Talking to Clients About Year-End Tax Planning

Deferring your income and accelerating expenses 

If you don’t expect to be in a higher tax bracket next year, deferring income into the following tax year and accelerating expenses into the current tax year is a tried-and-true technique. If you’re an independent contractor or other self-employed individual, you may opt to hold off on sending invoices until late December to push the associated income into 2020. However, all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. However, keep in mind that waiting to sell increases the risk that your investment’s value will decrease. Moreover, taxpayers who are eligible for the qualified business income (QBI) deduction for pass-through entities — sole proprietors, partnerships, limited liability companies and S corporations — could end up reducing the size of that deduction if they decrease their income. You may also opt to maximize the QBI deduction, which is scheduled to end after 2025. 

Bunching your deductions 

The TCJA substantially boosted the standard deduction for 2019 to be $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, you may find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier. Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. By bunching in one year and taking the standard deduction in an adjacent year, the total deductions over a two year period could be increased. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022. 

  • Bunching Your Donor-Advised Fund (DAF): You can make multiple contributions to it in a single year, accelerating the deduction. Thereafter, you can decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year. If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019). If you want to divest yourself of assets on which you have a loss, instead of donating the asset, sell it to take advantage of the loss and then donate the proceeds. 
  • Bunching Qualified Medical Expenses Deducting: It’s all about timing. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction. 
  • Bunching Property Tax Payments: Assuming local law permits you to pay in advance, this approach might bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess. As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year. 

Give to charitable organizations 

When considering the amount of your charitable donation, remember that if you receive any benefit from making the donation, you must reduce the amount of your deduction by the fair market value of goods and services received.Several changes to itemized deductions were made under the TCJA. One important change was the reduction of the state and local tax deduction to $10,000 and removing 2% miscellaneous itemized deductions. However, the charitable deduction is still available with some new enhancements. For the 2019 tax year, gifts or donations of cash to a public charity are deductible up to 60% of your adjusted gross income. Thus a married couple with an adjusted gross income of $200,000 may deduct up to $120,000 of cash contributions to an eligible charitable organization. You can also donate property to charitable organizations. With the donation of appreciated property, the fair market value of the property exceeds the cost basis and you have a choice to utilize either amount when claiming the deduction. When using the fair market value of the property, the maximum amount of the deduction is 30% of your Adjusted Gross Income. If you choose to utilize the cost or basis of the donated property, the maximum deduction increases to 50% of your AGI. This is true for donations of appreciated property to private operating foundations as well (donations to non-operating foundations are limited to 30% when using basis and 20% when using fair market value). Remember, certain automobile and travel expenses and other non-reimbursed expenses on behalf of certain charities may also be deductible.

Loss harvesting against capital gains 

2019 has been a turbulent year for some investments. Therefore, your portfolio may be ripe for loss harvesting, which is selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year. 

Maximizing your retirement contributions 

As always, as an individual taxpayer you should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans. 

Consider investing in a Qualified Opportunity Zone 

Although the capital gains rates are attractive, some taxpayers prefer to defer paying ANY tax to a later time. TCJA added a new way to defer the tax on capital gains for up to seven years by investing in a qualified Opportunity Zone. To take advantage of this tax deferral, you must invest the gain from the sale of a capital asset into an Opportunity Zone within six months after the date of sale. For partnerships, the clock starts at the end of the partnership’s tax year. (Special timing rules apply to capital gains arising from the sale of trade or business property). Investing in an Opportunity Zone provides several tax benefits, including: - Tax on the initial capital gain is deferred until December 2026 (unless you sell the investment earlier);  - If the proceeds are invested in the fund for five years, 10% of the initial gain is not taxed;  - If the proceeds remain invested for an additional two years, another 5% of the gain is not taxed;  - In order to achieve the full 15% exemption, the investment must be made before December 31, 2019 (unless Congress extends that date);  - If you hold the Opportunity Zone investment for a full 10 years, any appreciation on the original investment is exempt from tax. The rules governing the tax treatment and benefits of Opportunity Zone investments are still in flux – at this point the IRS has issued only proposed regulations – but the advantages are quite real. 

