Redkey Gordon P.C.

Social Security Will Look a Little Different in 2016

When your benefits check comes in the mail, you may want to review it to see how the Social Security changes this year affected you.

In the article "Social Security Changes in 2016.", AARP provided a full list of the Social Security changes for this year.

No Bump. Social Security beneficiaries will not receive a cost-of-living adjustment (COLA) due to low inflation. This is the third time since 2010 that beneficiaries won't see a raise.

Your Average Monthly Social Security Benefit. The maximum monthly benefit for workers retiring at full retirement age is $2,639. The average monthly benefit for all retired workers is $1,341.

No More Claiming Strategies. Many folks in the past used some popular "file and suspend" claiming strategies. They let married couples claim larger Social Security benefits than Congress intended. These will be eliminated, but couples who are eligible now have until the end of April 2016 to enter into a claiming strategy before the loopholes are zipped up.

Medicare Premiums Go Up – for Some. Without a COLA, 70% of Medicare beneficiaries will not enjoy an increase in Medicare Part B premiums. The remaining 30% will see base premiums rise from $104.90 to $121.80 per month.

Disability Benefits Secured. The reserves for disability benefits were nearing depletion in 2016, which caused a one-fifth cut for these beneficiaries; however, the government has implemented a plan to secure full benefits through 2022 by apportioning more monies to the disability fund during the next three years.

Reference: AARP (December 8, 2015) "Social Security Changes in 2016"

Five Basic Steps for Better Financial Health

Hindsight is 20-20, and that's especially true when it comes to basic financial decisions. All too easy to put off or overlook, these steps can make a big difference in your financial picture over time.

Maybe the biggest rookie finance mistake happens when someone from HR sends you a link or gives you a form to enroll in the company 401k at your first job. There's so much else going on, and the usual response is to put it on the "I'll get to it later" list. When "later" becomes years later, you wonder what might have been if you had signed up right from the start.

We've all faced similar decisions, and some we get right—but others leave us wondering the possibilities of what could and should have been. Forbes' article, "10 Financial Choices You'll Regret in 10 Years," discusses some financial decisions that you'll kick yourself for in 10 years. Let's take a look at five of these now:

1. Starting your budget way too late. Most people think that budgeting means not being able to spend money on the things they really want, but it's really a freeing exercise. You can recognize the areas of your life where you're wasting money on things that aren't important to you. Look at where you can use some money for something that is more desirable. As a result, instead of an expense that you could care less about, you will put your money to better use. If you've been putting off beginning to budget, start today and discover its amazing benefits.
2. Not paying off credit cards each month. Some of us grab credit cards left and right and keep telling ourselves that we can make the payments later. "Later" can become never, and credit card debt can start to pile on to the point of suffocation. Try to pay off your credit cards quickly to keep more money in your wallet instead of giving it over to some large credit card company. If you aren't able to control your credit card spending, stay away from credit cards altogether. You'll be better off.
3. Purchasing a financial product without investigating. It's not that hard to do a quick search online, so don't put your money into investment products you don't understand. Do your homework, get a second opinion, and make sure you understand how the investment works and what the real costs are.
4. Putting the emergency fund on the back burner. Things will happen—that's why we have emergency funds. A good rule of thumb is to have at least six months' worth of living expenses in your fund. Your emergency fund money should be stashed where you can retrieve it quickly without much risk to your capital, such as an online savings account.
5. Buying a new car that you can't afford. Vehicles are important for many of us, but they are a discretionary purchase. It's transportation, remember, and a big car payment can wreak havoc with your retirement goals. Do you know the differences between a car that's three to five years old and a brand new car? Not many, in most cases. So why spend the extra money?

Not every decision you make will be perfect, but if you can master these, you'll be in better shape than many!

Reference: Forbes (February 15, 2016) "10 Financial Choices You'll Regret in 10 Years"

Add Tax Planning to the List of New Parent Tasks

The joy of welcoming a new member of the family is increased by some generous tax deductions from your Uncle Sam.

The last thing most new parents are thinking about is taxes, but the addition of a new baby to your family has some nice tax perks, according to "The Most-Overlooked Tax Breaks for New Parents" from Kiplinger's. First step: make sure your new addition has a Social Security number.

You'll need an SSN to claim your new baby as a dependent on your tax return. If you don't report the number, it can mean a $50 fine and tie up your refund. Request a Social Security number for your newborn at the hospital when you apply for a birth certificate.

Dependency Exemption. Claiming your son or daughter as a dependent will shelter $4,000 of your income from taxes in 2015, which will save you $1,000 if you are in the 25% bracket. You will receive the full year's exemption, no matter when the child was born or adopted during the year.

Child Tax Credit. A new baby also gets you a $1,000 child tax credit every year until your dependent son or daughter turns 17, no matter when the child was born during the year. Unlike an exemption that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So, the $1,000 child credit will reduce your tax bill by $1,000.

Increase Your Take-Home Pay. When you claim another dependent, you will cut your tax bill. So decrease your tax withholding from your paychecks with a new W-4 form.

Head of Household Filing Status. If you're single, having a child may allow you to file as a head of household rather than as a single, which enables you to get a bigger standard deduction and more advantageous tax brackets. To qualify as a head of household, you must pay more than half the cost of providing a home for a qualifying person like your new child.

Earned Income Credit. Having a child pushes the cutoff to claim this credit which offsets federal payroll and income taxes for low- and moderate-income workers to $44,650 for 2015 returns. The income cutoff is higher if you have two or more children.

