Today's News on Social Security for Baby Boomers

Today, March 7, 2011 MONEY Magazine published:

The first wave of of baby boomers -- including Cher, Steven Spielberg, George W. Bush, Bill Clinton, and nearly 3 million other Americans -- will turn 65 this year. If you're among those celebrating in 2011 or the next few years, you may be feeling a bit gloomy about a birthday that officially crowns you a senior citizen. You're too young to be old, right?  Adding insult to arthritis, this big birthday doesn't offer all the perks it used to: You can't collect full Social Security benefits at age 65 anymore; boomers qualify between 66 and 67, depending on their birth year. And most "senior" discounts -- from travel bargains to blue-plate specials -- kick in from 50 to 60 nowadays, as horrifying as that may be.
(See seniordiscounts.com for a comprehensive list.)

 

That's not to say that this trip over the hill isn't a financial milestone at all. There are still a few important actions to take and things to think about as you approach this new mark of maturity.

1. Get set with Medicare

"If you don't take Medicare at the appropriate time, you face a lifetime of penalties and will have gaps in coverage," says Ilene Stein, a lawyer at the Medicare Rights Center. You can enroll, at medicare.gov or by calling 800-772-1213, from three months before you turn 65, and Medicare will kick in the first day of your birth month. You have three months after your birthday to enroll without penalty -- unless you're still working and have comparable insurance through your job, in which case you have eight months after that coverage ends to join up. Deciding between original Medicare (Parts A and B) and privately run Advantage plans (Part C) can be overwhelming. But you can compare premiums and out-of-pocket costs for all your options at medicare.gov. Just be sure to narrow your Advantage choices to plans that get four or five stars from Medicare.

2. Slash your taxes

Facing higher costs under health care reform, some plans may slash benefits or raise premiums. But as of 2012, the highest-rated plans will get federal bonuses too. At 65 you're entitled to some tax breaks that can add up to serious savings. These include:

* A larger federal deduction. The standard deduction increases for taxpayers 65 and older -- good news for those who don't itemize. For singles it goes from $5,700 to $7,100; for couples in which one partner is 65 it rises from $11,400 to $12,500; when both spouses are 65 or older, it's $13,600. That last boost, for those in the 28% bracket, knocks $616 off your tax bill.
* Property tax breaks. Forty-five states and the District of Columbia give seniors a break on real estate taxes for a primary residence, says analyst Cathleen Calhoun of tax information service CCH; in the vast majority of them you must be 65 to qualify.

The deals vary: In Ohio the Homestead Exemption cuts about $400 off yearly property taxes. In Illinois the assessment on your home is frozen when you or your spouse turns 65. Check with your tax assessor's office to see what's offered and if there are any income limits or prerequisites.

3. Assess retirement plans

Sixty-five may no longer be the retirement turning point it used to be, but it's still a watershed year psychologically. If you're still working -- nearly half of leading-edge boomers are, a recent AARP survey found -- you may be feeling an itch to get out. Put that desire to use by thinking about how you'd like to spend your retirement. Will you travel? Will you work at all? Will you move? Next, figure out how much your dream life will cost, and stress test your nest egg. Our OnTrak Retirement calculator can help you determine how much income your savings, Social Security, and any pension will provide. If it isn't enough, you could dial back your plans or work a few more years to postpone drawing on your savings and collecting Social Security. Delaying the latter beyond your full retirement age increases your benefit 8% a year. Determine what your payout will be with the Retirement Estimator at ssa.gov.

For more information on Pre/ Post Retirement Planning contact our office. We also offer our comprehensive retirement planning guides for those in or planning to retire in the next 5-10 years.

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Individual and Business Tax Relief from New Law

The recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act) includes many taxpayer-friendly provisions for individuals and businesses. Listed below is information on several of them.

Lower Tax Rates. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. It also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20%, and dividends would have been taxed at ordinary rates of up to 39.6%.

Marriage Penalty Relief. Getting married can cause a couple’s combined federal income tax bill to be higher than if they were single. Tax reduction legislation in 2001 eased this marriage penalty by tweaking the lowest two tax brackets for married couples and giving them bigger standard deductions. The Act extends this relief through 2012.

Social Security Tax Reduction. The Act cuts the Social Security tax withholding rate on employee salaries from 6.2% to 4.2% for 2011. This temporary change affects the first $106,800 of 2011 wages. The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed folks will benefit, too.