Sell capital assets 

There are currently preferential tax rates applied to gains on the sale of capital assets. For the current tax year, net long-term capital gains are subject to tax at either 0%, 15% or 20% depending on your filing status and taxable income; net short-term gains are taxed as ordinary income. There is also a 3.8% net investment income tax that is applied to gains on the sale of capital assets. If you have net short-term short term and long-term loss carryovers, you can deduct up to $3,000 per year on your return ($1,500 married filing separate). As it is unclear how long the capital gains rates will stay at this level, it is still prudent to consider selling your capital assets, such as stocks and bonds, to take advantage of the lower tax rates, assuming you can redeploy the gains to achieve the same or better yield. 

Accounting for 2019 TCJA changes 

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.  


Article provided by CPA Practice Advisor 

[This article first appeared on Friedman LLP's Tax Matters.]

401(k) Contribution Limit Increased to $19,500 for 2020

Employees in 401(k) plans will be able to contribute up to $19,500in 2020. The IRS announced this and other changes in Notice 2019-59 on This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

Highlights of changes for 2020

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.

The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2020.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

Key limit remains unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59, available on

Article provided by CPA Practice Advisor

IRS increases tax deductions for 2020

The Internal Revenue Service issued its annual inflation adjustments for dozens of tax items and tax schedules Wednesday, saying the standard deduction for married taxpayers who file joint tax returns will increase $400 to $24,800 in tax year 2020, while for single taxpayers and married individuals who file separately, the standard deduction will go up $200 to $12,400. For heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

Revenue Procedure 2019-44 spells out the details about these annual adjustments. Some tax law changes in the revenue procedure were added by the Taxpayer First Act of 2019, which increased the failure to file penalty to $330 for returns due after the end of 2019. The new penalty will be adjusted for inflation beginning with tax year 2021. Tax year 2020 adjustments typically are used on tax returns filed in 2021.

The tax items for tax year 2020 that promise to hold the most interest to the majority taxpayers and tax professionals include the following dollar amounts:

  • The personal exemption for tax year 2020 remains at 0, as it was for 2019. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
  • Marginal rates: For tax year 2020, the top tax rate will stay at 37 percent for individual single taxpayers whose incomes exceed $518,400 ($622,050 for married couples filing jointly).

The other rates are:

  • 35 percent for incomes over $207,350 ($414,700 for married couples filing jointly);
  • 32 percent for incomes over $163,300 ($326,600 for married couples filing jointly);
  • 24 percent for incomes over $85,525 ($171,050 for married couples filing jointly);
  • 22 percent for incomes over $40,125 ($80,250 for married couples filing jointly);
  • 12 percent for incomes over $9,875 ($19,750 for married couples filing jointly).

The lowest rate is 10 percent for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

  • For 2020, like this year and last year, there’s no limitation on itemized deductions because that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and starts to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800). The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600).
  • The tax year 2020 maximum Earned Income Credit amount will be $6,660 for qualifying taxpayers who have three or more qualifying children. That’s an increase from a total of $6,557 for tax year 2019. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2020, the monthly limitation for the qualified transportation fringe benefit is $270, as is the monthly limitation for qualified parking, up from $265 for tax year 2019.
  • For the taxable years beginning in 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.
  • For tax year 2020, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, the same as for tax year 2019; but not more than $3,550, an increase of $50 from tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019; however, the deductible cannot be more than $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from tax year 2019.
  • For tax year 2020, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $118,000, up from $116,000 for tax year 2019.
  • For tax year 2020, the foreign earned income exclusion is $107,600, an increase from $105,900 for tax year 2019.
  • Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from a total of $11,400,000 for estates of decedents who died in 2019.
  • The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019.
  • The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.

Article provided by Michael Cohn of

What are the Audit Flags for the IRS?

How the IRS decides which 1040s to audit. Many filers mistakenly believe that the IRS is less likely to audit returns that are submitted late in the filing season, rather than early. Not true.

All returns, whether filed early or late, go through the IRS’s ever-vigilant computers that scan them for arithmetic errors and single out returns for audit on the basis of a top-secret scoring system. The agency then scrutinizes high scorers, as well as some Form 1040s chosen purely at random, to determine which ones to actually examine. One important element in the selection process is how the amounts you claim for, say, charitable contributions and medical expenses as itemized deductions on Schedule A of Form 1040 compare with the totals taken by other individuals with comparable income levels.

Avoidance is perfectly legal, whereas, evasion is a criminal offense that carries a jail sentence of as much as to five years, plus a nondeductible fine of as much as $100,000. (Internal Revenue Code Section 7201)Is there a difference between tax avoidance and tax evasion? There is, and the difference isn’t academic.

