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Retirement Account Differences

You hopefully have an IRA, 401(k) (or another 401 account with a different letter), pension or another type of retirement account.  But, do you know the differences?  Here is a quick look at the differences:

Pension – This is something that we are seeing less and less.  Pensions are usually employer sponsored and employees receive a benefit after retiring.  Employees usually have not contributed to this benefit.  If the employee terminates employment prior to retirement, the benefit will likely cease and the employee will have no further entitlement.  These payments are usually fully taxable for income tax purposes.

401 (with a letter) – This is a retirement account that is employer sponsored and to which employers and/or employees contribute.  The contributions made by employees are pre-tax and go into an individual account within the plan of the employer.  Upon termination of employment or retirement, the employee will roll the assets in the account into an IRA – Individual Retirement Account.  Since this is an asset to which the employee has a vested interest, there will be a beneficiary designation with this account.  Some or all of the distributions will most likely be income taxable.

Individual Retirement Account – Traditional IRA – This is an account for retirement purposes that you establish and some or all of your contributions to the same may be deductible for income tax purposes.  You will need to complete a beneficiary designation for the account in the event of your passing.  Funds withdrawn from this type of an account are usually fully taxable for income tax purposes.

Roth IRA – This retirement account has had income taxes paid on the contributions as they are made, thereby any distributions from the account are income tax free.  The taxes are paid at the contributor’s income tax rate at the time of contribution.  Here again, there will be a beneficiary designation. 

Annuity Contracts – Annuities are purchased and there is a contract that sets forth the distribution of the benefits as well as many other details related to the contract.  Annuities are very diversified and can have very specific clauses as to their administration.  As part of the application for an annuity, there will be a beneficiary designation if the type of annuity provides for payment post death of the owner. 

Retirement-type accounts can be confusing and are sometimes not fully understood.  Distribution from 401 accounts and IRAs have age requirements for distributions and the income taxability of them. 

It is always wise to review your beneficiary designations for any of these assets that you own or are entitled to.  Life happens and circumstances change.  Make certain that your assets will benefit those that you wish to benefit.

Year-End To Do List

December is upon us and there are many things to accomplish.  Where do we find the time?  But, in spite of all of your tasks to be accomplished and their importance, I am sorry but I must add to that list things that really have a greater impact than holiday preparations.  Here’s a list of tasks for consideration by year end that will have an impact long after the change of the calendar to a new year:

  • If you are of an age that you must take required minimum distributions from a retirement-type account, have you done so?  Failure to do so could result in up to a 50 percent surcharge on the amount which should have been distributed.
  • If you have had significant medical expenses this year, consider incurring any anticipated medical expenses before year end, i.e., new eyeglasses, hearing aids, prescription refills, payment of any non-covered medical expenses, etc., which may help you to meet the threshold for taking medical deductions as an expense on your income tax returns.
  • Review your income tax withholdings so that you can avoid a penalty for underpayment of taxes.
  • Consider if it would be advantageous to make gifts of assets which may likely appreciate over time.  Gifts of up to $16,000 can be made per person in 2022 without any gift tax impact.
  • Make certain your estate plan is up to date.  If these haven’t been updated recently, there may have been changes in the law which should be considered.
  • Consider whether you should make any additional contributions to your retirement accounts if you are eligible.
  • Are you charitably minded?  Consider bunching contributions.  What you would likely make in 2023, make them in 2022 to possibly enable you to get a bigger deduction for the contributions by being able to itemize deductions.
  • If making charitable contributions, consider the use of appreciable assets with a low basis, i.e., stock you acquired long ago that has risen in value.  Donate the stock as opposed to selling it and donating cash to avoid the capital gains.
  • If you are eligible, consider donating from your IRA to charity using a qualified charitable deduction.  This would count toward your required minimum distribution for the year.
  • While this last suggestion may not seem to be important, have you checked your beneficiary designations for life insurance and retirement monies to ensure that they are accurate?  You may be surprised to see how often these are overlooked and don’t reflect the owner’s intention.

In the meantime, enjoy all of the December festivities. 

Reverse Mortgages

So, you have heard of Reverse Mortgages, but do you really understand what they are and how they can be helpful?  Like most things – you hear good and bad comments about them.

