Changes to Social Security Claiming Strategies
The Bipartisan BudgetAct of 2015 included asection titled "Closure ofUnintended Loopholes"that ends two SocialSecurity claimingstrategies that havebecome increasinglypopular over the lastseveral years. These two strategies, known as"file and suspend" and "restricted application"for a spousal benefit, have often been used tooptimize Social Security income for marriedcouples.
If you have not yet filed for Social Security, it'simportant to understand how these new rulescould affect your retirement strategy. Depending on your age, you may still be able to take advantage of the expiring claiming options.The changes should not affect current SocialSecurity beneficiaries and do not apply tosurvivor benefits.
File and suspend
Under the previous rules, an individual who had reached full retirement age could file for retired worker benefits--typically to enable a spouse tofile for spousal benefits--and then suspend his or her benefit. By doing so, the individual wouldearn delayed retirement credits (up to 8% annually) and claim a higher worker benefit at alater date, up to age 70. Meanwhile, his or her spouse could be receiving spousal benefits. Forsome married couples, especially those withdual incomes, this strategy increased their totalcombined lifetime benefits.
Under the new rules, which are effective as of April 30, 2016, a worker who reaches full retirement age can still file and suspend, but no one can collect benefits on the worker's earnings record during the suspension period.This strategy effectively ends thefile-and-suspend strategy for couples and families.
The new rules also mean that a worker cannotlater request a retroactive lump-sum payment for the entire period during which benefits were suspended. (This previously available claiming option was helpful to someone who faced a change of circumstances, such as a serious illness.)
Tip:If you are age 66 or older before the new rules take effect, you may still be able to take advantage of the combined file-and-suspendand spousal/dependent filing strategy.
Under the previous rules, a married person whohad reached full retirement age could file a"restricted application" for spousal benefits after the other spouse had filed for Social Security worker benefits. This allowed the individual to collect spousal benefits while earning delayed retirement credits on his or her own work record. In combination with the file-and-suspend option, this enabled both spouses to earn delayed retirement creditswhile one spouse received a spousal benefit, a type of "double dipping" that was not intended by the original legislation.
Under the new rules, an individual eligible forboth a spousal benefit and a worker benefit willbe "deemed" to be filing for whichever benefit ishigher and will not be able to change from oneto the other later.
Tip:If you reached age 62 before the end of December 2015, you are grandfathered under the old rules. If your spouse has filed for Social Security worker benefits, you can still file a restricted application for spouse-only benefits at full retirement age and claim your own worker benefit at a later date.
Basic Social Security claiming options remain unchanged. You can file for a permanently reduced benefit starting at age 62, receive your full benefit at full retirement age, or postpone filing for benefits and earn delayed retirementcredits, up to age 70.
Although some claiming options are going away, plenty of planning opportunities remain,and you may benefit from taking the time to make an informed decision about when to file for Social Security.
Whether you're preparing your own tax return or paying someone to do it for you, tax season can be a stressful time of year. Make things easier on yourself by pulling all your information together sooner rather than later--that includes a copy of last year's tax return, W-2s, 1099s,and any deduction records you have.
File on time
The filing deadline for most individuals is Monday, April 18, 2016. That's because Emancipation Day, a legal holiday in Washington, D.C., falls on Friday, April 15, thisy ear. If you live in Massachusetts or Maine, you have until Tuesday, April 19, 2016, to file a federal income tax return because Patriots' Day, a legal holiday in both states, is celebratedon April 18.
If you're not able to file your federal income tax return by the due date, you can file for anextension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.Filing thisextension gives you an additional six months(until October 17, 2016) to file your federal income tax return. You can also file for anautomatic six-month extension electronically(details on how to do so can be found in theForm 4868 instructions)
Note:Special rules apply if you're living outside the country, or serving in the military outside the country, on the regular due date of your federal income tax return.
Pay what you owe
One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if at all possible. If you absolutely cannot pay what you owe, file the return andpay as much as you can afford. You'll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance(options available may include the ability to enter into an installment agreement).