A drastically under-funded and under-staffed IRS lacks the resources to undertake criminal prosecutions against most evaders. That doesn’t mean the IRS is a paper tiger and that evaders can rest easy. The can look forward to more tax tribulations.

The IRS routinely launches civil actions against cheats and requires them to pay sizable, nondeductible civil penalties for fraud. Those penalties are in addition to back taxes and interest charges. 

Here are some words to the wise from a book, “Criminal Tax FraudRepresenting the Taxpayer Before Trial,” published by the Practicing Law Institute: “It is surprising how many ‘witnesses’ or ‘observers’ a taxpayer can create in the process of understating his taxes. A man's mistress can observe that he always pays cash when with her. An estranged wife might have a very good idea of who is being entertained on the ‘business trip’ to Miami. Any bookkeeper told not to record certain payments may be your bookkeeper for life. And it is very difficult to fire an insurance broker who has been giving you kickbacks for years.”

Those admonitions on how to avoid a stay in the slammer should have been heeded by the late Leona Helmsley. She was overheard by her housekeeper to say, "We don't pay taxes. Only the little people pay taxes." The housekeeper's testimony about the Queen of Mean's indiscreet remark helped Uncle Sam convict the premier New York hotelier and send her to Club Fed on April 15, 1992, to serve a four-year sentence for tax evasion. Unsurprisingly, the media-savvy feds selected the 1040 filing deadline as the date to announce her sentencing.

Senators Max Bacus of Montana and Russell Long of Louisiana on tax reform. Mr. Bacus at the Senate Finance Committee hearings on enactment of the Tax Reform Act of 1986:”The last time this committee met to review the tax code from top to bottom, Eisenhower was president, Joe DiMaggio was married to Marilyn Monroe, and there were no major league baseball teams west of Kansas City.”

Inevitably, there are largely silent winners and vocal losers; reform, said Mr. Long, means “Don't tax you, don't tax me. Tax that fellow behind the tree.” 

Article provided by Julian Block of


Being an Executor

What if you are an Executor or Administrator of an estate?

You are most likely looking to obtain waivers to release the decedent’s assets, such as NJ bank accounts, NJ stock, and NJ real estate. There are several steps to follow, and a few things you need to know before this can happen.

What are the different types of waivers?

A self-executing waiver (do-it-yourself) and the 0-1 waiver (issued by the Division of Taxation) are the different types of waivers. New Jersey banks are prohibited from closing a decedent’s bank accounts without one of these forms:

  • Form L-8 Self-Executing Waiver Affidavit can only be used when there is no Inheritance or Estate Taxes due : L-8s are to be filled out by you, as the estate representative. Then they can be sent or brought directly to the bank, transfer agent, or other financial institutions holding the funds. Many banks have these forms on hand, but they can also be obtained on our website. You do not file anything with the Inheritance and Estate Tax Branch if you qualify to use this form.  
  • Form 0-1 is a “waiver” that can only be issued by the Division of Taxation: To get this form, you must file a return with the Division. Real Estate transfers always require Form 0-1. Note: 0-1 is not a form that you will be able to find on our website. This form can only be issued by the Division of Taxation.

Are there any Inheritance or Estate Taxes Due?

Your next job as Executor/Administrator is to figure out if any Inheritance or Estate taxes will be due. This will determine what forms or returns you will need to file.

Besides the Federal estate tax, there are two separate State taxes related to a person’s death: the Inheritance Tax and the Estate Tax. You may owe one, but not the other. You will never pay more than the higher of the two taxes:

  • Inheritance Tax mainly depends on the relationship between the deceased person and the beneficiary. Estate proceeds payable to: o Surviving spouses, parents, children, grandchildren, etc. are exempt from Inheritance Tax. These are Class A beneficiaries. Brothers and sisters and children-in-law are subject to tax after built-in exemptions. These are Class C beneficiaries. Nieces, nephews, aunts, uncles, friends, and non-relatives are subject to Inheritance Tax. These are Class D beneficiaries. Charitable institutions are exempt from Inheritance Tax. These are Class E beneficiaries.

If it turns out that Inheritance Tax may be due, the Inheritance Tax Resident Return (Form IT-R) needs to be filed. Any tax must be paid within eight months after the date of death or you will incur a 10% annual interest charge on unpaid tax.