A reverse mortgage is unlike a purchase money mortgage or a refinance mortgage.  So, what’s the difference? 

When someone buys real estate, they may secure the funding for the same by way of a purchase money mortgage to finance the purchase.  A refinance mortgage is one where there is already a mortgage secured by real estate, but there may be a reason to refinance – lower interest rates, shorter term equity from the property.  In each of those cases, payments begin usually about a month after the mortgage has been disbursed or closed.

Whereas, a reverse mortgage is one in which the payments do not begin at the time the mortgage is funded.  The mortgage is not disbursed in full.  Rather, the mortgage paperwork is done and no withdrawal of funds is made until requested.  Payments can be either on demand or on a periodic basis.  Interest accrues on the mortgage and is added to the principal but no payments are required until the date set forth in the terms of the loan.  Usually, no payment is due until the borrower dies or permanently moves from the home.  At that time, the payoff will be only based on funds actually received, not on the maximum amount allowed to be withdrawn. 

Unlike conventional financing, reverse mortgage eligibility is geared specifically for lower income seniors.  Other eligibility qualifications are that the borrower must be at least 62 years old, the maximum amount that can be borrowed is limited to a percentage of the value of the home and your equity is the same due to existing encumbrances on the property. 

If you have a loved one who owns their residence and is in need of cash for their care, careful consideration should be given to selling their home and relocating or remaining in their home and getting a reverse mortgage.  This is important if there could be capital gains tax if the property is sold.  While the IRS has provisions to shelter gains of up to $250,000 per individual, New Jersey and Pennsylvania do not have the same exclusion and could result in significant taxes.  Currently, if someone dies owning real estate at the time of their death, a “step-up” in basis is given to the value at the time of death.  The amount of the “step-up” in basis is determined by how the real estate is owned. 

If you feel a reverse mortgage may be something that could help a homeowner, just as with most things – do your homework.  Investigate the current rates, the repayment terms, and the costs involved in putting a reverse mortgage in place.  Compare the options of a reverse mortgage vs. a home equity line of credit.  What are the income requirements for the various types of loans?  What are the tax consequences? 

Only then will an educated determination be able to be made in the best interest of the homeowner. 

Backup Withholding – What Is It?

You may have encountered being asked if you wanted “backup withholding” when doing certain financial transactions.  So, what is it? 

Backup withholding is when, during a financial transaction, there is a withholding of income taxes – federal or state – from the proceeds of the transaction.  These withholdings are credited to the taxpayer’s tax account(s).  When the transaction is reported for tax purposes, this amount is treated the same as an estimated tax payment or withholding from a paycheck. 

The tax law provides that the payer of the proceeds is responsible for knowing who they are paying.  You are required to provide your tax identification number – either a Social Security Number or an Employer Identification Number if a non-individual.  If you provide such information, then backup withholding may become optional.  And, there are some instances where backup withholding is not required. 

If backup withholding is required, the current federal rate is 24 percent.  State rates vary depending upon the state.  Payments subject to backup withholdings include, but are not limited to, interest, dividends, rents, commissions, gambling winnings, taxable grants, royalty payments, and sale of assets. 

If you are receiving the proceeds of a transaction that will incur a significant amount of tax, backup withholding is encouraged because, if you do not have sufficient credits for payments toward your annual tax obligation, you could be subject to underpayment penalties.  These penalties can add up quickly.  In the event there would be an excess amount withheld, then you would get a refund of the overpayment upon filing your income tax return. 

Medicare Open Enrollment

October through December of each year is the open enrollment period for Medicare.  Many people aged 65 and older are on auto-pilot and just continue with the plans they have in place without regard for investigating if there are other options that could be more beneficial. 

First of all, Medicare is available when you attain the age of 65.  In today’s world, many people over 65 are still working and may have benefits through their employer.  But, even if you are covered by employer insurance, you must sign up for Medicare or risk being penalized for late enrollment. 

Signing up for Medicare or looking at options can be very confusing.  First, let us look at the different parts of Medicare:  Part A covers hospital stays; Part B covers routine medical costs; Part C is a Medicaid Advantage Plan; and Part D is drug coverage (available as optional coverage).

