by Stephen Reed | Accounting News, CPA, IRS, News, Retirement, Tax, Tax Planning - Individual
As an American worker, relinquishing part of your income to taxes is standard practice, but once you move out of the workforce, much of your retirement income is subject to taxes as well. Below are some possible taxes you could face in retirement.
Social Security Taxes
If you have income in addition to Social Security, you will likely lose a portion of your benefits to federal taxes. To determine if your Social Security benefit will be taxable, you need to determine your provisional income. This is your income outside of Social Security—including pension payments, traditional 401(k) and IRA withdrawals, and income from a part-time job—plus half of your yearly benefits. If your provisional income totals more than $25,000 for individuals and $32,000 for couples, 50% of your Social Security benefit will be taxable. If your provisional income exceeds $34,000 for individuals and $44,000 for couples, up to 85% of your Social Security benefit will be subject to tax.
Retirement Plan Penalties
A common tax deduction tactic among workers is to deposit money in an IRA shortly before filing taxes in order to defer paying income tax on the new contributions, but this is not an option after age 70 ½. Additionally, if you miss a required distribution from your retirement accounts after age 70 ½, you will incur a 50% penalty, which is added to the income tax due on retirement account distributions. However, Roth IRAs don’t have distribution requirements in retirement, and workers older than 70 ½ might be able to delay 401(k) distributions.
Taxes on Pension Income
With the possible exception of military or disability pension, you should expect to pay taxes on pension income. However, if you contributed after-tax dollars to your pension, you won’t be required to pay tax on that part of the contribution.
Taxes on Investment Sales
If you intend to sell some investments in retirement, expect to report that sale on your tax return as a short-term or long-term capital gain or loss. Long-term gains are generally taxed at a lower rate than other types of income, but you must hold the investment for at least a year and a day in order to qualify for long-term gains. Interest income and dividends will also continue to be taxed as they were before retirement.
by Stephen Reed | Estate Planning - Individual, News, Retirement, Tax Planning - Individual
For many, even hearing the word investing seems like a frightening proposition filled with great risk and little reward. While investing your hard earned money certainly involves patience and a willingness to learn some key principles, it does not have to be the intimidating process that many make it out to be. According to research, there are four concerns people often cite when choosing not to invest: lack of knowledge or experience, lack of pricing transparency, distrust of the financial industry and the sheer complexity of investing. Below, we discuss ways to conquer each of these concerns and begin investing well.
LACK OF KNOWLEDGE/EXPERIENCE
We can’t sit here and act like investing is a walk in the park. It takes time, patience and at least a general understanding of some finance and investment principles. However, you do not need to have your MBA or have worked in finance for 10 years to grasp the fundamentals of investing. Luckily, we live in an age where you have a wealth of knowledge at your fingertips. A simple internet search can return articles, blogs, podcasts and more that discuss concepts such as long-term compounding of returns or diversification to lower risk. Solid research combined with common sense can put you well on your way to investing sensibly.
LACK OF PRICING TRANSPARENCY
Surely, there are often additional charges, such as fixed index annuities and variable annuities, that can seem confusing or excessive when considering the cost of investing. However, there are plenty of investment structures out there with clearly defined and labeled fees. Sites like morningstar.com allow you to search for investment quotes and discover the annual expenses and sales charges associated with that fund, providing you with a clear directive and comparison to invest where it makes the most sense for you.
DISTRUST OF THE FINANCIAL INDUSTRY
Markets shift on a daily, sometimes even hourly basis, and there are financial advisers out there who take advantage of people’s lack of knowledge, so while a dose of skepticism may be healthy when you begin investing, it should not stop you entirely. If you understand upfront that the markets will indeed fluctuate, sometimes dramatically, so you must remain patient, and know that every investment firm may not have your best interest in mind, you will enter the market cautiously and avoid falling into unknown investment traps.
COMPLEXITY OF INVESTING
Many financial firms will advise a plan of constantly scanning the market and jumping in and out of funds based on new data to be the smartest investor, a process that truly does sound complicated and confusing. However, while this process may work for some, it is not a one-size-fits-all formula. There are a variety of options, from total stock or bond market index funds to target fund portfolios, where you can build wealth for your future with less hassle and constant shifting.
Many let the fear of failure stop them from even trying, but you don’t have to let your fears control you. Be smart, consider your options and do some solid research to mitigate uncertainties, then get those feet wet and start planning and investing for your future, today.
by Daniel Kittell | Accounting News, Tax, Uncategorized
By Ken Berry
New cost basis reporting rules now apply, for the first time ever, to Form 1099-B sent to investors and the IRS. But other onerous reporting rules for businesses and landlords scheduled to take effect in 2012 have been repealed.
Are you confused? You’re not alone. Here’s a brief recap on what is and isn’t taking place this year.
Reporting for investments: Previously, financial institutions were required to report on Form 1099-B certain information relating to the sale of investments, such as the date of the sale and the amount of the sale proceeds. It was the investor’s responsibility, however, to provide the acquisition date and the purchase price on Schedule D, although many brokers often provided additional information when it was available.
Many clients will panic about the new rules taking effect and about rules that were supposed to take effect this year and won’t. Be a calming influence and explain the implications to your clients.
This meant that investors – and their tax return preparers – had to figure out the cost basis of investments for tax purposes before the information was transferred to Schedule D. Typically, an investor had some flexibility in choosing a method for establishing the basis of securities that were sold if he or she had acquired multiple shares of the same security at different times and prices. In essence, the investor could choose to identify the shares being sold as the ones that provided the optimal tax result. Thus, an investor could effectively decrease a taxable gain or increase a loss.
But now the rules have changed. Under the Emergency Economic Stabilization Act of 2008, financial institutions must report on Form 1009-B the relevant cost basis information, but only for “covered securities” phased in over a three-year period. The new cost basis reporting rules apply to:
Stocks (both domestic and foreign), American Depository Receipts (ADRs), real estate investment trusts (REITs), and exchange-traded funds (ETFs) taxed as corporations acquired on or after January 1, 2011.
Mutual funds, dividend reinvestment plans (DRPs), and other ETFs acquired on or after January 1, 2012.
All other remaining securities – such as options, fixed income instruments, and debt instruments – acquired on or after January 1, 2013.
Therefore, cost basis information must be reported on Form 1099-B for stocks acquired after 2010, but not for mutual fund shares acquired before 2012. The new rules for mutual fund shares acquired after 2011 will be reflected on 1099-B forms sent to investors next year.
If an investor doesn’t select a cost basis method indentifying the shares of covered securities at the time of the transaction, the institution will use a default method. The default method for stocks acquired after 2010 is the first-in, first-out (FIFO) method. For mutual funds shares acquired after 2012, the broker may choose to use the FIFO method or an “average cost” method as a default.
Reporting for businesses and landlords: Traditionally, businesses have reported on Form 1040 payments compensating parties for services rendered if the annual total received by the provider is $600 or more. This reporting requirement also applies to commissions, rents, royalties, interest and the like.
However, these reporting rules don’t extend to payments for goods. Furthermore, a business generally doesn’t have to report payments made to corporations.
Under the Affordable Care Act of 2010 (ACA) – the controversial health care legislation – a business was required to provide 1099s for payments to corporations, beginning in 2012. The health care law also imposed these extended reporting rules on payments for goods.
These onerous requirements faced strong opposition from the business sector and the tax community. Ultimately, the extended requirements were repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. So there are new no reporting requirements for businesses in 2012. It’s as if this provision of the health care law never existed.
Similar rules would have increased reporting responsibilities for landlords. Under the Small Business Jobs Creation Act of 2010, new reporting rules were imposed for payments for services in conjunction with rental properties, beginning in 2011. Subsequently, the ACA extended the reporting rules to payments to corporations and to payments for goods. These changes were scheduled to take effect in 2012. As with the provision applicable to businesses, the 2011 law repealed the new reporting requirements for landlords.
Calm the waters: Undoubtedly, many clients will panic about the new rules taking effect – and those that were supposed to take effect and won’t – this year. You can be a calming influence.
Set the record straight and explain the implications to your clients.
Full Article: http://www.accountingweb.com/topic/tax/ins-and-outs-new-reporting-rules-2012