Sometimes, a return needs to be filed even if there might not be any tax due. If there are any Class C, D, or E beneficiaries, you will need to file a full return. 

  • Estate Tax depends on the size of the decedent’s gross estate and the decedent’s date of death. You will have to file an Estate Tax return if the estate value is higher than the exemption level for that year: 
  • Year of Death/Exemption Level/Return Required: 2016 or earlier $675,000 including adjusted taxable gifts IT-Estate; 2017 $2 million IT-Estate 2017; 2018 or after All exempt No Estate Tax return

If you determine that all of the beneficiaries and the estate are exempt from tax, you may use the following form to obtain a real estate waiver:

  • Form L-9: Resident Decedent Affidavit Requesting Real Property Tax Waiver. This Form needs to be filed with the Inheritance & Estate Tax Branch to receive a Form 0-1 Waiver for real estate.

Non-Resident Decedents (someone who died as a legal resident of another state or a foreign country): People who did not live in New Jersey, but owned certain types of property in New Jersey (usually real estate) may need to pay NJ Non-Resident Inheritance Tax. There is no Estate Tax on non-resident decedents.

Other Important information for executors/administrators to know:

  • Banks and financial institutions may release up to 50% of the entire amount of funds on hand before a waiver is received. These funds may only go to the executor or administrator or joint owner of the account(s).
  • Banks also must pay (without a waiver) any checks for Inheritance/Estate Taxes written to New Jersey Inheritance and Estate Tax from a decedent’s account (if there are sufficient funds in the account, of course.)
  • When filing any return for Inheritance Tax, the fair market value of decedent’s assets should be reported as of the date of death, not as of the filing date.

How long does processing take?

Once you have filed a return with the Division, please plan for processing to take at least several months. If a return must be audited, it may take several months longer. About 40 to 50% of returns require additional attention in the form of an audit. Returns are processed and audited in the order they are received.

Inheritance and Estate Tax payments are usually posted within two weeks from the time they are received, but the processing of a return and issuing of waivers will take longer.

Full details regarding the above information are available on the State of New Jersey Division of Taxation's website:

Social Security Benefits after Marriage, Death, or Divorce

Making Social Security decisions is relatively simple for seniors filing single tax returns. Assuming modest or no earned income, retirement benefits can begin as early as age 62. For each year of waiting to start, annual benefits increase by approximately 7%–8%. (After full retirement age, now 66 or 67 depending on year of birth, the presence of earned income will not affect Social Security benefits.)

By age 70, however, the waiting game must stop; seniors who begin then receive the maximum benefit. Regardless of the starting date, Social Security payments generally increase each year, to keep up with inflation, and they last for the recipient’s lifetime.

Paired Planning

Social Security decisions become more complex for married couples, especially if one spouse has earned much more than the other and is entitled to far greater benefits. Each spouse has a choice: take benefits on one’s own earnings record or on the spouse’s record.

Suppose Al is entitled to $2,000 per month in benefits at full retirement age in 2020. His wife Beth is the same age, and her retirement benefit is $1,200 per month. The basic spousal benefit is half of the other spouse’s benefit, so Beth would be better off taking her own $1,200 benefit rather than a $1,000 spousal benefit (50% of Al’s $2,000 benefit). If Beth’s own benefit would be lower, such as $720 per month, she would be better off with a $1,000 monthly spousal benefit.

Staggered Starts

The plan described above might work if both spouses are the same age and both want to start Social Security benefits at full retirement age. This is often not the case, however, so couples have to make choices.

One strategy would be for the lower-earning spouse (i.e., Beth) to start at 62, the earliest date possible, while Al delays until age 70 to receive a maximum benefit. Assuming that Al has not yet started retirement benefits, Beth will not be able to claim a spousal benefit, so she will be limited to her own retirement benefit.

Moreover, starting at age 62, Beth’s benefit would be only 75% of her age 66 benefit, or $540 per month, instead of $720. She would collect $6,480 per year from Social Security, plus any future cost-of-living adjustments (COLA), a total that will help the couple pay their bills until Al turns 70. At that point, Al’s monthly Social Security payment will be $2,640 per month (a 32% boost for waiting four years before starting), plus any COLAs in the interim.

Between their benefits, Al and Beth could receive $3,180 per month ($38,160 per year) from Social Security, plus COLAs. This would go on as long as they both live and be partially tax sheltered under current law, providing some assurance that they will not run out of money if they live to advanced ages.