Child-Care Credit. If you pay for child care to allow you to work, and that income is taxed, you can earn a credit if you're paying for the care of children under 13. The size of your credit depends on how much you pay for care and your income.

Kid IRAs. Once a child is working, whether from a job or from being self-employed, he or she can open an IRA. Babysitting money or newspaper delivery money can be added to an IRA. By starting early, the opportunity to grow their IRA over time gives their retirement an additional boost. Parents and grandparents can give the child money for the IRA; however, contributions are limited to $5,500 a year or 100% of the child's earnings—whichever is less. It's often overlooked, but this is a nice way to get your child into the habit of saving for the future.

Reference: Kiplinger (February 2016) "The Most-Overlooked Tax Breaks for New Parents"

Retirees Should Know These IRS Audit Red Flags

The odds of the IRS auditing your tax returns are pretty low, but why take that chance?

Certain transactions and situations that tend to occur more in retirement than during working years are red flags for the IRS. Even though only 0.84% of all individual tax returns are audited, knowing about these tips from Kiplinger's "9 IRS Audit Red Flags for Retirees" will help minimize your chance of being among the "lucky" ones.

Math errors may draw an IRS inquiry, but they don't usually mean an audit. Nonetheless, review these red flags that could increase the chances that the IRS will give the return of a retired taxpayer some very special and unwanted attention.

The overall individual audit rate is only about one in 119, but the odds go up significantly as your income increases—like if you sell a valuable piece of property or get a big payout from a retirement plan.

IRS statistics show that folks with incomes of above $200,000 had an audit rate of 2.71%—about one out of every 37 returns. If you report an income of $1 million or more, there's just a one-in-13 chance your return will be audited. The reverse is also true as the audit rate plummets for those reporting less than $200,000, with just 0.78% or one out of 128 of those returns audited—the majority of these exams were conducted by mail.

Make sure you report all required income on your return because the IRS is good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a tax form showing income that isn't yours or listing incorrect income, you need to ask the issuer to file a correct form with the IRS.

Taking Higher-Than-Average Deductions. If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return. For example, a costly medical expense could alert the IRS, but if you have the proper documentation for your deduction, you shouldn't be afraid to claim it.

Claiming Big Charitable Deductions. If your charitable deductions are very large compared to your income, it'll be a red flag. Likewise, if you fail to get an appraisal for donations of valuable property or fail to file Form 8283 for noncash donations over $500, you are a bigger audit target. Retain all of your supporting documents, such as receipts for cash and property contributions made during the year.

Failing to Take Required Minimum Distributions. The IRS will check to see that you're taking and reporting required minimum distributions (RMDs). The penalty for not taking your RMD is equal to 50% of the shortfall. Also, IRS looks at early retirees or others who take payouts before reaching age 59½ and who don't qualify for an exception to the 10% penalty on these early distributions. Those age 70½ and older must take RMDs from their retirement accounts by the end of each year, but there is a grace period for the year in which you turn 70½, allowing you to wait until April 1 of the following year.

You can delay taking RMDs from your current employer's 401(k) until after you retire, but note that this does not apply to IRAs. How much you take every year is based on the balance of your accounts on the very last day of a prior year and the life-expectancy tables from the IRS. An experienced estate planning attorney will be able to help you navigate these financial waters.

Reference: Kiplinger (February 2016) "9 IRS Audit Red Flags for Retirees"

Disturbing Network of Theft and Fraud by New Jersey Women Targeting the Elderly

A group of thieves have been charged and one has pleaded guilty as an investigation uncovered a ring of theft and fraud perpetrated against elderly men and women.

This is a story that any professional working with seniors finds particularly abhorrent. An investigation by the New Jersey State Police and the Division of Criminal Justice uncovered a scheme by a New Jersey woman, her sister and several others—including an attorney—to steal millions from elderly clients they were supposed to be helping.

The story was reported by New Jersey 101.5 in "NJ woman pleads guilty to scamming millions of dollars from the elderly."

A New Jersey State Police investigation led to the indictment of Sondra Steen along with her sister Jan Van Holt. The latter was the owner of a company that offered elderly clients in-home care and legal financial planning. Two other employees pleaded guilty to taking part in the scheme and stealing $125,000 from an elderly couple. Van Holt and Steen were charged with conspiring with a lawyer to steal over $2.7 million from 12 elderly clients.

Van Holt would target potential elderly clients who were known to have substantial assets with no immediate family. They would be offered help through the company with non-medical services such as running errands, managing finances, getting to appointments, and housework. Steen would then serve as the client's primary caregiver.

When they had gained the trust of these elderly clients, they would take control of their finances and add their names to bank accounts by forging power of attorney documents or using false pretenses to obtain control. They then stole from the accounts to pay their own expenses. If the victim owned stocks or bonds, they were cashed out and the funds were deposited into the account allegedly controlled by the defendants. The defendants would also name themselves as executors of the wills and then name Steen as a beneficiary. Authorities began investigating the alleged laundering after the state Office of the Public Guardian referred a case involving one of the victims to the State Police.

Barbara Lieberman forfeited $3 million in assets and her law license, while Steen pleaded guilty to first-degree money laundering. Charges against Van Holt and Hamlett are pending. Steen will be responsible for restitution as well.

Reference: New Jersey 101.5 (February 9, 2016) "NJ woman pleads guilty to scamming millions of dollars from the elderly"