Mar 14

Note – this ‘letter’ is to my mother-in-law, whom I sometimes just call ‘mom,’ even though she’s fine with my using her first name. She’s a widow, and in her 80’s.

Dear Mom,
It’s no burden for me to do your taxes, in fact, I enjoy the process. After you and dad (who passed away almost 8 years ago) told me what you were paying for your tax guy, I thought I could save you that money to spend on something else. The fact that the tax guy wasn’t really a financial planner also gave me the opportunity to offer some advice that would help save on your tax bill each year.

I just looked at the folder of paper to start doing this year’s return. Wow. A lot more than we really need. Here’s why – you don’t itemize. To take any deduction for medical expenses, you need to be out of pocket more than 7.5% of your adjusted gross income. Even though your bills feel like they were in the thousands, the amount you had for copayments didn’t even add up to $1000. Your standard deduction is $7400. Your Condo property tax and interest (you own your unit, but there’s a master mortgage on the property) along with your donations aren’t anywhere near this. A few years ago, when you had one really large donation we used a Qualified Charitable Distribution from your IRA. Since you were going to make that donation anyway, by using money from your Required Minimum Distribution (RMD), it made that distribution tax free. I thought that was pretty cool, but this year it was pages of small donations, so we agreed to pass on the QCD trick.

All in all, there are a handful of numbers to enter. Your pension, dad’s pension you still receive, social security, and the transactions from your brokerage accounts. What makes it even easier is that TurboTax (disclaimer, right here, for FTC, this is an unpaid mention) will pull the yearend data from your Schwab (FTC – ditto) account, so I don’t even type those numbers in.

The other thing I do for you is to convert a bit of you IRA each year to your Roth account. This way you pay 15% on the money, and it keeps growing tax free. If we didn’t do this, your RMDs would keep increasing each year and you might be pushed into the 25% bracket. You’re not even spending your RMD, and the girls and I keep telling you that you should spend more on yourself. But, if you need to withdraw more than your RMD and should start to hit the 25% bracket, you can use the Roth money. If I did two thing right for you, it was this – a balance of stocks and CDs so you were buying in at the bottom, and rebalancing at the tops. You have more now than you did 10 years ago, even after withdrawals. And keeping your tax rate right at 15%. This is one strategy that’s perfect for someone in your situation, just enough income to let you convert a bit each year to top off that bracket.

I hope you understand a bit better why I don’t need all that other stuff every year, but I’m pretty sure it will all be there next year when I look at your 2013 return. And I’ll explain again, ‘you don’t itemize!’

written by Joe \\ tags: , , , ,

Jan 16

Two years ago, I wrote about donating your IRA RMD (The required minimum distribution you must take from your traditional IRA if you are over 70-1/2). This effectively gave people who were charitable, had to take RMDs, and for the most part, weren’t itemizing their deductions. Congress dragged its feet on this rule for 2012 up until after the New Year, and the IRS has published the rules for those who wish to take advantage of this in 2012.

To take advantage of the QCD (Qualified Charitable Distributions) for 2012 is a bit tricky. If you took your RMD in December, 2012, you can donate any or all of it (up to $100K per person) to a charity and have it count as a 2012 QCD.

If you wish, you can make your 2012 QCD by having your IRA distribution paid directly to the charity. But note, if you wish to make a 2013 QCD, you must wait until after January.

Note also – If you forgot to take your RMD for 2012, this is a pretty cool way to avoid paying Uncle Sam a penalty, and letting your favorite charity be the richer. Recall, a missed RMD comes with a 50% penalty, so between the tax and penalty, you may have as little as 15% left. Time to help that local Vet’s Shelter.

I’ve offered a quick overview of this rule, if you wish to read more, Charitable Donations from IRAs for 2012 and 2013 is the link to the IRS press release.

written by Joe \\ tags: ,

Dec 04

Let’s start this week’s roundup with Oblivious Investor’s Social Security Do-Over Options. The rules regarding when you can start collecting your benefit and how and when you are permitted to put it on hold have changed since last year, and this is a great primer to help you understand these rules.

At The Simple Dollar, Trent shared Some Thoughts on Dinner With My Family, an interesting read on how to keep the meals full of variety and avoiding the boredom that comes with the same few dishes week after week. Trent keeps an eye on the cost while he’s cooking, too.

Know what an RMD is? Well, it’s time you found out, and Neal Frankle at Wealth Pilgrim is the guy to show you. He explain the when, how much, and how to of this sometimes confusing process.

The financial buff discussed Behavioral Economics Explanation for Sensitivity on Service Fees. TFB offers a great recent example (Debt Card fees) as well as some older ones (Airline Baggage fees) and discusses why we feel the way we do when we’re asked to pay more.

Free Money Finance shared Smart Money’s Six Steps to Making a Successful Low-Ball House Offer.  In this market, it pays to plan and have a strategy ready if you are looking to buy a house.

At Five Cent Nickel, a reminder that You Can Only Spend Each Dollar Once. While this may stand to reason, Nickel’s story of how we use some faulty mental accounting to justify overspending is an eyeopener, a unique read.

And last, Kevin at Thousandaire tells us why Joe Biden’s Net Worth is Embarrassing!  I’ll give you a hint, the more famous Joe while earning a decent salary, doesn’t save, and has managed to blow through nearly all of his income over the last 50 years. Say it ain’t so, Joe. As Kevin said,” Now I know why this administration can’t balance a freaking budget!” Indeed.

written by Joe \\ tags: , , ,

Dec 22

Recently, legislation to suspend the rule for RMDs (Required Minimum Distributions) from retirement accounts for those over 70-1/2 was passed. The wording actually eliminated the penalty for those not making the withdrawal, effectively eliminating the requirement.

One potential benefit of this change for 2009 is that one might consider converting this amount to their Roth IRA. I believe the Roth is a great vehicle for managing one’s tax burden over time, and can be used after retirement to ‘top off’ the current tax bracket. This process slowly shifts money from a tax deferred status to a taxed, but growing tax free status. Something to consider next year.


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Nov 21

In 2006 and 2007, there was a tax law allowing someone over 70-1/2 to make a donation from their IRA, even if this was part of their RMD. This had a very narrow audience of interest, one would have to find herself a combination of 70-1/2 or older, therefore taking IRA RMDs, making donations worth the effort to do the extra paperwork, and not an itemizer. The benefit for this situation is that the donor is making the donation directly from IRA to charity, and therefore avoids the tax due on that portion of her distribution.

Given the limited discussion of this topic, I expected it to expire as 2007 closed, and not get revisited. I was mistaken, the Emergency Economic Stabilization Act of 2008 renewed this law for both 2008 and 2009.


written by Joe \\ tags: , , , , ,