Note that Al’s waiting until age 70 will not increase Beth’s monthly check. If Beth starts at her full retirement age, she will receive $1,000 per month, which is half of the $2,000 per month Al will receive by starting at full retirement age. Waiting longer will not boost Beth’s spousal benefit to half of Al’s increasing benefit. Therefore, Beth should not wait beyond her full retirement age to begin collecting a spousal benefit.

Another possibility is for Beth to start at age 62, collecting a reduced benefit based on her own work history, as illustrated above. When Al starts to collect his own benefit at age 70, Beth can compare her own reduced Social Security ($540 per month) to a spousal benefit based on Al’s work history ($1,000 per month) and claim the spousal benefit if it is greater.

Depending on how the numbers work out, it can make sense for one spouse to start with her own benefit and later switch to a spousal benefit. For this type of switch to work, Beth must claim her own benefit when Al has not yet started his Social Security benefits, then claim a spousal benefit when Al files for retirement benefits.

A limited window exists for people who reached age 62 before January 2, 2016. They can restrict a Social Security application to their spouse’s benefit and delay filing for their own retirement as late as age 70 so their own benefit can grow.

Survivor’s Step-Up

Continuing this example, Al is receiving $2,640 per month, plus COLAs, after age 70, while Beth’s Social Security payments are an inflation-adjusted $540. If Beth dies first, Al will continue to receive lifelong payments of $2,640 per month, plus COLAs.

Conversely, suppose Al is the first spouse to die. Will Beth receive only $540 per month? No. The surviving spouse will always receive the greater of the two Social Security benefits, so Beth will receive an inflation-adjusted $2,640 per month for the rest of her life.

Therefore, having one spouse—especially the one with higher lifetime earnings—delay Social Security as long as possible serves two purposes: the couple will have more income after age 70, and the survivor will enjoy a larger “pension” from Uncle Sam.

In order for Beth to receive Al’s full monthly payment as a survivor’s benefit, she must have reached full retirement age. Younger widows and widowers can collect as early as age 60 (50 if disabled), but starting before full retirement age would result in smaller monthly checks.

Other requirements may apply to Social Security survivor’s benefits. To receive them, a widow or widower generally must have been married to the deceased individual for at least nine months before death; a deathbed wedding will not generate a lifetime payout from Social Security. Exceptions to the nine-month rule include death by auto accident or other disasters in that time frame.

Supporting the Survivor

Based on the above, comprehensive planning might call for encouraging the higher-earning spouse to delay as long as possible. Not only will the couple have more income during a long retirement, but the surviving spouse will have more—possibly much more—monthly income. Waiting to start Social Security may wind up effectively providing some “life insurance” or “longevity insurance,” in the form of higher lifelong cash flow, for the lower-earning spouse.

Such insurance may be especially valuable to survivors. After a two-year transition period, widows/widowers who do not remarry will file as single taxpayers. Assuming taxable income remains approximately the same, with the loss of one Social Security check offset by a single person’s lower standard deduction, the survivor likely will be in a higher tax bracket, and thus owe much more in tax.

For example, Carl and Diane have $75,000 in taxable income this year. Filing a joint return, this couple is in a 12% tax bracket. If Carl dies a few years from now, and his income does not substantially change in that time, Diane will be in a 22% bracket. Her tax bill will likely be higher, so the larger Social Security benefit would be welcome.

Split Heirs

After a divorce, both spouses naturally will be entitled to Social Security retirement benefits, based on their own work history. In addition, spousal retirement and survivor’s benefits may apply.

For example, Ed and Fiona were married but are now divorced. Ed’s work history entitles him to larger Social Security benefits than Fiona would receive on her own. To qualify for retirement benefits on Ed’s work history while Ed is still alive, Fiona must be unmarried, be at least age 62, and have been married to Ed for at least 10 years.

Here, the rules for spousal retirement benefits are generally the same for Fiona after a divorce as they were when the couple was married. Fiona will not receive more than half of Ed’s retirement benefit, and any benefits Ed earns after full retirement age will not help Fiona. Filing before full retirement age will produce a smaller benefit. Therefore, Fiona should take her own retirement benefit if it is larger than the spousal benefit she would receive on her own work record.

