Michele Clark
Clark Hourly Financial Planning - Chesterfield, MO Advisor
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Chesterfield, MO 63017 USA
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Tax Planning Ideas for Year End 2016

December 20th, 2016

December 31, the window of opportunity for many tax-saving moves closes.  So it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2016 tax year.

Timing is everything

Consider any opportunities you have to defer income to 2017. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2016. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2016 and postponing deductible expenses to 2017. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2017; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes won’t help your 2016 tax situation, but could hurt your 2017 bottom line.

Special concerns for higher-income individuals

The top marginal tax rate (39.6%) applies if your taxable income exceeds $415,050 in 2016 ($466,950 if married filing jointly, $233,475 if married filing separately, $441,000 if head of household). And if your taxable income places you in the top 39.6% tax bracket, a maximum 20% tax rate on long-term capital gains and qualifying dividends also generally applies (individuals with lower taxable incomes are generally subject to a top rate of 15%).

If your adjusted gross income (AGI) is more than $259,400 ($311,300 if married filing jointly, $155,650 if married filing separately, $285,350 if head of household), your personal and dependency exemptions may be phased out for 2016 and your itemized deductions may be limited. If your AGI is above this threshold, be sure you understand the impact before accelerating or deferring deductible expenses.

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and retirement plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2016 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2016, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2016, you can contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2016 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2016 IRA contributions.

Roth conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions). If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. (Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.)

If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (things don’t go the way you planned and you realize that you would have been better off waiting to convert), you can recharacterize (i.e., “undo”) the conversion. You’ll generally have until October 16, 2017, to recharacterize a 2016 Roth IRA conversion — effectively treating the conversion as if it never happened for federal income tax purposes. You can’t undo an in-plan Roth 401(k) conversion, however.

Changes to note

If you didn’t have qualifying health insurance coverage in 2016, you are generally responsible for the “individual shared responsibility payment” (unless you qualified for an exemption). The maximum individual shared responsibility payment for 2016 increased to 2.5% of household income with a family maximum of $2,085 for 2016, up from 2% of household income for 2015. After 2016, the individual shared responsibility payment will be based on the 2016 dollar amounts, adjusted for inflation.

Since 2013, individuals who itemize deductions on Schedule A of IRS Form 1040 have been able to deduct unreimbursed medical expenses to the extent that the total expenses exceed 10% of AGI. However, a lower 7.5% AGI threshold has applied to those age 65 or older (the lower threshold applied if either you or your spouse turned age 65 before the end of the taxable year). Starting in 2017, the 10% threshold will apply to all individuals, regardless of age. This is something that you may want to factor in if you’re considering accelerating (or delaying) deductible medical expenses.

Expiring provisions

Legislation signed into law in December 2015 retroactively extended a host of popular tax provisions — frequently referred to as “tax extenders” — that had already expired. Many of the tax extender provisions were made permanent, but others were only temporarily extended. The following provisions are among those scheduled to expire at the end of 2016.

  • Above-the-line deduction for qualified higher-education expenses
  • Ability to deduct qualified mortgage insurance premiums as deductible interest on Schedule A of IRS Form 1040
  • Ability to exclude from income amounts resulting from the forgiveness of debt on a qualified principal residence
  • Nonbusiness energy property credit, which allowed individuals to offset some of the cost of energy-efficient qualified home improvements (subject to a $500 lifetime cap)

Talk to a professional

When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.

Article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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Retirement Income: Estimating How Much You Will Need

September 2nd, 2016

Use your current income as a starting point

You have probably read financial press articles that discuss desired annual retirement income as a percentage of your current income. Depending on the article, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., costs associated with working such as lunches out, dry cleaning, commuting, etc.) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project you retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

  • Food
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, HOA fees, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cell phone, Internet, cable TV, trash
  • Transportation: Car purchases or payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, Medicare Supplement, dental, life, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Taxes: Federal and state income tax, capital gains tax, personal property tax
  • Travel: for fun, to visit family, to go to family events such as weddings and funerals
  • Clothing
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal such as Christmas, birthday, wedding
  • Recreation: dining out, hobbies, leisure activities, season tickets to sports or entertainment
  • Miscellaneous: Personal grooming, pets, club memberships, household items

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.3 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2015.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, will increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Keep in mind that some expenses have historically gone up at a rate greater than inflation.  For example, in our retirement projections we inflate healthcare expenses at a rate of 6%.

Decide when you will retire

To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy

The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic–there are probably steps that you can take to bridge the gap. We can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses now so you’ll have more money to save for retirement
  • Consider delaying your retirement for a few years (or longer)
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
  • Work part-time during retirement for extra income

The best way to determine if you are on track for the retirement you envision, is to get started now on a financial plan. You don’t have to go it alone; you can enlist the help of a professional.  Contact us today.

Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

 

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Garrett Planning Network Retreat 2016

August 8th, 2016

I was recently out of the St. Louis area for a bit while I attended The Garrett Planning Network 16th Annual Retreat which was held in Denver, Colorado. I am a member of the Garrett Planning Network which is an international  group of financial planners that offer planning and investment advice on an hourly basis.  Each member owns their own firm. I have written about the Garrett Planning Network before.  This was the eighth year I have gone.

I attended the conference and earned continuing education credits by going to various educational programs, which I need so that I can keep my designations and licenses such as:

  • CERTIFIED FINANCIAL PLANNER™
  • NAPFA Registered Financial Advisor
  • CHARTERED RETIREMENT PLANNING COUNSELOR℠

During the four day conference I attended various educational programs such as:

  • Behavioral Finance: Psychology and Economics in Investing
  • Reverse Mortgages in Retirement Income Planning
  • Planning Costs Related to Caregiving
  • Fiduciary Best Practices for Registered Investment Advisor Owners
  • And others

Noted author William Bernstein, a bit of a rock star in our industry, gave one of the Keynote addresses titled “What the Liberal Arts Have to Teach Us about Finance.”  He talked about the difficulty of forecasting, and characteristics of good forecasters.  He discussed economic history; not the usual economic history going back to the market crash of the 20s, or even the tulip bulb bubble.  But economic history going back to biblical times and what conclusions can be drawn from such “longitudinal studies.”

Allan Roth, another well known author and fellow financial advisor delivered the Keynote address “Behavioral Finance: Psychology and Economics in Investing”, wonderfully telling it like it is in his typical style.  He shared financial decision making biases that negatively impact consumers and advisors alike based on academic research and personal observation.

You can see some of the live tweeting that I did at the conference under my Twitter handle @HourlyPlanner.  You do not need a Twitter account.

The Garrett Planning Network, has dozens of conference calls throughout the year, and the members interact on an internal forum to help each other with more complex planning cases on a daily basis.  One of the most beneficial outcomes of my annual trip to this retreat, is getting together with this group, sharing ideas, and getting updates from these amazing colleagues in person.  I am already looking forward to next year!

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Retirement Planning: When You Haven’t Tracked Your Spending

August 19th, 2013

Planning for retirement is not a subject you dwell on every day until you realize it’s closer than you think. However, there are various components for you to consider when planning for your “golden years.” An important piece of this planning requires you to calculate your current spending so you can make wise financial decisions for your retirement years.

How much do you spend?

Some families track their spending using software, online tools, a homemade spreadsheet, or simple paper and pencil. If you have been tracking your spending, congratulations! You have some solid spending history to use when estimating how much you will need to spend each year to pay your bills and do the things you want to do to enjoy your retirement.

What if you do not track your spending?

Many families that are easily able to pay their bills and accumulate healthy balances in their savings and investment accounts have never felt the need to track their spending. However, as they get within a few years of retirement they realize they do not have any spending history to use for projecting whether they can afford to retire soon. They do not know if their investments will provide enough income to support them with the same lifestyle they have always enjoyed. Fortunately there is a solution.

How to calculate your current spending?

Before you decide to turn off your income from employment, you want to be confident that you know how much money you need for retirement. What you don’t want to do is not have enough income at the time of retirement to provide for you and your loved one. Therefore, it is best to use pure facts when calculating your current spending.

  1. You make A.
  2. You give B to the government for taxes.
  3. You save C.

The rest is what you spend.

A – B – C = what you spend

It’s that simple. Don’t let the fact that you have not been tracking your spending delay your retirement planning. You can use this simple calculation to estimate how much you spend currently. And track your spending going forward so that you can more accurately estimate your spending needs in retirement.

Tracking your monthly spending today is important to do in the last few years before retirement. If you haven’t started, it’s okay. Start now. When you have an accurate picture of your expenses today, you’ll be better off in your future.

 

 

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Social Security Cost of Living Adjustment for 2013

October 19th, 2012

If you receive monthly Social Security and Supplemental Security Income benefits your benefits will increase 1.7% beginning in January 2013.

Cost of Living Adjustment

The cost of living adjustment (COLA) is made annually.  Sometimes there is no increase as we saw in 2010 and 2011, and sometimes it is as high as 14.3% which we saw in the 1980’s during the high inflation years.  The COLA for 2012 was 3.6%.

No More Paper Checks

Another change for 2013, for those receiving Social Security benefits, is that paper checks are being phased out by March 1, 2013.  In my first job out of college I worked at a bank, while I did not work in the lobby, I walked past the lobby to get to the elevators on the way to my office.  I remember that the lobby was always packed on the third day of the month, because Social Security checks were hitting mailboxes and customers would bringing them in to deposit them.  That was many years ago, I’m sure that isn’t the case anymore.  However, the estimate is that the government is going to save $120 million dollars per year when they stop mailing paper checks. So there are many people that still get paper checks, and there will be a cost savings to moving people to direct deposit.  If you get paper checks, be aware that you must sign up for direct deposit very soon.

Maximum Earnings Subject to Social Security Tax

For those of you still working, the maximum amount of earnings subject to the Social Security tax has been increased from $110,100 to $113,700.

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