It's important to understand that filing for an automatic extension to file your return does notprovide any additional time to pay your tax.When you file for an extension, you have to estimate the amount of tax you will owe; you should pay this amount by the April 18 (April 19if you live in Massachusetts or Maine) due date.If you don't, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.
Limited planning opportunities may still be available
Though the opportunity for many potential tax-saving moves closed on December 31, the window is still open for IRA contributions. You generally have until the April due date of your federal income tax return to make contributions to a traditional or Roth IRA for the 2015 tax year. That means there's still time to set a sideup to $5,500 ($6,500 if you're age 50 or older)in one of these tax-advantaged savings vehicles.
Note:To contribute to either a traditional or a Roth IRA for 2015, you (or, if you file a joint return, your spouse) must have receivedtaxable compensation during the year. Providedthat you did not reach age 70½ by the end oft he year, you're able to contribute to atraditional IRA. Eligibility to contribute to a Roth IRA depends on your filing status and income.
With a traditional IRA, you're generally able todeduct the full amount of your contribution,provided that you're not covered by a 401(k) or another employer-sponsored retirement plan; if you or your spouse is covered by an employer plan, the ability to deduct some or all of your contribution depends on your filing status and income. With a Roth IRA, there's no up-frontd eduction, so contributing won't affect your 2015 tax situation, but it's still worth considering given that future qualified Roth distributions are free of federal income tax.
You also have until the due date of your return,including any extension, to undo("recharacterize") a 2015 Roth IRA conversion. For example, if you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2015 and that Roth IRA is now worth only $50,000, the $100,000 will be included on your 2015 federal income tax return. If yourecharacterize the conversion, however, it's as though it never happened--you have a traditional IRA worth $50,000, and no income or tax resulting from the conversion. If you do recharacterize a 2015 Roth conversion in 2016,you're allowed to convert those dollars (and any earnings) back to a Roth IRA after a 30-day waiting period (taxes due as a result of such are conversion would be included on your 2016 federal income tax return).
You don't have to do it alone
When it comes to your taxes, you want to make sure that you get it right. A tax professional cananswer any questions you have, help you evaluate your situation, and keep you apprised of any legislative changes that might affect you.
When it comes to your finances, some birthdays are more important than others. Take this quiz to see if you can identify the ages that might trigger financial changes.
1. Eligibility for Medicare coverage begins at what age?
2. A child can stay on a parent's health insurance plan until what age?
3. At this age individuals who are making contributions to a traditional or Roth IRA or an employer-sponsored retirement plan can begin making "catch-up" contributions.
4. This age is most often associated with drops in auto insurance premiums.
5. Individuals who have contributed enough to Social Security to qualify for retirement benefits become eligible to begin collect ingreduced benefits starting at what age?
6. To obtain a credit card, applicants underthis age must demonstrate an independentability to make account payments or have a cosigner.
1. b. 65.Medicare eligibility begins at age 65,although people with certain conditions or disabilities may be able to enroll at a youngera ge. You'll be automatically enrolled in Medicare when you turn 65 if you're already receiving Social Security benefits, or you can sign up on your own if you meet eligibility requirements.
2. c. 26.Under the Affordable Care Act, a child may retain his or her status as a dependent on a parent's health insurance plan until age 26. If your child is covered by your employer-based plan, coverage will typically end during the month of your child's 26th birthday. Check with the plan or your employer to find out exactly when coverage ends.
3. a. 50.If you're 50 or older, you may be able to make contributions to your IRA or employer-sponsored retirement plan above the normal contribution limit. These "catch-up"contributions are designed to help you make up a retirement savings shortfall by bumping up the amount you can save in the years leading up to retirement. If you participate in an employer-sponsored retirement plan, check plan rules--not all plans allow catch-up contributions.
