longer period of time). Insurance companies assume you’re at a higher risk for health problems as you age.

Slome says the sweet spot for buying a policy is between the ages of 55 and 65, before you sign up for Medicare. “The first time that people actually take advantage of all those wonderful free health screens is usually after they sign up for Medicare,” he says. “And when they do, the doctors tend to find something.” If you have a health condition, you’ll pay higher premiums, or the insurer may decline to cover you at all.

A traditional policy with $165,000 in initial benefits (and no inflation rider) that would cost a 55-year-old man $950 a year jumps to almost $1,200 a year, on average, if he waits until his 60th birthday to buy coverage. A 55-year-old woman’s premiums would jump from $1,500 to about $2,000.

If you decide to buy a policy at a relatively young age—in your fifties, for example—you may want to add a restoration of benefits rider. If you make a claim and later recover from the illness that caused you to require long-term care, the rider enables the benefit amount you used to be restored to your policy benefit pool. For example, suppose at age 60 you make a claim for $50,000 to pay for your care. If you recover and can show your insurance company you’ve been healthy for a set amount of time (usually determined by the insurance company when the policy is written), the restoration rider will add back the $50,000 you initially used. This type of benefit is typically only good for a one-time use. A policy with this rider, which not every insurer offers, costs about 4% to 6% more than one without it.

If the numbers start to feel overwhelming, keep in mind that you probably don’t need a policy that will cover 100% of your long-term-care costs, Adam says. Instead, you should consider whether a policy can help you pay for some of your long-term care without depleting all of your retirement assets. And if a policy that offers the benefits you want is unaffordable, a long-term-care insurance specialist can help you look for ways to lower the cost.

Consider a hybrid policy

Another alternative to a traditional long-term-care policy is a hybrid life insurance policy that includes long-term-care benefits. If you tap the policy to pay for long-term care, your death benefit will be reduced, although some hybrid policies will pay a small residual benefit even if the entire death benefit is exhausted by long-term-care costs.

Say you have a hybrid policy with a $120,000 death benefit that provides $180,000 of potential long-term-care benefits. If you spend $80,000 on long-term care, your heirs will still receive $40,000 after you die. If you spend the entire $180,000 on care and your policy pays a small residual death benefit, your beneficiaries may receive $10,000.

Such a policy may appeal to you if you’re determined to leave something to your heirs, but you’ll pay more for this kind of insurance. A 55-year-old man can expect to pay roughly $4,600 a year (compared with $950 for a traditional long-term-care insurance policy) for a life insurance policy that provides $180,000 in long-term-care benefits with a $120,000 death benefit.

To find a long-term-care specialist, go to aaltci.org and click on “LTC Resources.” Type in your zip code to find a professional in your area; make sure he or she has a “certified in long-term care” designation.

Is government help on the way?

In a recent poll conducted by the Associated Press, 60% of respondents favored a federal, Medicare-like long-term-care insurance program. Some 70% said Medicare should cover long-term care. While a federal long-term-care program is unlikely anytime soon, President Joe Biden has proposed spending $400 billion on home and community-based services for long-term care (although the outlook for the proposal is unclear).

In the meantime, some states may look into starting their own programs. In 2019, the Washington State legislature passed a bill to create a state long-term-care program funded by a new payroll tax. Starting on January 1, 2022, the state will add an additional 58 cents to payroll taxes for every $100 of eligible wages reported on Form W-2. Employees can opt out by November 1, 2021, if they purchase a qualifying long-term-care insurance policy.

If you’re thinking that Medicaid will be your golden ticket for long-term care, think again. To qualify for Medicaid, you must spend down nearly all of your assets first. Medicaid also has a “look back” period that involves examining your financial transactions from the past five years to determine whether you gave away money to qualify for Medicaid, which could render you ineligible. And even if you qualify for Medicaid, you’ll have to go to a facility that accepts Medicaid, and as the population ages, those will be increasingly hard to find.

table of who will need long-term care by gender and health conditionstable of who will need long-term care by gender and health conditions

Source: kiplinger.com

Empty Cubicles? Many Workers Want to Stay Home

September marks the beginning of a new school year, and children who have been learning remotely won’t be the only ones adjusting to a new environment. Millions of employees are returning to work as companies reopen their physical offices. But many employees are hesitant to return to the office—either because of pandemic-related concerns or because they’ve discovered they prefer working from home.

A survey by FlexJobs.com found that 58% of workers said they’d look for a new job if they cannot continue remote work in their current role. But before you give notice, there are steps you can take to navigate changes to your workplace—and your budget.

If you want to continue working from home, you’ll need to negotiate that with your supervisor. But first, prepare talking points that highlight how your remote work will benefit your employer, says Toni Frana, a career coach at FlexJobs. Instead of explaining how working from home will help you, she says, focus on how it will increase your productivity.

Your employer may also be more receptive to an arrangement in which you work remotely part of the time rather than full-time. In May, Google announced that it would adopt a hybrid work week, requiring in-person office work for only three out of five days starting in September. Other companies—especially in the technology sector—are also developing hybrid work models.

Still, while some com­panies are open to hybrid work schedules, others want their employees back in the office full-time. If your employer falls into that group, leverage your bargaining power, says Alison Green, founder of the Ask a Manager website and author of Ask a Manager: How to Navigate Clueless Colleagues, Lunch-Stealing Bosses and Other Tricky Situations at Work. At a time when many companies are struggling to fill open jobs, managers may be forced to be more receptive to your concerns, she says.  

Anticipating a changing budget. Nearly 60% of Americans who worked from home at some point during the pandemic said it had a positive effect on their personal finances, according to a survey by Bankrate.com. People who were able to work remotely saved money on expenses such as transportation, lunches, workplace attire and child care, says Bankrate analyst Ted Rossman. To cut your back-to-work costs, ask your employer if it plans to offer (or reinstate) sub­sidies for parking or mass transit. If you have unused funds in a pretax commuter benefits account, make sure to use them. And now that you’ve learned how much money you can save by cooking at home, you may be inspired to start bringing your lunch to work.

chart of how much money people save working at homechart of how much money people save working at home

Source: kiplinger.com

Calculate Your Required Minimum Distribution From IRAs

This calculator makes it easy to compute your required minimum distributions from a traditional IRA, which started when you hit age 70½ if you were born before July 1, 1949, and start at age 72 if you were born on or after July 1, 1949. (The change in age was part of the SECURE Act, which was enacted in December 2019.) All you need is your age at the end of 2021 and the total balance of your traditional IRA accounts as of December 31, 2020. Do not include balances from Roth IRAs. Those accounts do not have required minimum distributions. 

If you’re married and your spouse is more than 10 years younger than you are — and is named as the sole beneficiary on at least one of your IRAs — the RMD will be less than what this calculator shows. Consult a financial planner for more details.