Medicare Advantage Plans are not your standard Medicare and many people believe that the Advantage system offers a better portfolio of benefits and lower costs.  Medicare Advantage plans are administered by private insurance companies while the standard Medicare is administered by the federal government.  Medicare Advantage Plans are sold by insurance brokers who receive a commission for selling a plan.  The coverage is based on specific areas – geographical, restricted to “in network” providers, include coverage for hospital, medical and, most likely, prescriptions as well as possibly extras such as vision, dental and hearing.  However, Medicare Advantage Plans do not provide for services when you are out of your network.  There is no coverage outside of the U.S., and no coverage to assist in the cost of your return to the U.S. for treatment. 

Original Medicare covers hospitalizations, routine medical services – doctor visits, testing, etc. under Parts A and B.  As mentioned above, if you wish to have prescription coverage under Part D, that is optional and available at an additional charge.  You can obtain prescription coverage through outside insurance companies.  You can add Medicare Supplement Insurance (Medigap) or you can use coverage from a former employer or union or Medicaid (if you qualify for the same).  Under Original Medicare, you can use any doctor or hospital that takes Medicare anywhere in the U.S., even if traveling away from home. 

So, what do you choose?  Only you can be the judge of which plan you become a member of.  There are various factors to be considered, including any existing health issues you may have experienced.  Do your homework and investigate.  Good luck in making the best choice for you.  And, who said we don’t have options?

Have You Taken Your Required Minimum Distribution For The Year?

As we are quickly approaching the end of the year, it is important to determine if you have taken your required minimum distribution from retirement-type assets.  For a financial institution to do the calculation,  process the request for the distribution and send out the distribution, bear in mind that you are not the only person for whom they are processing a distribution.  So, please do yourself (and the financial institution) a favor and DON’T wait until December to initiate the distribution. 

If an RMD (required minimum distribution) is not made by the end of the year, you can be surcharged for the failure to take the RMD. 

For example – let’s say that your RMD for the year is $10,000. Not only do you have to pay applicable income taxes on the distribution; the surcharge calculation would be $5,000 or 50 percent.  That’s a BIG chunk of your hard-earned money. 

While many people think it best to wait until the end of the year, I always recommend that people think of taking their RMD during tax season.  That way, it is done and doesn’t have to be thought about. Also, there is much less chance of missing the distribution that you have to take in any event and it will eliminate the possibility of a surcharge.

DON’T DELAY.  Contact your financial institution to initiate your RMD for 2022 NOW if you aren’t already one step ahead of the game.

Avoiding Scams When Donating After a Disaster

Hopefully, you were not impacted by the recent Hurricane Ian and are safe and sound.  But, there are thousands of individuals who may have lost their entire life’s accumulation.  And, being the kind-hearted person you are, you want to donate funds to help these unfortunate individuals. 

In the world we live in today, criminals take advantage of a disaster and solicit funds for fake charities.  Also, scammers sometimes pose as a federal agency to dupe disaster victims who are trying to get relief. 

If you want to help those less fortunate, don’t fall for solicitations received by phone, social media, email, or in person.  Make certain that your donation is going to a reputable organization – one that you initiated the donation.  And, when you do donate, remember to keep the receipt for the donation for income tax purposes. 

To check the status of a charity, use the IRS Tax Exempt Organization Search tool located here. If the charity isn’t listed in this database, it is not a qualified charity that you can claim a deduction on your income taxes for any donations made.

All donations should be made via check or credit card so that you have a record of the donation.  DO NOT make cash donations or donations via a service such as Western Union. 

You may think that a solicitation for a donation that is identified as a well-known charity, such as the American Red Cross, is legitimate.  But, just like an individual, organizational identities can also be stolen.  Rather than make a donation in response to a phone call, email or text, go directly to the charity to make your donation.  Look on the charity’s website for how to make a donation or initiate a phone call to make a donation; this ensures that your donation is going to the legitimate charity and not to some scam organization claiming to be that charity. 

If you are a disaster victim, beware as well.  Scammers can claim to be from a disaster relief program and obtain your personal information and then fraudulently use your information for their benefit.  The IRS provides disaster assistance by calling 866.562.5227.

Beware Of Texting Scams

We have all gotten those annoying emails that we know are scams and, hopefully, we have not taken the bait.  Also, many have received phone calls that are scams claiming to be the IRS, a law enforcement agency or even claiming they have a loved one captive and are holding them for ransom.  Recently, someone I know who is a grandfather received a call saying that his high school age granddaughter was being held ransom and he needed to send $500 immediately.  He called the granddaughter’s mother, who reassured him that the granddaughter was safe at home, but he couldn’t be convinced and felt it necessary to send the money.  So, yes, he was scammed out of concern for his granddaughter. 

But, now we are getting these nuisance messages via text and the IRS has warned that there has been a recent increase in IRS-themed texting scams which are aimed at stealing personal and financial information.  They look like they are coming from the IRS, but are not and if you receive one, you should report them to phishing@irs.gov.  The IRS has reported that hundreds of thousands of IRS-themed messages have been delivered in a matter of a few days.

Remember that the IRS will not contact you by email or text or phone, but by USPS.  They are working hard to stop these scams, but it is a difficult task and criminals are sly.  So, beware and don’t fall for scams received by text, email or phone.  Don’t give out your personal information unless you can validate who you are providing it to. 

Report any attempts to the IRS using the following process: 

  • Create a new email to phishing@irs.gov.
  • Copy the caller ID number (or email address).
  • Paste the number (or email address) into the email.
  • Press and hold the SMS/text message and select “copy”.
  • Paste the message into the email.
  • If possible, include the exact date, time, time zone and telephone number that received the message.
  • Send the email to phishing@irs.gov.

You can also report the message to the Treasury Inspector General for Tax Administration using the IRS Impersonation Scam Reporting form, which can be found on irs.gov.  Also, all incidents should be reported to the Internet Crime Complaint Center at www.ic3.gov. 

Think football – the best offense is a good defense!

Do You Need To Amend Or Correct Your Income Tax Return?

In moving to automate the ability to electronically file more types of income taxes, the IRS has recently announced that corrections or amendments to Form 1040-NR, U.S. Nonresident Alien Income Tax Return and Forms 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico) and Forms 1040-PR, Self-Employment Tax Return – Puerto Rico can now be done electronically. 

In addition, a new electronic checkbox has been added for Forms 1040/1040-SR, 1040-NR and 1040-SS/1040-PR to indicate that a superseded return is being filed electronically. A superseded return is one that is filed after the originally filed return but submitted before the due date, including extensions.

Also, returns can be amended to change the filing status or to add a dependent who was previously claimed on another return.

Forms 1040, 1040-NR and 1040-SR can still be amended electronically for tax years 2019, 2020 and 2021 along with corrected Forms 1040-SS and Form 1040-PR for tax year 2021.

Fear not, as taxpayers still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form.

New Jersey “ANCHOR” Program

Yes, we certainly live in a world of acronyms – a recent one being ANCHOR.  So, what does it mean?

If you are a New Jersey resident, the Affordable New Jersey Communities for Homeowners and Renters a/k/a ANCHOR replaces the Homestead Rebate.  This program is different in that there is no age restrictions and can provide credits of up to $1,500 to taxpayers based upon their gross incomes. 

If you were a New Jersey resident and owned and occupied a home in New Jersey as your principal residence on October 1, 2019 on which 2019 real estate taxes were paid on that home and your NJ gross income was $250,000 or less, you are eligible.  Just as with the old Homestead Rebate program, there are certain qualifiers such as sharing your home with someone who was not your spouse/civil union partner or if you didn’t own 100 percent of your home. 

If you did not own a home on October 1, 2019, you do not qualify even if you owned your home for a part of the year.  Nor do you qualify if your residence was completely exempt from property taxes or you were enrolled in the P.I.L.O.T. (Payments in Lieu of Tax) program.  Also, you are not eligible for the benefit of a second home or for a property you owned but rented to someone else. 

If you were renting your main home on October 1, 2019, then you may qualify as a tenant eligible to receive the benefit.  Tenants can qualify for a benefit of $450 based upon their gross income. 

Applications for the ANCHOR program are being sent during September based upon the county.  There will be mailings via email as well as by USPS.  If you do not receive your application by October 15, 2022, you should call the ANCHOR hotline at 1-888-238-1233. 

Applications are due by December 30, 2022 for expected benefits to be paid by May 2023.  In the meantime, keep your eyes open for your application. 

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