Alternative Minimum Tax (AMT). As you may know, it has become an annual ritual for Congress to “patch” the AMT rules to prevent millions of additional households from getting socked with this add-on tax. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act provides an AMT patch for 2010 and 2011.

American Opportunity Education Credit. The American Opportunity credit can be worth up to $2,500, be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010. The Act extends this credit through 2012.

College Tuition Deduction. This write-off, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.

More Generous Student Loan Interest Deduction. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by 2001 legislation.

Education Savings Accounts (ESAs). For 2011, the maximum contribution to federal-income-tax-free ESAs was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by 2001 legislation.

State and Local Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The sales tax deduction option expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.

Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500, over the two years combined. The Act extends the credit through 2011, but the credit percentage is scaled back to only 10%, and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006–2010.

First-year Bonus Depreciation. The Act generally allows 100% first-year bonus depreciation for qualifying new assets that are acquired and placed in service after September 8, 2010, through December 31, 2011. It also allows 50% first-year bonus depreciation for qualifying new assets that are placed in service in calendar year 2012. For a new passenger auto or light truck that is used for business and is subject to the luxury auto depreciation limitation, the bonus depreciation breaks increase the maximum first-year depreciation deduction by $8,000 for vehicles acquired and placed in service by December 31, 2012.

15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements. The 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements is retroactively restored for property placed in service in 2010 and extended to cover property placed in service in 2011. (Without the favorable 15-year depreciation rule, these assets would have to be depreciated straight-line over 39 years.)

100% Gain Exclusion for Qualified Small Business Stock (QSBS). The Small Business Jobs Act of 2010 (enacted last September) created temporary 100% gain exclusion (within limits) for sales of QSBS issued after September 27, 2010, through December 31, 2010. The Act extends the window for taking advantage of this change by one year to cover QSBS shares issued after September 27, 2010, through December 31, 2011.

New Estate and Gift Tax Rules

Estate tax legislation has been debated in Congress for several years. The recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act) includes estate tax provisions for individuals who died in 2010, as well as those who die in 2011 and 2012. Here is a brief summary.

$5 Million Estate Tax Exemption and 35% Rate. For estates of individuals who die in 2010 through 2012, the Act establishes a $5 million federal estate tax exemption with the 2012 amount indexed for inflation. Big estates are taxed at 35% above the $5 million threshold.

Electing out of the Estate Tax in 2010. For estates of decedents who died in 2010, executors are permitted to elect out of the estate tax rules (the default rules), and instead choose the modified carryover basis rules for property transferred at death. Although no estate tax will be due, assets transferred at death will not get the step-up in basis to date of death fair market value, and the transferees will owe income tax on the appreciation on those assets. Determining whether to follow the default rules or elect out of the estate tax will depend on many factors that will require professional guidance.

Unused Estate Tax Exemption. For the first time, married individuals who do not use up their estate tax exemptions will be able to pass along unused amounts to surviving spouses. In other words, unused exemptions of individuals who die in 2011 or 2012 (but not 2010) will be "portable."

Unlimited Basis Step-ups for Inherited Assets. For heirs of decedents who die in 2011 and beyond, the rule is reinstated that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death. This favorable rule is also reinstated for decedents who died in 2010, unless the estate elects to instead use the modified carryover basis rule. With the restoration of the unlimited basis step-up rule, heirs will not owe any federal capital gains taxes on appreciation that occurs through the date of death—as long as that date is after 2010 or, for decedents who died in 2010, if their estate does not elect to use the modified carryover basis rules.

Estate and Gift Tax Exemptions and Rates Are Equalized. The Act sets the lifetime federal gift tax exemption for 2011 and 2012 at $5 million—with the 2012 amount indexed for inflation (likewise for the generation-skipping transfer tax exemption). Thus, the gift and estate tax exemptions are equalized for 2011 and 2012. This is a huge improvement over the previous $1 million gift tax exemption (which continued to apply for 2010). An unmarried person can now give away up to $5 million while alive without paying any gift tax, and a married couple can give away up to $10 million. However, to the extent you dip into your gift tax exemption, your estate tax exemption is reduced dollar-for-dollar. The tax rate on 2011 and 2012 gifts in excess of the $5 million exemption is 35%, the same as the estate tax rate. Again, due to sunset provisions, the gift tax exclusion reverts back to $1 million after 2012.

Minimizing estate and gift taxes is a complex process. So, please contact us for information on how to reduce these onerous taxes.