4. b. 25.By age 25, drivers generally see their premiums decrease because, statistically,drivers younger than this age have higher accident rates. Gaining experience and maintaining a clean driving record should lead to lower premiums over time. However, there's no age when auto insurance rates automatically drop because rates are based on many factors,including type of vehicle and claims history, and vary by state and insurer; each individual's situation is unique.
5. a. 62.You can begin receiving Social Security retirement benefits as early as age 62.However, your benefits will be reduced by as much as 30% below what you would have received if you had waited until your full retirement age (66 to 67, depending on your year of birth).
6. c. 21.As a result of the Credit Card Act of 2009, credit card companies cannot issue cardsto those under age 21 unless they can showproof that they can repay the debt themselvesor unless someone age 21 or older with theability to make payments cosigns the creditcard agreement.
What are required minimum distributions (RMDs)?
Traditional IRAs and employerretirement plans such as 401(k)s and 403(b)s offer several tax advantages, including the ability to defer income taxes on both contributions and earnings until they're distributed from the plan.
But, unfortunately, you can't keep your money in these retirement accounts forever. The law requires that you begin taking distributions,called "required minimum distributions" or RMDs, when you reach age 70½ (or in somecases, when you retire), whether you need the money or not. (Minimum distributions are not required from Roth IRAs during your lifetime.
Your IRA trustee or custodian must either tellyou the required amount each year or offer to calculate it for you. For an employer plan, the plan administrator will generally calculate the RMD. But you're ultimately responsible for determining the correct amount. It's easy to do. The IRS, in Publication 590-B, provides a chart called the Uniform Lifetime Table. In mostc ases, you simply find the distribution period for your age and then divide your account balance as of the end of the prior year by the distribution period to arrive at your RMD for the year.
For example, if you turn 76 in 2016, your distribution period under the Uniform Lifetime Table is 22 years. You divide your account balance as of December 31, 2015, by 22 to arrive at your RMD for 2016.
The only exception is if you're married and your spouse is more than 10 years younger than you. If this special situation applies, use IRS Table II (also found in Publication 590-B)instead of the Uniform Lifetime Table. Table II provides a distribution period that's based on the joint life expectancy of you and your spouse.
If you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any of your IRAs. Inherited IRAs aren't included with your own for this purpose. (Similar rules apply toSection 403(b) accounts.) If you participate inmore than one employer retirement plan, your RMD is calculated separately for each plan andmust be paid from that plan.
Remember, you can always withdraw more than the required amount, but if you withdraw less you will be hit with a penalty tax equal to 50% of the amount you failed to withdraw.
Should I delay taking my first RMD?
Your first RMD from a traditional IRA and an employer retirement plan must be taken for the calendar yearin which you turn 70-1/2. However, if you're still working, you can delay RMDs from your current employer's plan until the year you retire (but only if allowed by the plan and you are not a 5% owner).
In general, you must take your RMDs no later than December 31 of each calendar year toavoid a serious tax penalty equal to 50% of the amount you failed to withdraw. However, a special rule applies to your first RMD. You have the option of delaying your first distribution until April 1 of the following calendar year.
- You might delay taking your first distribution if you expect to be in a lower income tax bracket in the following year, perhaps because you're no longer working or will have less income from other sources. However, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.
- For example, assume you have a traditional IRA and you turn 70½ in 2016. You can take your first RMD during 2016 or you can delay it until April 1, 2017. If you choose to delay your distribution until 2017, you will have to take two required distributions in that year, one for 2016 and one for 2017. This is because your distribution for 2017 cannot be delayed until the following year.
- Receiving your first and second RMDs in the same year may not be in your best interest. Since this "double" distribution will increase your taxable income for the year, it will probably cause you to pay more in federal and state income taxes. It could even push you into a higher federal income tax bracket for the year.
- In addition, the increased income may result in the loss of certain tax exemptions and deductions that might otherwise be available to you.
Obviously, the decision to delay your first required distribution can be important. Your tax professional can help you decide whether delaying the RMD makes sense for your personal tax situation.