July 2014 Newsletter

15 Facts about Social Security

It’s easy to take Social Security for granted when retirement is years away, but with 94% of the U.S. workforce covered by Social Security,* it’s likely that this program will play a role in your financial future, perhaps even sooner than you think. Here are some facts and statistics from the Social Security Administration that highlight why Social Security is important to so many people.

Retirement benefits
The Social Security program began in 1935 as a way to protect individuals against economic hardship. Over the years, Social Security has grown to include several other types of benefits, but Social Security is still synonymous with retirement.   Did you know that …
• Approximately 70% of Social Security benefits are paid to retirees and their dependents**
• 73% of workers elect to receive reduced benefits early, before their full retirement age*
• The average monthly retirement benefit is $1,262**
• The maximum monthly retirement benefit payable in 2014 is $2,642 for someone retiring at full retirement age***

Survivors benefits
Upon your death, your surviving spouse, ex-spouse, children, or dependent parents may be eligible to receive benefits based on your earnings record. These benefits can be a valuable source of income when your family needs it the most.  Did you know that …
• Survivors of deceased workers account for about 11% of Social Security benefits paid**
• About 96% of persons aged 20 to 49 have survivors protection for their children under 18 and for their surviving spouse who cares for those children****
• The average monthly family benefit is approximately $2,561 for a widowed mother or father and two children*

Disability benefits
Disability benefits from Social Security can help protect you and family members that rely on you for financial support in the event that due to sickness or injury you’re unable to work and earn a living.  Did you know that …
• Disabled workers and their dependents account for 19% of Social Security benefits paid**
• Approximately 90% of workers age 21 to 64 and their families are protected against long-term disability****
• The average age of a worker receiving disability benefits is 53.2**
• The average monthly benefit for a disabled worker is $1,130**

Other facts
Here are some other facts about Social Security that you may not know:
• 55% of adult Social Security beneficiaries are women**
• More than 3.4 million children under age 18 and students age 18 to 19 receive Social Security benefits**
• Social Security provides at least half of total retirement income for 74% of non-married beneficiaries age 65 or older**
All of the following source publications can be found on the Social Security Administration’s website, www.ssa.gov.
*Annual Statistical Supplement, 2013, published February 2014
**Fast Facts & Figures About Social Security, 2013, published July 2013
***Fact Sheet: 2014 Social Security Changes, published October 2013
****Social Security Basic Facts, published July 2013


Charitable Gifts of Items You No Longer Need

If you have used clothing, household goods, or a car that you no longer need, you may be able to do good by contributing the property to charity while obtaining an income tax deduction for your charitable contribution. Subject to certain limitations, the amount of your charitable contribution is usually the fair market value (the price that property would sell for on the open market) of the property at the time of the contribution.

Used clothing and household goods
You generally cannot take a deduction for donations of used clothing or household goods unless the property is in good used condition or better. However, you can take a deduction for used clothing or household goods that are not in good used condition or better if the claimed value is greater than $500 and you include a qualified appraisal with your tax return.  The value of used clothing or household goods is usually far less than what you paid for the property. A good indication of the value of used clothing is the price that a buyer would pay in used clothing stores, such as consignment or thrift stores. Used household goods may have little or no value because of their worn condition, or because they are out of style or no longer useful.

Used cars
The value of a used car can usually be determined using a used car pricing guide for a private party sale. The price listed should be for a car of the same make, model, and year, and with similar options and accessories. Adjustments may be needed for wear and tear, and mileage. However, your deduction for a donated car may be limited to the amount for which the charity then sells the car. This rule applies if the claimed value for the car is over $500 unless: (1) the charity makes a significant intervening use of or material improvement to the car before selling it; or (2) the charity gives the vehicle, or sells it for well below fair market value, to a needy individual to further the organization’s charitable purpose.  You must attach Copy B of Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, (or other statement from the charity containing the same information) to your tax return. Form 1098-C shows the gross proceeds the charity received if the charity sold the car and whether either of the two exceptions for cars valued at more than $500 applies.  If the charity sells the car for $500 or less (and neither of the two exceptions applies), your deduction is generally limited to the lesser of $500 or the car’s fair market value on the date of the contribution.