Divorced spouses do, however, have one advantage. Even if Ed has not applied for Social Security benefits, Fiona may still be able to receive retirement benefits on his work history. To do so, Fiona must meet all the above qualifications and have been divorced for at least two years.

In this example, Fiona may receive survivor’s benefits from Social Security if Ed is the first spouse to die. As is the case with a still-married couple, Fiona could receive the equivalent of Ed’s retirement benefit after he dies. Often, that means a larger monthly payment for a divorced ex-spouse. Again, the marriage must have lasted at least 10 years for Fiona to receive a survivor’s benefit. Remarriage will not affect this benefit if that wedding occurs after Fiona turns 60, but Fiona can receive only one benefit—the largest—even if she is entitled to multiple benefits from multiple sources. Other rules for surviving ex-spouses may apply if Fiona is disabled or if she is caring for Ed’s young (under age 16) child.

Suppose that Ed gets remarried to Gloria and dies in a car crash a year later. Gloria would receive a widow’s benefit, as described above, but what would happen to Fiona’s Social Security survivor’s benefit? In brief, nothing. Survivor’s benefits paid to the surviving spouse will not reduce the amount paid to a surviving ex-spouse, so Gloria and Fiona could both receive lifelong payouts of Ed’s monthly retirement benefit amount, if all qualifications are met. There is no limit to the number of ex-spouses who can receive benefits on one person’s Social Security record, as long as the former marriages all last 10 years or more.

Keep in mind that Social Security rules can be complex. This article covers the basics, but it is always a wise move to ask Social Security about specific taxpayer circumstances


Article provided by Sidney Kess, JD, LLM, CPA of the CPA Journal

401k Early Withdrawal: What to Know

A normal, penalty-free 401k withdrawal occurs after retirement or after you’ve reached the age of 59½. The funds are subject to income tax just like your paycheck previously was. However, if you choose to withdraw funds before the age of 59½, there will be penalties.

Every early 401k withdrawal is subject to income tax as well as a 10% early withdrawal penalty tax. You can cash out up to 100% of your 401k early, but depending on your tax bracket, this could cause you to lose almost half of your savings. Additionally, you’ll lose out on potential future savings growth.

When it’s time to file taxes, you’ll owe more because your taxable income has increased. If your withdrawal was substantial, it may even push you into a new tax bracket, causing you to owe even more to the IRS.

Let’s say you choose to make an early 401k withdrawal of $50,000. Consider the following hypothetical taxes (yours will vary depending on your state and income bracket):

  • Federal income tax of 25% = $12,500
  • State income tax of 7% = $3,500
  • Penalty tax of 10% = $5,000

This leaves you with a meager $29,000 left—a little over half of what you started with. This early 401k withdrawal calculator will give you a better grasp on your specific numbers.

Exceptions to 401k Early Withdrawal Penalties


Withdrawals made under the age of 59½ will not be subject to the 10% early withdrawal tax under any the following circumstances:

  • You pass away and the funds are withdrawn by your chosen beneficiary
  • You become permanently disabled
  • You terminate employment and are at least 55, or 50 if you work for the government
  • You withdraw an amount less than is allowable as a medical expense deduction
  • Your withdrawal is related to a Qualified Domestic Relations Order after a divorce
  • You begin a series of “substantially equal payments
  • You are a qualified military reservist called to active duty

Additional Considerations Before You Withdraw


If you’re in a pinch and need to use your 401k savings, an alternative to an early withdrawal is to take out a loan from your 401k. If your plan allows it, it could have significantly less of an impact on your retirement savings, given you pay it back. If you fail to repay the loan plus interest, it will be treated like an early withdrawal, and you’ll be subject to the penalties.

Another option to keep your savings intact is to roll them over into a traditional or Roth IRA account. If you’ve left a job and don’t know what to do with your 401k, this is a good option. A direct rollover is ideal, because your plan writes the check directly to your IRA. If you choose an indirect rollover, your plan writes the check to you, but the process is more complicated. Consult your financial advisor if you’re ever unsure.

Because of the many roadblocks to 401k early withdrawals, you may find you want to keep away from your 401k until you’re retired — just be sure to consult your financial advisor if you’re ever unsure. Remember that diligently contributing to your 401k now will set yourself up for a happier, less stressful retirement. Because when that time comes, you’ll have earned the right to spend less time worrying about money and more time sipping mai tais on the beach.

Article Provided By Mint.Com: