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When Should I Take Social Security? (Part 3)

This is the last part of the series! Here are just a couple more things to think about and the bottom line.

Changing your mind
If you previously elected to receive early Social Security benefits at a reduced rate, you have the option of paying back to the government what you’ve already received. You could then restart benefits at a later date to take advantage of a higher payout. As of December 8, 2010, the SSA announced that this option would henceforth be limited to one year’s worth of benefits, effective immediately.

For example, let’s say you elected to receive early benefits at age 62 and you’re now 63 and thinking of going back to work. You could stop receiving Social Security, pay back the one year’s worth of benefits you received, go back to work, and then wait until a later age to restart your benefit checks at a higher level.

Whether it makes sense to take advantage of this option depends on your tax situation, age and life expectancy. Of course, you also have to come up with the repayment money. You might want to enlist the help of a CPA or another financial professional to help you crunch the numbers.

What about the future of Social Security? 
If you’re skeptical (or downright cynical) about the future of Social Security, you may be inclined to take benefits as early as you can under the assumption that a bird in the hand is better than nothing. Healthy skepticism is understandable.

Early in 2010, the Congressional Budget Office announced that according to its own projections, Social Security would be running a negative cash flow as early as 2010—a full six years earlier than expected. That projection was confirmed in the annual Social Security Trustees report, released in August of 2010. The SSA also projects that beginning in 2037, Social Security benefits could be reduced by 22% and could continue to be reduced annually.

If you’re really worried about the future prospects for Social Security, that’s all the more reason to save more for your own retirement—even if it means spending a little less now.

The bottom line 
If you have a choice and are in good health, it’s probably best to wait as long as you can to take your benefits (but no later than age 70). There are many factors to consider, and deciding when to take Social Security can be complex. Get some help from your financial planner or tax professional if you need it.

For more information, you can check out Social Security Administration’s website.

Also, if you would like to view the unabridged version of this article, click here:

http://www.schwab.com/public/schwab/research_strategies/market_insight/retirement_strategies/planning/when_should_you_take_social_security.html

When Should I Take Social Security? (Part 2)

Now that you have a general understanding of how Social Security works, here are some factors to consider as you decide when to take the money.

1. Your cash needs. If you’re contemplating early retirement and you have sufficient resources (adequate investments, a traditional pension, other sources of income, etc.), you can be flexible about when you take Social Security benefits. However, if you can’t make ends meet without electing for an early, reduced benefit, you may want to consider postponing retirement for a few years until you reach your normal retirement age, or even longer.

2. Your life expectancy and break-even age. Taking Social Security early reduces your benefits, but it also means you’ll receive monthly checks for a longer time. Taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.

Clearly, how long you expect to live will greatly influence your decision. If you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you’re in poor health or have reason to believe you won’t beat the average life expectancy, you might decide to take what you can get while you can.

3. Your spouse. Don’t forget to take your spouse’s age and health into account as you consider when to begin receiving Social Security, particularly if you’re the higher-earning spouse. The amount of survivor benefits for a spouse who hasn’t earned much during his or her working years could depend on the deceased, higher-earning spouse’s benefit—the bigger the higher-earning spouse’s benefit, the better for the surviving spouse.

4. Whether you’re still working. If you take Social Security before your normal retirement age, earning a wage (or even self-employed income) could reduce your benefit.

Starting the month you hit your normal retirement age, your benefits are no longer reduced no matter how much you earn. Keep in mind, any reduction in benefits due to the earnings test is only temporary, analogous to “withholding.” You will get the money back in the form of a higher benefit at full retirement age, so you shouldn’t cut back on working or worry about earning too much.

That said, keep in mind that Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), more of your benefit is subject to income tax, up to a maximum of 85%.
In any case, if you’re still working, you may want to postpone Social Security either until you reach your normal retirement age or until your earned income is less than the annual limit. However, in no case should you postpone benefits past age 70. (You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.)

5. The amount on your Social Security statement isn’t what you actually get. Besides the potential for taxes to eat into your benefit, your Medicare Part B (and Part D, if applicable) premium will also be deducted from the gross amount.

If SSA projections hold true, Medicare premiums will likely take an increasing share of your Social Security check. According to the Social Security Trustee’s Report, by 2037, Medicare Part B and D premiums and co-pays on Medicare covered services will take 70% of the average Social Security benefit.

All the more reason to hold out for the largest gross benefit you’re entitled to if you have other sources of income and expect to live a long life.

To be continued…

When Should I Take Social Security? (Part 1)

I read the following from Charles Schwab (schwab.com). There’s a lot of information so I’ve decided to break it up into 3 parts. This first part is general information about social security and the rules that govern it. The next installment will be about factors you should consider when determining what age to take your benefits. The last section will be extra things to consider and the bottom line.

When it comes to Social Security, you’ve got three alternatives:

• Take it early
• Wait until your normal retirement age
• Wait even longer

You can still elect to take benefits early at age 62, or wait as late as age 70. Before you consider whether it makes sense to take Social Security benefits earlier or later, let’s take a look at some of the rules.

What’s the “normal” retirement age?
Normal retirement age (abbreviated as NRA, but sometimes called full retirement age) is when you’re eligible to receive full Social Security benefits. The normal retirement age used to be 65 for everyone.

However, under current law, 2002 was the last year anyone age 65 could receive full benefits. If you were born in 1938 or later, your normal retirement age is some point after age 65—all the way up to age 67 for those born after 1959.

When can you get your full Social Security benefit?

You’ll get a penalty for starting too early … 
If you choose to start receiving your Social Security check before your normal retirement age, your benefit is reduced by five-ninths of 1% for each month before that age, up to 36 months. If you start more than 36 months before your normal retirement age, the benefit is further reduced by five-twelfths of 1% per month.

For example, if your normal retirement age is 66 and you elect to start benefits at age 62, there are 48 months of reduced benefits. The reduction for the first 36 months is five-ninths of 36%, or 20%. The reduction for the remaining 12 months is five-twelfths of 12%, or 5%. So, in this example, the total benefit reduction is 25%.

… and you’ll get credit for delaying 
If you delay retirement until after your normal retirement age (prior to age 70), you typically get a credit. For example, say you were born in 1944. Your normal retirement age is 66, but you intend to take your benefits at age 68.

By waiting the extra two years, you get a credit of 8% per year, which means your benefit is 16% higher than the amount you would have received at age 66.

If waiting seems hard to do, you’re not alone. Even though most people would probably be better off delaying benefits,  more than two-thirds of eligible workers take early Social Security.

To be continued…

What are the Bush Era Tax Cuts?

You see...

Today I will focus on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).

The U.S. has a progressive income tax system. That means that lower-income taxpayers pay a lower percentage of their income than do higher-income taxpayers. Early in his term, President Bush and the Congress voted to reduce the tax percentage rates from those of a previous administration. Taxpayers from top to bottom have paid a lower income tax rate for about 10 years. That the Bush administration changed the income tax rates was not unusual; income tax rates have moved up and down numerous times for various reasons under both Democrat and Republican Presidents (BobGriggs.com).

EGTRRA created six tax rate brackets–10%, 15%, 25%, 28%, 33% and 35%, based on income levels. If no extension is passed and signed into law, then the pre-2001 tax rates will go back into effect starting in tax year 2011. The 10% bracket would disappear, and those taxpayers would move up to the 15% bracket, which would apply to all incomes below $34,550. The other tax rates would increase to 28%, 31%, 36% and 39.6% for the highest earners making more than $379,650 (Forbes.com).

To secure the votes required to pass the tax rate reduction, the Bush administration agreed to a time limit; the rates would remain at the lower level for a specific time period, subject to renewal. The law establishing the lower rates is set to expire at the end of this year. Unless an agreement is reached, the tax rates will return to the levels at which they were prior to the reduction.

Today I will focus on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).

The U.S. has a progressive income tax system. That means that lower-income taxpayers pay a lower percentage of their income than do higher-income taxpayers. Early in his term, President Bush and the Congress voted to reduce the tax percentage rates from those of a previous administration. Taxpayers from top to bottom have paid a lower income tax rate for about 10 years. That the Bush administration changed the income tax rates was not unusual; income tax rates have moved up and down numerous times for various reasons under both Democrat and Republican Presidents (BobGriggs.com).

EGTRRA created six tax rate brackets–10%, 15%, 25%, 28%, 33% and 35%, based on income levels. If no extension is passed and signed into law, then the pre-2001 tax rates will go back into effect starting in tax year 2011. The 10% bracket would disappear, and those taxpayers would move up to the 15% bracket, which would apply to all incomes below $34,550. The other tax rates would increase to 28%, 31%, 36% and 39.6% for the highest earners making more than $379,650 (Forbes.com).

To secure the votes required to pass the tax rate reduction, the Bush administration agreed to a time limit; the rates would remain at the lower level for a specific time period, subject to renewal. The law establishing the lower rates is set to expire at the end of this year. Unless an agreement is reached, the tax rates will return to the levels at which they were prior to the reduction.

An Explanation of Historical Tax Rates vs. Current Tax Rates

I read this article from teachinghistory.org. I thought it gave a very good explanation about the history of tax rates and now have a better understanding of how they work. It’s a little lengthy; I tried to shorten it to hit the important concepts and I left some of the numbers and percentages in to give some perspective. 

During the World War II, the top “marginal rate” was 94%, but 94% of what? Then as now, income tax rates moved up at distinct break points. In this made-up example, consider a 15% rate up to $25,000, 21% from $25,000 to $50,000, and 25% over $50,000. Those making $50,001 or more won’t pay a quarter of their total income, but rather 15% of the first $25,000, 21% of the next $25,000, and 25% of everything above $50K. That’s why the system is called progressive – the percentage rate progresses upward with income, but the higher percentage applies only to new (marginal) income above each break point. In 1944-45, “the most progressive tax years in U.S. history,” the 94% rate applied to any income above $200,000 ($2.4 million in 2009 dollars, given inflation).

Very few individuals encountered this top rate, however. Tax rates have fallen since then: the current top level is 35% of income above $357,000. Brackets also have simplified (24 in the 1950s, just six today), yet the federal government takes in far more revenue than 60 years ago and citizens complain hugely about being over-taxed. What has happened?

Three things, basically.

1. First in World War II, tax law revisions increased the numbers of “those paying some income taxes” from 7% of the U.S. population (1940) to 64% by 1944, vastly broadening the tax base and increasing the total intake.
2. Second, other federal taxes increased substantially. The share of earned income taxed increased fourfold or more since the early 1950s. As well, Medicare and Medicaid taxes appeared in the late 1960s and rose from half a percent then to nearly 1.5% now. Thus many Americans currently pay more for these retirement and medical coverages than they do in regular income taxes.
3. But the biggest blow may have been the evidently sharp increase in state and local taxes since the 1970s. Rising from a national average of $800 per capita (multiply by the number of your family members) in 1977, these taxes neared $4,300 per person by 2008, rising 44% faster than inflation. The principal mechanisms employed by non-federal governments were wage and income taxes, property taxes, and a vast range of fees, all of which went to support public safety (police, fire), health, basic and higher education, roads and other infrastructures, courts, prisons, and the regulation of everyday life (deeds, inspections, voter registrations, licensing, et al.)

Two final notes: despite these surges, Americans remain among the least-taxed citizens of advanced industrial nations, with 28% of gross domestic product taken for taxes, vs. an average of 36% for the 38 member countries of the Organization for Economic Cooperation and Development, while, since 1942, the U.S. has spent far more than any other nation on military and national security needs. Second, none of the above discussion has touched the issue of business taxes, which are included in the U.S. vs. OECD assessment, but rarely examined historically, especially with attention to their state and local components.

Incorporate, or not to incorporate?

As a new business owner, you have to decide whether or not to turn your company into a corporation. When a business becomes incorporated, a separate and distinct legal entity is created. An incorporated business acts independently of its business owners.

Advantages of forming a corporation:

• Asset Protection – If you operate as a sole proprietor or partnership, there is virtually unlimited personal liability for business debts or lawsuits. If you incorporate, generally your personal assets are protected.
• Easier to Sell – a new buyer will not be personally liable for any wrongdoings on the part of the previous owners, which is why corporations are more attractive than sole proprietor or partnerships.
• Tax Savings – because a corporation is separate legal entity, there are many transactions that you can structure between you and your corporation to save big money on taxes
• Privacy and Confidentiality
• Easier to Raise Money
• Perpetuity – can endure almost forever despite what happens to the shareholders, directors, or officers
• Increases Credibility

Disadvantages of forming a corporation:

• Another Tax Return – you’ll have to file 2 tax returns a year, which means increased accounting fees
• Increased Paperwork
• No Personal Tax Credits
• Less Tax Flexibility – As a sole proprietor, if your business experiences operating losses, you could use these to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation’s income from other years.
• Liability May Not Be As Limited As You Think – may be undercut by personal guarantees and/or credit agreements
• Registering A Corporation is Expensive

If you do decide to incorporate, there are a few different types to chose from:

C corporation

The traditional form of corporation is the C corporation. C corporations have the most flexibility in structuring ownership and benefits, and most large companies operate in this form. The biggest drawback is double taxation. First the corporation pays tax on its profits; then the profits are taxed again as they’re paid to individual shareholders as dividends.

S corporation and LLCs

These types of corporations avoid the double taxation. Both of these are called “pass-through” entities because there’s no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns.

S corporations have some ownership limitations. There can only be one class of stock and there can’t be more than 100 shareholders, none of whom can be foreigners. State registered LLCs have become a popular choice for many businesses. They offer more flexible ownership than S corporations and certain tax advantages.

So, should you incorporate?

You might not need to incorporate. Depending on the size and type of your business, liability may not be an issue or can be covered by insurance. Weigh out the pros and cons and goals of your business, and decide what is best for your and our company.

How Much Should I Save?