For your first RMD, you have until April 1 after the year you turn 72. All subsequent ones must be taken by December 31. For instance, if you turn 72 in 2021, you have until April 1, 2022 to take your first RMD. Then you would have to take your second one by December 31, 2022. 

Taking two RMDs in one year can have important tax implications. This could push you into a higher tax bracket, meaning a larger portion of your Social Security income could be subject to taxes, or you could also end up paying more for Medicare Part B or Part D.

To determine the best time to take your first RMD, compare your tax bills under two scenarios: taking the first RMD in the year you hit 72, and delaying until the following year and doubling up RMDs. 

You should also make sure you take your RMDs every year. Failure to do so means you get hit with a 50% penalty on the amount you were supposed to take out. For instance, if you were supposed to withdraw $18,000 but only took out $14,000, you would owe a $2,000 penalty plus income tax on the shortfall. 

But the IRS is known to be fairly lenient in these situations, and you may be able to get the penalty waived by filling out Form 5329. You will need to include a letter of explanation, including what steps you took to fix the mistake. 

One way to avoid forgetting: Ask your IRA custodian to automatically withdraw RMDs. 

Source: kiplinger.com

13 States That Tax Social Security Benefits

If you’re wondering if Social Security benefits taxable, here’s your answer: Absolutely. Uncle Sam taxes up to 85% of your benefits, depending on your income, and more than a dozens states can tack on additional taxes of their own. New Mexico, for one, treats Social Security benefits the same way as the feds. But other states tax Social Security benefits only if income exceeds a specified threshold amount. For example, Missouri taxes Social Security benefits only if your income tops $85,000, or $100,000 for married couples. Then there’s Utah, which includes Social Security benefits in taxable income, but starting in 2021 allows a tax credit for a portion of the benefits subject to tax.

Also remember that a tax on Social Security doesn’t necessarily mean a state is unsuitable for retirement. Colorado, one of the 13 states that taxes at least some Social Security benefits, actually ranks as one of the 10 most tax-friendly state for retirees. That’s why it’s best to weigh all state taxes when researching the best places to retire. For each state, we’ve included a link to that state’s page in our State-by-State Guide to Taxes on Retirees. Take a look at the 13 states that tax Social Security benefits.

The state-by-state guide to taxes on retirees is updated annually based on information from state tax departments, the Tax Foundation, and the U.S. Census Bureau. Income tax rates and thresholds are for the 2020 tax year unless otherwise noted.

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Colorado

Scenic shot of mountain in Colorado reflected in waterScenic shot of mountain in Colorado reflected in water

State Taxes on Social Security: For beneficiaries younger than 65, up to $20,000 of Social Security benefits can be excluded, along with other retirement income. Those 65 and older can exclude benefits and other retirement income up to $24,000. Also, Social Security income not taxed by the federal government is not added back to adjusted gross income for state income tax purposes.

Note that, beginning in 2022, the $24,000 cap is removed for federally taxable Social Security benefits, which effectively makes all federally taxed Social Security income deductible for taxpayers 65 and over.

Sales Tax: 2.9% state levy. Localities can add as much as 8.3%, and the average combined rate is 7.72%, according to the Tax Foundation.

  • Groceries: Exempt
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt

Income Tax Range: By law, Colorado residents who have federal taxable income pay a flat rate of 4.55% (the approval of Proposition 116 on the November 3, 2020, ballot reduced the standard tax rate from 4.63% to 4.55%). The state also limits the how much its revenue can grow from year-to-year by lowering the tax rate if revenue growth is too high. For example, in 2019, this resulted in a rate reduction to 4.5%. Denver and a few other cities in Colorado also impose a monthly payroll tax.

Property Taxes: In Colorado, the median property tax rate is $494 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Colorado.

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Connecticut

Fall colors and a lake in ConnecticutFall colors and a lake in Connecticut

State Taxes on Social Security: Social Security income is fully exempt for single taxpayers with federal adjusted gross income of less than $75,000 and for married taxpayers filing jointly with federal AGI of less than $100,000. Taxpayers who exceed these thresholds can still deduct 75% of their federally taxable Social Security benefits on their Connecticut tax return.

Sales Tax: The state taxes most items at 6.35%, and localities are not allowed to add to that.

  • Groceries: Exempt.
  • Clothing: Taxable (6.35% for items under $1,000; 7.75% for items over $1,000; items costing less then $50 are fully exempt)
  •  Motor Vehicles: Taxable (6.35% for vehicles under $50,000; 7.75% for vehicles over $50,000; 4.5% for non-resident military personnel on full-time active duty in the state)
  •  Prescription Drugs: Exempt.

Income Tax Range: Low: 3% (on up to $20,000 of taxable income for married joint filers and up to $10,000 for those filing individually). High: 6.99% (on the amount over $1 million for married joint filers and over $500,000 for those filing individually).

Property Taxes: In Connecticut, the median property tax rate is $2,139 per $100,000 of assessed home value.

Inheritance and Estate Taxes: Connecticut has an estate tax with a $7.1 million exclusion for 2021. The tax due is limited to $15 million. Connecticut is the only state with a gift tax on assets you give away while you’re alive. If you made taxable gifts during the year, state law requires that you file a Connecticut estate and gift tax return to identify such gifts. However, taxes are due in 2021 only when the aggregate value of gifts made since 2005 exceeds $7.1 million. Estate and gift tax rates for 2021 range from 10.8% to 12%.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Connecticut.

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Kansas

Farmer plowing huge Kansas fieldFarmer plowing huge Kansas field

State Taxes on Social Security: Social Security benefits are exempt from Kansas income tax for residents with a federal adjusted gross income of $75,000 or less. For taxpayers with a federal AGI above $75,000, Social Security benefits are taxed by Kansas to the same extent they are taxed at the federal level.

Sales Tax: 6.5% state levy. Localities can add as much as 4%, and the average combined rate is 8.7%, according to the Tax Foundation.

  • Groceries: Taxable
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Taxable

Income Tax Range: Low: 3.1% (on $2,501 to $15,000 of taxable income for single filers and $5,001 to $30,000 for joint filers). High: 5.7% (on more than $30,000 of taxable income for single filers and more than $60,000 for joint filers). Kansas also has an “intangibles tax” levied on unearned income by some localities.

Property Taxes: In Kansas, the median property tax rate is $1,369 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no estate tax or inheritance tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Kansas.

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Minnesota

A road and the aurora borealis in MinnesotaA road and the aurora borealis in Minnesota

State Taxes on Social Security: Social Security benefits are taxable in Minnesota, but for 2020 a married couple filing a joint return can deduct up to $5,240 of their federally taxable Social Security benefits from their state income. The 2020 tax break can be as much as $4,090 for single and head of household filers, and up to $2,620 for married taxpayers filing separate returns. The deduction is phased out for married couples with more than $79,480 of provisional income (it’s reduced to zero for couples with more than $105,680 of provisional income). The phase-out range for single and head of household filers is $62,090 to $82,540. For married taxpayers filing separate returns, the phase-out range is $39,740 to $52,840.

Sales Tax: 6.875% state levy. Localities can add as much as 2%, with an average combined rate of 7.47%, according to the Tax Foundation.

  • Groceries: Exempt
  • Clothing: Exempt
  • Motor Vehicles: Exempt from ordinary sales tax, but taxable under special 6.5% excise tax ($10 for certain older vehicles; $150 for certain collector vehicles)
  •  Prescription Drugs: Exempt

Income Tax Range: Low: 5.35% (on less than $26,960 of taxable income for single filers and on less than $39,410 for joint filers).  High: 9.85% (on more than $164,400 of taxable income for single filers and on more than $273,470 for joint filers).

For 2021, the 5.35% rate applies to taxable income less than $27,230 for single filers and less than $39,810 for joint filers. The 9.85% rate applies to taxable income over $166,040 for single filers and over $276,200 for joint filers.

Property Taxes: In Minnesota, the median property tax rate is $1,082 per $100,000 of assessed home value.

Inheritance and Estate Taxes: Minnesota’s estate tax exemption is $3 million, but the state looks back to include any taxable gifts made within three years prior to death as part of your estate. Tax rates range from 13% to 16%.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Minnesota.

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Missouri

St. Louis and the Gateway Arch in MissouriSt. Louis and the Gateway Arch in Missouri

State Taxes on Social Security: Social Security benefits are not taxed for married couples with a federal adjusted gross income less than $100,000 and single taxpayers with an AGI of less than $85,000. Taxpayers who exceed those income limits may qualify for a partial exemption on their benefits.

Sales Tax: 4.225% state levy. Localities can add as much as 5.763%, and the average combined rate is 8.25%, according to the Tax Foundation.

  • Groceries: Taxable (1.225% state rate; additional local taxes may apply)
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt.

Income Tax Range: Low: 1.5% (on taxable of income of $107 or more). High: 5.9% (on more than $8,584 of taxable income). Kansas City and St. Louis have an earnings tax of 1 percent.

Property Taxes: In Missouri, the median property tax rate is $930 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Missouri.

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Montana

A fenced farm and the mountains of MontanaA fenced farm and the mountains of Montana

State Taxes on Social Security: Social Security benefits are taxable. The method used to calculate the taxable amount for Montana income tax purposes is similar to the method used for federal returns. However, there are important differences. As a result, the Montana taxable amount may be different than the federal taxable amount. (Beginning in 2024, Social Security benefits will be taxed by Montana to the same extent they are taxed at the federal level.)

Sales Tax: No state sales tax. Resort areas such as Big Sky, Red Lodge and West Yellowstone have local sales taxes.

Income Tax Range: Low: 1% (on up to $3,100 of taxable income). High: 6.9% (on taxable income over $18,700).

Starting in 2022, the top rate will be 6.75% on taxable income over $17,400. Then, beginning in 2024, the income tax rates and brackets will be substantially revised (there will only be two rates – 4.7% and 6.5%).

Property Taxes: In Montana, the median property tax rate is $831 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Montana.

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Nebraska

Nebraska fields in a stunning sunscapeNebraska fields in a stunning sunscape

State Taxes on Social Security: Social Security benefits were not taxed in 2020 for joint filers with a federal adjusted gross income of $59,100 or less and other taxpayers with a federal AGI of $44,460 or less (AGI threshold amounts for 2021 are not available yet). For taxpayers exceeding these thresholds, Social Security benefits are taxed by Nebraska to the same extent they are taxed at the federal level.

For 2021, taxpayers can chose to deduct 5% of social security benefits included in federal AGI instead of following the rules in place for 2020 (with federal AGI thresholds that are adjusted for inflation). The optional deduction percentage increases to 20% for 2022, 30% for 2023, 40% for 2024, and 50% for 2025 and thereafter. (Note: The state legislature intends to enact future legislation that would increase the percentage to 60% for 2026, 70% for 2027, 80% for 2028, 90% for 2029, and 100% for 2030 and beyond.)

Sales Tax: 5.5% state levy. Localities can add as much as 2.5%, and the average combined rate is 6.94%, according to the Tax Foundation.

  • Groceries: Exempt
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt

Income Tax Range: Low: 2.46% (on up to $3,290 of taxable income for single filers and $6,570 for married couples filing jointly). High: 6.84% (on taxable income over $31,750 for single filers and $63,500 for married couples filing jointly).

Property Taxes: In Nebraska, the median property tax rate is $1,614 per $100,000 of assessed home value.

Inheritance and Estate Taxes: With Nebraska’s inheritance tax, the closer the heir’s relationship to the decedent, the smaller the tax rate and the greater the exemption (surviving spouses are exempt from the tax). For example, the tax on heirs who are immediate relatives (e.g., parents, grandparents, siblings, children and other lineal descendants) is only 1% and does not apply to property that is worth less than $40,000. For remote relatives (e.g., uncles, aunts, nieces, nephews), the tax rate is 13% and the exemption amount is $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Nebraska.

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New Mexico

New Mexico desertNew Mexico desert

State Taxes on Social Security: Social Security benefits are taxed to the same extent they are taxed at the federal level.

Sales Tax: 5.125% state levy. Localities can add as much as 4.313%, and the average combined rate is 7.84%, according to the Tax Foundation. New Mexico’s tax is a gross receipts tax that covers most services.

  • Groceries: Exempt
  • Clothing: Taxable
  • Motor Vehicles: Exempt from ordinary sales tax, but taxable under special 4% excise tax
  • Prescription Drugs: Exempt

Income Tax Range: Low: 1.7% (on up to $5,500 of taxable income for single filers and $8,000 for joint filers). High: 4.9% (on taxable income over $16,000 for single filers and over $24,000 for married couples filing jointly).

Beginning with the 2021 tax year, the top rate will be 5.9% on taxable income over $210,000 for single filers and over $315,000 for joint filers.

Property Taxes: In New Mexico, the median property tax rate is $776 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in New Mexico.

9 of 13

North Dakota

A national park in North DakotaA national park in North Dakota

State Taxes on Social Security: Social Security benefits are not taxed for joint filers with a federal adjusted gross income of $100,000 or less and other taxpayers with a federal AGI of $50,000 or less. For taxpayers exceeding these thresholds, Social Security benefits are taxed by North Dakota to the same extent they are taxed at the federal level.

Sales Tax: 5% state levy. Localities can add as much as 3.5%, and the average combined rate is 6.96%, according to the Tax Foundation. 

  • Groceries: Exempt
  • Clothing: Taxable
  • Motor Vehicles: Exempt from ordinary sales tax, but taxable under special 5% excise tax
  • Prescription Drugs: Exempt

Income Tax Range: Low: 1.10% (on up to $40,125 of taxable income for singles and up to $67,050 for married couples filing jointly. High: 2.90% (on taxable income over $440,600).

Property Taxes: In North Dakota, the median property tax rate is $986 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax and no estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in North Dakota.

10 of 13

Rhode Island

Rose Island lighthouse in Rhode IslandRose Island lighthouse in Rhode Island

State Taxes on Social Security: Social Security benefits were not taxed in 2019 for joint filers with a federal adjusted gross income of $106,400 or less and other taxpayers with a federal AGI of $85,150 or less (AGI threshold amounts for 2020 are not available yet). For taxpayers exceeding these thresholds, Social Security benefits are taxed by Rhode Island to the same extent they are taxed at the federal level.

Sales Tax: 7% state levy. No local taxes.

  • Groceries: Exempt
  • Clothing: Exempt if under $250
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt

Income Tax Range: Low: 3.75% (on up to $65,250 of taxable income). High: 5.99% (on taxable income over $148,350).

Property Taxes: In Rhode Island, the median property tax rate is $1,533 per $100,000 of assessed home value.

Inheritance and Estate Taxes: Rhode Island has an estate tax with a 2021 exemption amount of $1,595,156. Rates range from 0.8% to 16%.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Rhode Island.

11 of 13

Utah

An arch in the desert of UtahAn arch in the desert of Utah

State Taxes on Social Security: Social Security benefits are included in Utah taxable income to the same extent they’re taxed at the federal level. However, beginning in 2021, a nonrefundable tax credit is available for Social Security benefits. The credit is calculated by multiplying the Utah income tax rate (currently 4.95%) by the amount of Social Security benefits included in federal adjusted gross income (AGI). The total credit amount is reduced by $.025 for each dollar by which the taxpayer’s modified AGI exceeds $25,000 for a married person filing a separate tax return, $30,000 for a single filer, and $50,000 for a married couple filing a joint return or a head-of-household filer. Taxpayers can’t claim both the Social Security credit and the general $450 credit for retirees.

Sales Tax: State levy is 4.85%, but mandatory 1% local sales tax and 0.25% county option sales tax are added to the state tax (for a 6.1% total rate). Plus, localities can add up to an additional 2.95%, making the average combined state and local rate 7.19%, according to the Tax Foundation.

  • Groceries: Taxable (1.75% state tax, plus mandatory 1.25% in local and county taxes)
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt

Income Tax Range: Utah has a flat tax of 4.95%.

Property Taxes: In Utah, the median property tax rate is $575 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Utah.

12 of 13

Vermont

Vermont farm scene in fallVermont farm scene in fall

State Taxes on Social Security: Social Security benefits are not taxed for joint filers with a federal adjusted gross income of $60,000 or less and other taxpayers with a federal AGI of $45,000 or less. Taxpayers who exceed those income limits may qualify for a partial exemption on their benefits.

Sales Tax: 6% state levy. Municipalities can add 1% to that, but the average combined rate is 6.24%.

  • Groceries: Exempt
  • Clothing: Exempt
  • Motor Vehicles: Exempt from ordinary sales tax, but taxable under special 6% purchase and use tax
  • Prescription Drugs: Exempt

Income Tax Range: Low: 3.35% (on up to $40,350 of taxable income for singles and up to $67,450 for joint filers). High: 8.75% (on taxable income over for $204,000 for singles and up to $248,350 for joint filers).

Property Taxes: In Vermont, the median property tax rate is $1,861 per $100,000 of assessed home value.

Inheritance and Estate Taxes: Vermont has an estate tax with an exemption of $5 million for 2021. The tax rate is a flat 16%.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in Vermont.

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West Virginia

Harpers Ferry, West VirginiaHarpers Ferry, West Virginia

State Taxes on Social Security: In 2020, 35% of Social Security benefits taxed by the federal government are excluded from taxable income for single taxpayers with federal adjusted gross income of $50,000 or less ($100,000 or less for joint filers). In 2021, 65% will be excluded for qualifying taxpayers. After 2021, qualifying taxpayers can exclude all Social Security benefits.

Sales Tax: 6% state levy. Municipalities can add up to 1% to that, with an average combined rate of 6.51%, according to the Tax Foundation. 

  • Groceries: Exempt
  • Clothing: Taxable
  • Motor Vehicles: Taxable
  • Prescription Drugs: Exempt

Income Tax Range: Low: 3% (on up to $10,000 of taxable income). High: 6.5% (on taxable income of $60,000 or more).

Property Taxes: In West Virginia, the median property tax rate is $571 per $100,000 of assessed home value.

Inheritance and Estate Taxes: There is no inheritance tax or estate tax.

For details on tax breaks for retirees and state taxes on other retirement income, see the complete guide to taxes on retirees in West Virginia.

Source: kiplinger.com

3 Strategies to Avoid Running Out of Money in Retirement

The trend of increasing life expectancy means that Americans are much more likely to live 25, 30 or even 35 years in retirement. The benefits of this trend include spending more time with your family and a higher chance of meeting your great-grandchildren. The downsides include the increased potential for running out of money close to the end of this retirement.

Today’s retirees can expect to live 40% longer than those who retired 70 years ago. Recent research reveals that affluent Americans are likely to live longer. This means that if you’ve had consistent access to health care and high income, you are more likely to enjoy a longer lifespan. Men in the top quintile of income born in 1960 will live on average 12.7 years longer than men who are in the lowest quintile of income; for women the equivalent is 13.6 years.

These raw numbers can be headache-inducing. However, the implications are profound. What they mean basically is that those who have recently retired or who are getting ready to retire, one out of three women and one in five men can expect to live to 90 years or beyond.

As retirements lengthen, they require more financial resources to support not only day-to-day expenses, but also the increased health care expenses that can crop up due to aging. It’s no surprise then, that 60% of pre-retirees surveyed by Allianz fear running out of money in retirement.

Fortunately, holistic retirement planning built around three strategies — minimizing taxes, managing savings and reducing market downside risks — can mitigate the risk of running out of money in retirement.

Strategy #1: Minimize Your Taxes

Most retirees fund their expenses in retirement through a combination of Social Security and retirement savings from company-sponsored retirement accounts. What many retirees don’t realize is that in most cases, part of Social Security is taxed, and that withdrawals from traditional company-sponsored retirement plans are taxable.

That means that money you may have counted on to help pay your bills in retirement will, instead, need to be paid to federal, state and local governments in the form of taxes. While state and local taxes depend on where you live — nine states levy no state income tax — everyone must pay federal taxes.

In the case of Social Security benefits, if you and your spouse’s income from all sources — including Social Security — is between $32,000 and $44,000 a year, up to 50% of your Social Security is taxable. If your income from all sources is greater than $44,000 a year, up to 85% of your benefit is taxable. If you are single, up to 50% of your Social Security benefit is taxable if your income from all sources is between $25,000 and $34,000. If that income exceeds $34,000 a year, up to  85% of your Social Security is taxable.

As far as your retirement savings go, if your retirement savings are in a traditional 401(k) or IRA, that means you got a tax deduction when you made your original contributions. When you start withdrawing those funds during retirement, you must pay taxes on those withdrawals. The exact amount of taxation depends on your other sources of income and your tax bracket. Even if you don’t need that money to pay your bills in retirement, IRS rules mandate that you begin to withdraw money from those accounts by making required minimum distributions at age 72.*

As a result of this taxation of retirement income, you may be shocked to realize that your tax rates aren’t much lower than they were during your working years. There’s also another potential bump in the road when it comes to retirement taxation: Taxes may rise in future years.

That’s because a rising number of retirees — 10,000 baby boomers are currently retiring every day — will put more strain on Social Security and other entitlement programs, such as Medicare and Medicaid. There’s also the unpleasant fact that the federal budget deficit continues to spiral to unimagined heights due to the relief measures required for the COVID-19 pandemic.

One fairly simple way to reduce your tax liabilities during retirement is to engage in strategic Roth IRA conversions between when you retire and when you need to begin taking required minimum distributions at age 72. This is a “sweet spot” for Roth conversions because you will likely be in a lower tax bracket as long as you delay tapping your retirement accounts.

The lower your tax bracket, the cheaper it is to convert traditional IRAs to Roth IRAs. Why? Because you must pay taxes on the conversion at the time you convert. For example, if you convert $10,000 to a Roth IRA from a traditional IRA and you are in the 24% federal tax bracket, you will pay $2,400 in federal taxes to convert. It’s a good idea to have the funds to pay the taxes in a savings account, because taking out more money to pay the taxes will increase your tax liability. If you live in a state with state income taxes, you will also owe state income taxes on your conversion.

Other options to lower your tax liability during retirement include purchasing a whole life insurance policy.

Strategy #2: Manage Your Savings

Your primary focus in looking toward retirement should be making certain you will have a steady stream of income to support yourself and your partner, if you have one. The No. 1 priority in retirement is replacing your income from work with ongoing income from your retirement savings, Social Security — and any other sources — to pay your bills.

This means changing your mindset when it comes to investing. When saving for retirement, lower-cost passive investment types, time and employer contributions all work together to increase the value of your account so you can afford to retire.

However, when you retire, your situation changes from accumulating money for retirement to spending money from your retirement accounts to support your lifestyle. That means that a strategy that worked well pre-retirement may not work so well in a completely different situation.

If you try to stick with this strategy, you may find yourself withdrawing too much money to pay your bills, which will increase the odds that you’ll run out of money in retirement. Instead, consider switching to other types of investments and retirement vehicles that can generate the types of income you’ll need in retirement. Some possibilities include annuities and dividend investing.

Strategy #3: Reduce Market Downside Risk

While the market historically has had an upward bias, there’s no way to know what type of market will occur when you retire. Analysis of past markets reveals that investors who retire during or right before a bear market can potentially face a severe risk to their retirement financial stability. That risk is known as sequence of returns risk.

Retiring during or shortly before a bear market can be a risk, because a bear market can erode the value of your savings just as you enter retirement. For example, if you retired in early 2007 at the beginning of the financial crisis, your stock portfolio would have fallen by approximately 50%. For a $1 million retirement portfolio divided 50% in stocks and 50% in bonds, the loss during that period could have been as much as $250,000, or 25% of your retirement savings. That’s a lot of money, which could have damaged your ability to continue to withdraw money at the same rate throughout retirement, increasing the chance of running of money later in retirement.

To avoid this risk, one tactic is to place two years of retirement expenses in a safe, liquid savings account. Another strategy involves purchasing a fixed index annuity with a yearly penalty-free withdrawal option of up to 10% of the annuity’s value, which you can access in a pinch.

These options may preserve the type of financial flexibility that is useful in retirement.

A final word

Planning for retirement can often appear scary, and because of this, too many people put it off to the point where they suffer from avoidable financial bumps and bruises. As you move closer to retirement, consider implementing these strategies to help you enjoy your golden years and minimize the risks all retirees face.

*This new rule applies to individuals born on July 1, 1949, or later. For others born before then, the previous RMD rule of 70½ applies.

Wealth Manager, Reliant Financial Services

Domenic Rizzi started his career in the financial service industry in 1986. He has helped many clients reach their financial goals, as many have been with him for 30 years or longer. He is dedicated to developing lifelong relationships. This only happens if people are happy with the results and believe that he has the highest level of dedication, integrity and respect. 

Source: kiplinger.com

Here’s What to Do with the Money Left Behind in Old 401(k) Accounts

Recently, a Capitalize Research study revealed that Americans have left behind over $1 trillion untouched in their old 401(k)s. This implies that millions of employees are struggling to manage their retirement savings as they move from job to job, leading to the accumulation of money in these abandoned accounts. 

The 401(k), a tax-advantaged savings plan, has helped revolutionize the American workforce since its enactment in 1978. However, millions of dollars are left unclaimed as people change jobs, relocate and subsequently forget about their old 401(k)s. When you lose track of a 401(k) at an old employer, your savings in that account stagnate, leaving an opportunity toward building a secure financial future squandered.

Even if you are contributing to a new plan with your current employer, leaving money behind in an old 401(k) account and forgetting about it harms your overall financial well-being, prevents you from building a cohesive financial plan and does not allow all your money to work for you and your goals in the best possible way.

The Cons of Leaving Your 401(k) Behind

Risk of Losing Track of Old 401(k)s

Rolling over an old 401(k) or managing your savings during a job transition can be stressful and chaotic. Some people end up leaving behind an old account with the intention to revisit it later, only to forget about it or lose track of it as they are faced with other aspects of their job transition. This will make it difficult to put your savings to good use in a way that promotes your financial stability in the future.

As of now, if you have less than $5,000 in any old accounts, your previous employers will likely either cut you a check for the remaining balance or move the money into an IRA. It’s up to you to find it, though. (For more on how to do that, keep reading.)

Missing Out on Investment Opportunities

Do you know when you forget your old 401(k) accounts, you miss out on a chance for a solid investment plan? You were wise enough to set up a retirement plan to secure your financial freedom for the future. But, when you leave behind any amount of savings, it leads to loss of earning capacity. 

Leaving behind money in an old retirement account also means that your savings dollars may not be invested in the most beneficial way possible for you. Staying on top of old accounts or rolling them over into your current plan can help you ensure you are investing every dollar with purpose, efficiency and your unique goals in mind.

How to Find an Old 401(k) Account

One of the easiest ways to begin locating your lost account is by contacting your previous employer or previous plan administrator first. They will have firsthand knowledge and records of your plan. Be sure to have your Social Security number and employment dates ready to be shared, and provide any previous 401(k) statements or other relevant documents if you have them.

If you can no longer trace the account with your former employer, run a search on the National Registry of Unclaimed Retirement Benefits.  This site enables employers to connect former employees with their retirement contributions. You also have the option of searching for any filing on the U.S. Department of Labor’s Abandoned Plan Database.

What to do With Your Leftover 401(k) Funds

Moving from one job to another and dealing with the surprises of life can be overwhelming, right? It is easy to forget or lose track of your previous 401(k) plan as you start focusing on your current retirement savings account and settle into your new job.

To maintain ease of access to your savings and make the most of your leftover 401(k)s, there are several options to choose from when deciding what to do with your old 401(k)s. 

First, you can leave the money in the old 401(k) if you are sure you will not forget about it. The advantage of this option is your account maintaining a tax-deferred status. The downside is, if you have less than $5,000 your past employer can send a check to you (possibly triggering a tax bill) or to an IRA, which can attract some fees.

Rolling over your past 401(k) accounts into an individual retirement account ensures that you maintain good record-keeping of the funds, as they are all saved in one place. Even better, you will accrue more benefits, such as having more control over factors, such as account fees and access to a broader range of investments.

You can also choose to roll over your old 401(k) into your current employer’s plan, as long as the plan allows it. This ensures you protect your savings in a tax-deferred account and have access to profitable investment options. Just ensure you understand the rules set in the new plan.

Ultimately, what you decide to do with your old 401(k) funds is a personal decision that requires you to critically weigh both the risks and benefits associated with the choices available in handling old funds. Make the best decision for your future by ensuring your funds are always in an account that offers favorable terms that optimize your investment returns.

President, Partner and Financial Adviser, Diversified, LLC

In March 2010, Andrew Rosen joined Diversified Lifelong Advisors, bringing with him nine years of financial industry experience.  As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. 

Source: kiplinger.com

Guiding Your Company with Business Continuity Planning

Business continuity is a tool for handling the transfer of a business to a different owner when the original owner leaves, dies or becomes incapacitated.  A continuity plan protects short-term and long-term business interests and is one of the most important components to business exit planning. 

Ripple Effects

The death of an owner often sets off a ripple of events for a business if it is not prepared for continuity.  This loss of direction can lead to losses of financial resources and vendors, key talent and ultimately loyal customers.  Below are the key issues that can occur when owners do not create a plan, along with ways to mitigate them:

Loss of Financial Resources

Vendors may decide to discontinue their services to the business, especially if the business defaults on their contracts.  The banks, lessors, bonding and financial institutions you do business with may end their relationship with your company.  How to handle these situations depends on the type of ownership:

Sole owners: Your death can put enormous pressure on the business to continue its performance should third parties refuse to lend money or make guarantees based on the health of your company.  Continuity planning can help offset the loss of leadership.

Partnerships: The loss of financial resources can be mitigated by funding a buy-sell agreement, which places a significant amount of money in the company reserves should you die.

Loss of Key Talent

Another issue that can create problems with business continuity is the loss of your key talent.  If the remaining owners do not have your experience or skills, the business can suffer as if it had been a sole ownership.  Your experience, skills and relationships with customers, vendors and employees may be difficult to replace, especially in the short term.  To overcome this situation, begin grooming and training successive management capable of filling your shoes.  You should also begin preparing for the transition early, because training your replacement can take years.

Loss of Employees and Customers

Particularly with sole ownership, as vendors end their relationship with the business, employees will be unable to satisfy their obligations to customers.  This can hasten the employees’ departure, taking with them key skills and even client relationships. 

To mitigate the loss of key employees, you can incentivize them to continue their employment through a written Stay Bonus that provides bonuses over a period of time, generally 12-18 months.  This bonus is designed to substantially increase their compensation, usually by 50% to 100% for the duration specified.  Typically, this type of bonus is funded using life insurance in an amount that is sufficient to pay the bonuses over the desired timeframe.

Continuity Planning

For businesses with only one owner, it should be obvious that there will be no continuity of the business unless a sole owner takes the appropriate steps to create a future owner.  Whether it be grooming a successor or creating group ownership, this step is one that should be addressed early.  Even if your business is owned by your estate or a trust, you will need to provide for its continuity, if only for a brief period while it can be sold or transferred.  These steps should help business owners move through the process of creating a continuity plan:

  • Create a written Succession of Management plan that expresses your wishes regarding what should be done with your business over a period of time, until your eventual departure.
  • Name the person or persons who will take over the responsibility of operating your business.
  • Ensure your plan specifically states how the business transfer should be handled, whether continued, liquidated or sold.
  • Notify heirs of the resources available to handle the company’s sale, continuation or liquidation.
  • Meet with your banker to discuss the continuity plans you have made.  Showing them that the necessary funding is in place to implement your continuity plans will help the eventual transfer of ownership to proceed smoothly.
  • Work closely with a competent insurance professional to assure the amount of insurance purchased by the owner, the owner’s trust, or the business can cover the business continuity needs outlined in your plan.

Buy-Sell Agreement

For businesses with more than one owner, continuity planning can be achieved by creating a buy-sell agreement.  Such an agreement stipulates how the co-owner’s interest in the business is transferred and is often funded using life insurance or disability buyout insurance.  It can also be funded through an employee stock ownership plan (ESOP) by creating a privately held corporation.  It is important that you keep the buy-sell agreement updated to avoid creating additional problems with continuity.  There are several types of buy-sell agreements to consider:

Cross purchase: Another business partner agrees to purchase the business from the owner or the owner’s family.  All business owners generally purchase, own and are the beneficiary of an insurance policy insuring each of the other business owners.

Entity purchase: The business entity agrees to purchase the business from the owner or the owner’s family.  In this case, the insurance policy is usually owned by the business.

Wait-and-see: The buyer of the business is allowed to remain unspecified, and a plan is put in place to decide on a buyer at the time of a triggering event (e.g., retirement, disability, death).  The policy ownership and beneficiary structures vary, depending on the type of the agreement.

Deciding when to begin business continuity planning is complicated and likely depends on your health, family circumstances and overall business financial wellness. We suggest you seek the advice of a business planning professional to help you sort through your options.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice.  Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.   

President and Founder, Global Wealth Advisors

Kris Maksimovich, AIF®, CRPC®, CRC®, is president of Global Wealth Advisors in Lewisville, Texas. Since it was formed in 2008, GWA continues to expand with offices around the country. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth.

Source: kiplinger.com

Biden’s Tax Plan Could Make ‘Marriage Penalty’ Worse

Getting married is likely one of the biggest life decisions you will make, and while it may seem like an easy one, it could just have gotten a little more complicated. In addition to the obvious selection and reflection of a life with a future spouse, and all the family, friends and other things that come with it, there may now be a new consideration to add to the mix: Uncle Sam.  That’s because the so-called “marriage penalty” may have just gotten larger for high-earning dual-income households. 

Under the recently released so-called “Green Book,” which contains the Department of Treasury’s tax-related proposal for the Biden administration, is a proposal to increase the top marginal income tax rate from the current 37% to 39.6%.  This is similar to previous tax increase proposals by President Biden.  Specifically, the Green Book provides that the increase, as applied to taxable year 2022, will impact those with taxable income over $509,300 for married individuals filing jointly and $452,700 for unmarried individuals.  However, because of the way our tax system and tax brackets work, some married couples who each earn under $452,700 would be subject to a higher tax, as compared to their single counterparts earning the same amount. In this instance, being unmarried and single is better — for tax purposes anyway.  