To answer this question, you should first answer “How much do you want to spend each year when you are retired?” There is no “rule of thumb” to follow; financial experts suggest saving between 10-20% of your income. However, it isn’t always easy to start saving. Take care of your monthly living expenses, credit card debt (reduce high monthly interest charges), and put 3-6 months living expenses in a fund for emergencies before taking chunks of money out of your paycheck. Once you start saving, here are some common sense tips:

• The earlier you start saving, the longer your money will have time to grow
• Live within or below your means
• When you receive extra money (e.g. bonuses, gifts), put it in your savings right away before you can spend it

Take some time, sit down, and do the math. Make your goal and then determine the steps you need to take to reach that goal. Here are some financial calculators at my website to help you: http://darrensmithcpa.com/fintools.php?category_id=6

Start saving!

Small Business Retirement: Comparing the Solo 401k v. SEP IRA

Hmm..

The Solo 401k and SEP IRA are the two most common small business owner retirement plans.

Who are eligible for these plans?

To qualify for the Solo 401k, you must be the sole owner of the business, although a spouse can also be included in the plan. You must also not be expecting to employ any other staff in your business in the future.

Those eligible for SEP IRA are sole proprietors, partnerships, incorporated and unincorporated small businesses including Sub S corporations, and individuals with self employment income even if they are covered by their employers retirement plan such as a 401k, 403b or 457 plan.

If you are a sole proprietor, which one should you choose? Here’s a basic comparison between them:

Solo 401k

• Has potentially greater retirement contributions at identical income levels
• Allowed to take out a loan against a Solo 401K to up to 50% of the 401K’s value ($50,000 maximum)
• Greater administrative responsibilities and fees

Why Accountants Are Like The Marine Corps

The Few. The Proud.

You may or may not know, but I received my Masters in Taxation after a stint in the Marine Corps.  The Marines certainly changed my perspective on life, and I thought I would share with you some key points of why a good accountant is like a good marine.

1. Semper Fidelas: “Always Faithful” is the official motto of the Marine Corps.  Your accountant should be faithful to you and your finances as well as the tax code.
2. Honor: This is the first commitment of the Marine Corps.  At the same time, there should be a high degree of integrity required when handling finances as an accountant, and they should also be respectful their communication to you as the client..
3. Courage: Within the Marine Corps, there are undoubtedly courageous men & women, and accountants need to be too. The entire architecture of the tax code represents shades of grey in terms of reporting and utilizing both credits and deductions.  Your accountant shouldn’t be afraid to take it on and battle it for your benefit.
4. Commitment: There is a spirit of determination and dedication for every marine and accountant.  Once they agree to take on a mission, consider it done.  Your accountant should have a relentless desire to work on your behalf over the long term.

So let me know if you need Marine Corps effort on your taxes or accounting needs. I am certain I can make it all work out for you!

Filing Tax Returns with BOE.

You will be required to file your use tax returns using BOE-file, BOE’s free electronic filing (e-File) system that enables taxpayers to use the internet to file a California sales and use tax return and make payment for amounts due.

The website is:  http://www.boe.ca.gov/elecsrv/efiling/sutd.htm.

The BOE will mail you a registration letter containing your account number and express login code.  These two numbers will enable you to e-file your use tax returns.  Subsequent tax returns are due yearly on April 15^th for the previous calendar year.

The SBE, on its website, advises taxpayers that they should review the SBE’s “In-State Consumer Voluntary Disclosure” program as it applies to the use tax. The benefits of this program are:

1. Limits the time the SBE can make an assessment for prior use tax to three years (instead of up to 10 years)
2. Allows the SBE to waive late filing and late payment penalties
3. Allows applicants to describe their circumstances and obtain from the SBE a written opinion regarding whether the SBE might approve their voluntary disclosure request.

To qualify for the In-State Consumer Voluntary Disclosure program, ALL of the following conditions must exist:

1. You reside or are located withinCaliforniaand have not previously registered with the SBE
2. You have not previously filed an individual use tax return with the SBE
3. You have not reported an amount for use tax on your individual income tax return filed with the FTB
4. You are not engaged in business in this state as a retailer (as defined in Revenue and Taxation Code Section 6015)
5. You have not been contacted by the SBE for failure to report the use tax imposed by Section 6202 of the Revenue and Taxation Code
6. Your purchase is not of a vehicle, vessel, or aircraft
7. You voluntarily came forward to the SBE

If you have use tax obligations and can meet the above requirements, you should consider registering with the SBE and file Form 404-DS to report your use tax obligation. Be sure to include Form BOE-38-I to request the benefits of the Voluntary Disclosure program.

Lastly, you need to be prepared to show that your out-of-state purchases are not subject to use tax or that you paid sales tax on the purchases so that you are not liable for the use tax. It is important that you retain your purchase invoices to show that you have paid sales tax on the item or that it is exempt from use and sales tax.