Married vs. Single: Do the Tax Math

The reason for this dichotomy is because we have different tax brackets for single filers and married filers. Assume you have a couple (not married) each making $452,699. These taxpayers would not have reached the highest bracket for an unmarried individual per the Green Book proposal.  Each individual would be taxed at the 35% bracket, resulting in approximately $132,989 in federal income taxes using this year’s tax bracket for single filers (or a total of $265,978 combined for both individuals).

 If instead this couple decides to marry, they will now have a combined income of $905,398, putting them in the highest tax bracket (39.6%) as married filing jointly. This translates to an estimated $284,412 in federal income tax, which is $18,434 more in taxes (or about 6.9%) than compared to a situation if they were single, according to a projected tax rate schedule we created based on the available federal income tax information.

There is another option for married couples: the filing status of “Married Filing Separately.” In this situation, the couple may file as “single” for tax purposes but must use the “Married Filing Separately” rate table, which for the vast majority of situations, when you do the math, does not yield a better result.

The Effect, Going Forward

If the changes, as currently proposed, pass, I am anticipating a lot of tax planning around filing status and income threshold management.  Accountants will be very busy with detailed analyses and projections to evaluate the optimal filing status for married couples, and where certain deductions or planning opportunities would be more beneficial if applied to one spouse over the other.

In extreme cases, could this factor into one’s marital decision?  While I certainly hope that we do not make life decisions around taxes, the reality is that taxes hit the bottom line, and that impact is real. 

No one has a crystal ball as to what will happen, but let’s hope that in the end, this doesn’t become an unforeseen factor in the increasing divorce rate we have already seen since the start of the pandemic.  Let’s hope for marital bliss, not marital dismiss.

As part of the Wilmington Trust and M&T Emerald Advisory Services® team, Alvina is responsible for wealth planning, strategic advice, and thought leadership development for Wilmington Trust’s Wealth Management division.
©2021 M&T Bank Corporation and its subsidiaries. All rights reserved.
Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation. M&T Emerald Advisory Services and Wilmington Trust Emerald Advisory Services are registered trademarks and refer to this service provided by Wilmington Trust, N.A., a member of the M&T family.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting or other professional advice since such advice always requires consideration of individual circumstances. Note that tax, estate planning, investing and financial strategies require consideration for suitability of the individual, business or investor, and there is no assurance that any strategy will be successful.

Chief Wealth Strategist, Wilmington Trust

Alvina Lo is responsible for strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina’s prior experience includes roles at Citi Private Bank, Credit Suisse Private Wealth and as a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She holds a B.S. in civil engineering from the University of Virginia and a JD from the University of Pennsylvania.  She is a published author, frequent lecturer and has been quoted in major outlets such as “The New York Times.”

Source: kiplinger.com

IRS Extends Tax Deadlines for Michigan Storm Victims

Residents of certain Michigan counties can wait until November 1, 2021, to file federal tax returns and make tax payments that would normally be due before that date. The IRS extended the deadlines because of the severe storms, flooding and tornadoes that began on June 25, 2021, in parts of the state that were declared a disaster area by the Federal Emergency Management Agency (FEMA). The tax relief applies to residents of Washtenaw and Wayne Counties.

Various federal tax filing and payment due dates for individuals and businesses from June 25 to October 31 will be shifted to November 1, 2021. Although this will not include tax payments related to 2020 returns that were due on May 17, 2021, it will include:

  • Quarterly estimated income tax payments normally due on September 15;
  • Quarterly payroll and excise tax returns ordinarily due on August 2;
  • Valid extension filings normally due on October 15; and
  • Filing of Form 2290, Heavy Highway Vehicle Use Tax Return, normally due on August 31.

Penalties on payroll and excise tax deposits due from June 25 to July 12 will also be waived if the deposits were made by July 12, 2021.

You don’t have to contact the IRS to get this relief. However, if you receive a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, you should call the number on the notice to have the penalty abated.

The IRS will also waive fees for obtaining copies of previously filed tax returns for taxpayers affected by the storm. When requesting copies of a tax return or a tax return transcript, write “Michigan Severe Storms, Flooding, and Tornadoes” in bold letters at the top of Form 4506 (copy of return) or Form 4506-T (transcript) and send it to the IRS.

In addition, the IRS will work with any taxpayer who lives outside Michigan, but whose records necessary to meet a deadline occurring during the postponement period are located in the state. Taxpayers qualifying for relief who live in another state need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2021 return normally filed next year), or the return for the prior year. This means that taxpayers can, if they choose, claim these losses on their 2020 return. Be sure to write the FEMA declaration number (FEMA 4607-DR) on any return claiming a loss. It’s also a good idea for affected taxpayers claiming the disaster loss on a 2020 return to put the Disaster Designation (“Michigan Severe Storms, Flooding, and Tornadoes”) in bold letters at the top of the form. See IRS Publication 547 for details.

Source: kiplinger.com

“Plus-Up” Stimulus Checks Have Already Been Sent to 9 Million Americans – Will You Get One Too?

If you already received a third stimulus check, you might find an additional check from the IRS in your mailbox in the coming weeks – especially if you filed your 2020 tax return close to the May 17 deadline. The IRS is calling these extra checks “plus-up” payments, and more than 9 million Americans have already receive the supplemental payment. Over 900,000 plus-up payments were sent in just the last six weeks, and more of them will be sent in the weeks and months ahead as the IRS continues to process 2020 tax returns. The big question is: Will you get one?

The IRS is sending plus-up payments to people who received a third-round stimulus check that was based on information taken from their 2019 federal tax return or some other source, but who are eligible for a larger payment based on a 2020 return that is filed and/or processed later. This could happen, for example, if you had a new baby last year that is reported as a dependent for the first time on your 2020 return (see below for other possible reasons).

So, if you recently filed your 2020 return, you might get a plus-up payment soon. If you requested a filing extension and haven’t filed your 2020 return yet, there’s an extra incentive to get it done quickly (i.e., not waiting until October 15 to file your return). Your 2020 return must be filed and processed by the IRS before August 16, 2021, if you want to get a plus-up payment. That means you still have time to act if you got an extension – but not too much time! Plus, the sooner you file your return, the sooner you’ll get your “plus-up” payment (plus any other tax refund the IRS owes you).

How Stimulus Payments Are Calculated

Most eligible Americans have already received their third stimulus check. The “base amount” is $1,400 ($2,800 for married couples filing a joint tax return). Plus, for each dependent in your family, the IRS adds on an extra $1,400. Unlike for previous stimulus payments, the age of the dependent is irrelevant.

However, third-round stimulus checks are then “phased out” (i.e., reduced) for people with an adjusted gross income (AGI) above a certain amount. If you filed your most recent tax return as a single filer, your payment is reduced if your AGI is over $75,000. It’s completely phased-out if your AGI is $80,000 or more. For head-of-household filers, the phase-out begins when AGI reaches $112,500 and payments are reduced to zero when AGI hits $120,000. Married couples filing a joint return will see their third stimulus check drop if their AGI exceeds $150,000 and completely disappear when AGI is $160,000 or more.

The IRS looks at your 2019 or 2020 tax return to determine your filing status, AGI, and information about your dependents. If you don’t file a 2019 or 2020 return, the IRS can sometimes get the information it needs from another source. For instance, it got information from the Social Security Administration, Railroad Retirement Board, or Veterans Administration for people currently receiving benefits from one of those federal agencies (although the IRS may not have gotten all the information it needs to send a full payment). If you supplied the IRS information last year through its online Non-Filers tool or by submitting a special simplified tax return, the tax agency can use that information, too.

If your 2020 tax return isn’t filed and processed by the time it starts processing your third stimulus check, the IRS will base your payment on your 2019 return or whatever other information is available. If your 2020 return is already filed and processed, then your stimulus check will be based on that return. If, however, your 2020 return is not filed and/or processed until after the IRS sends your third stimulus check, but before August 16, that’s when the IRS will send you a plus-up payment for the difference between what your payment should have been if based on your 2020 return and the payment actually sent that was based on your 2019 return or other data.

(Note: The IRS has had tax return processing delays this year. So, even if you submitted your 2020 return before your third stimulus check was sent, your stimulus payment still might be based on your 2019 return because your 2020 return wasn’t processed in time. Returns filed electronically are generally processed faster than paper returns.)

If for some reason you don’t get a plus-up payment, you’ll still get your money if a payment based on your 2020 tax return is higher than the payment you actually received – but you’ll have to wait until next year to get it. In that case, you can claim the difference as a Recovery Rebate credit on your 2021 tax return, which you won’t file until 2022.

[Use our Third Stimulus Check Calculator to compare your payment if it’s based on your 2019 return vs. your 2020 return. Just answer three easy questions to get a customized estimate.]

Who Will Get a Supplemental “Plus-Up” Payment

Again, you’ll only get a supplemental “plus-up” payment if you received a third stimulus check based on your 2019 tax return or other information, but you would have gotten a larger check if the IRS based it on your 2020 return. So, who falls into this category? Of course, it depends on your specific circumstance. However, to give you a general idea, here are a few examples of hypothetical taxpayers who should get a plus-up payment.

You Had Less Income in 2020 Than in 2019: Kay was unemployed for much of 2020. As a result, her AGI dropped from $78,000 in 2019 to $40,000 in 2020. Kay received a $560 third stimulus check that was based on her 2019 return (she is single with no dependents). Since her 2019 AGI was above the phase-out threshold for single filers ($75,000), her payment was reduced. Kay later files her 2020 tax return, which is processed before August 16, 2021. Since Kay’s 2020 AGI is well below the applicable phase-out threshold, her third stimulus check would have been for $1,400 if it were based on her 2020 return. As a result, Kay will receive a $840 plus-up payment ($1,400 – $560 = $840).

You Had a Baby in 2020: Josh and Samantha had their first child in 2020. They’ve been married for five years, and they file a joint return each year. Their AGI was $110,000 in 2019 and $120,000 in 2020, which are both below the phase-out threshold for joint filers ($150,000). The IRS sent Josh and Samantha a $2,800 third stimulus check based on their 2019 return. They filed their 2020 tax return before the IRS sent the payment, but the return was not processed until a week after the payment was sent. That’s why the payment was based on their 2019 return. Since Josh and Samantha claimed their new bundle of joy as a dependent on their 2020 return, their stimulus check would have been for $4,200 if it were based on their 2020 return (i.e., they would have received an additional $1,400 for their baby). As a result, the IRS will send Josh and Samantha a $1,400 plus-up payment ($4,200 – $2,800 = $1,400).

You Got Married in 2020: Patty and Greg were married in 2020. They had a combined AGI of $150,000 in 2020 and have no dependents. In 2019, as separate single filers, Patty had an AGI of $72,000 and Greg had an AGI of $78,000. The IRS sent Patty a $1,400 third stimulus check based on her 2019 return. Since her 2019 AGI was below the phase-out threshold for single filers ($75,000), her payment was not reduced. The IRS sent Greg a $560 third stimulus check based on his 2019 return. Since his 2019 AGI was above the phase-out threshold for single filers, his payment was reduced. Between the two of them, they got a total of $1,960 in third stimulus check payments ($1,400 + $560 = $1,960). After receiving their stimulus checks, Patty and Greg file a joint return for the 2020 tax year that is processed before August 16, 2021. Since the AGI reported on their 2020 joint return does not exceed the phase-out threshold for joint filers ($150,000), their stimulus check would have been for $2,800 if it were based on their 2020 return (i.e., it wouldn’t have been reduced). As a result, the IRS will send Patty and Greg a $840 plus-up payment ($2,800 – $1,960 = $840).

You Used the Non-Filers Tool Last Year: Mary is single and has two dependent children. One turned 15 and the other turned 18 in 2020. Mary was not required to file a 2019 tax return, but she did use the IRS’s Non-Filers tool last year to get a first-round stimulus check. Since children over 16 did not qualify for the extra $500 payment for first-round payments, Mary only reported her youngest child to through the tool. The IRS sent Mary a $2,800 third stimulus check based on the information it received through the Non-Filers tool. Mary later files a 2020 tax return, which is processed before August 16, 2021. She used the head-of-household filing status, reported an AGI of $15,000, and claimed both of her children as dependents. For third-round stimulus checks, an additional $1,400 is added to the total payment for each dependent regardless of the dependent’s age. Since Mary’s 2020 AGI is below the phase-out threshold for head-of-household filers ($112,500), her third stimulus check would have been for $4,200 if it were based on her 2020 return. As a result, Mary will receive a $1,400 plus-up payment ($4,200 – $2,800 = $1,400).

A Federal Agency Supplied Information to the IRS: Ron is a disabled veteran who receives benefits from the Department of Veterans Affairs (VA). He is single and has one dependent child. Ron was not required to file a 2019 tax return, but the VA sent information to the IRS about Ron. The VA did not send any information about Ron’s child. Based on the information it had, the IRS sent Ron a $1,400 third stimulus check. After receiving this payment, Ron files a 2020 tax return, which is processed before August 16, 2021. Ron filed as a single person with an AGI of $18,000 and one dependent. Since Ron’s 2020 AGI does not exceed the phase-out threshold for single filers ($75,000), his third stimulus check would have been for $2,800 if it were based on his 2020 return. As a result, the IRS will send Ron a $1,400 plus-up payment ($2,800 – $1,400 = $1,400).

Source: kiplinger.com