Other requirements
A receipt is generally required from the charity for all non-cash gifts. However, a receipt may not be required where it is impractical to get one (e.g., leaving clothing at a charity’s unattended drop site).  A written statement is required from the charity acknowledging all non-cash gifts above $250. The acknowledgment must generally include a description and good faith estimate of the value of any goods or services (if any) you received in return for your contribution. Your charitable contribution deduction is reduced if you receive something in return for your contribution.  An appraisal is generally needed when you donate an item or group of items of property if the claimed value is more than $5,000. You must also complete Section B of Form 8283 and attach it to your tax return. Section B of Form 8283 should be signed by both the appraiser and a responsible officer of the charity. However, you do not need an appraisal for the donation of a car if the deduction is limited to the gross proceeds of its sale by the charity.

Limits on deductions
Charitable contribution deductions are generally limited to 50% of your adjusted gross income (AGI) (or 30% or 20% of AGI depending on the type of charity and the property donated). Disallowed amounts can generally be carried over and deducted in the following five years, subject to the percentage limits in those years.  If you donate property with a fair market value that is more than your income tax basis in it (not usually a concern when donating used goods), your deduction is generally limited to your basis in the property, except for capital gain property when you use the 30% of AGI limit.  The total of your charitable contribution deductions and certain other itemized deductions is limited (but not reduced by more than 80%) if your adjusted gross income in 2014 is more than $254,200 (for single taxpayers, $305,050 for married filing jointly taxpayers).


Saving through Your Retirement Plan at Work? Don’t Let These Five Risks Derail Your Progress

As a participant in your work-sponsored retirement savings plan, you’ve made a very important commitment to yourself and your family: to prepare for your future. Congratulations! Making that commitment is an important first step in your pursuit of a successful retirement. Now it’s important to stay focused–and be aware of a few key risks that could derail your progress along the way.

1. Beginning with no end in mind
Setting out on a new journey without knowing your destination can be a welcome adventure, but when planning for retirement, it’s generally best to know where you’re going. According to the Employee Benefit Research Institute (EBRI), an independent research organization, workers who have calculated a savings goal tend to be more confident in their retirement prospects than those who have not. Unfortunately, EBRI also found that less than half of workers surveyed had actually crunched the numbers to determine their need (Source: 2013 Retirement Confidence Survey, March 2013).   Your savings goal will depend on a number of factors–your desired lifestyle, pre-retirement income, health, Social Security benefits, any traditional pension benefits you or your spouse may be entitled to, and others. By examining your personal situation both now and in the future, you can determine how much you may need to accumulate to provide the income you’ll need during retirement.  Luckily, you don’t have to do it alone. Your employer-sponsored plan likely offers tools to help you set a savings goal. In addition, a financial professional can help you further refine your target, breaking it down to answer the all-important question, “How much should I contribute each pay period?”

2. Investing too conservatively
Another key to determining how much you may need to save on a regular basis is targeting an appropriate rate of return, or how much your contribution dollars may earn on an ongoing basis.  Afraid of losing money, some retirement investors choose only the most conservative investments, hoping to preserve their hard-earned assets. However, investing too conservatively can be risky, too. If your contribution dollars do not earn enough, you may end up with a far different retirement lifestyle than you had originally planned.

3. Investing too aggressively
On the other hand, retirement investors striving for the highest possible returns might select investments that are too risky for their overall situation. Although it’s a generally accepted principle to invest at least some of your money in more aggressive investments to pursue your goals and help protect against inflation, the amount you invest should be based on a number of factors.  The best investments for your retirement savings mix are those that take into consideration your total savings goal, your time horizon (or how much time you have until retirement), and your ability to withstand changes in your account’s value. Again, your employer’s plan likely offers tools to help you choose wisely. And a financial professional can also provide an objective, third-party view.

4. Giving in to temptation
Many retirement savings plans permit plan participants to borrow from their own accounts. If you need a sizable amount of cash quickly, this option may sound appealing at first; after all, you’re typically borrowing from yourself and paying yourself back, usually with interest. However, consider these points:
• Any dollars you borrow will no longer be working for your future
• The amount of interest you’ll be required to pay yourself could potentially be less than what you might earn should you leave the money untouched
• If you leave your job for whatever reason, any unpaid balance may be treated as a taxable distribution
For these reasons, it’s best to carefully consider all of your options before choosing to borrow from your retirement savings plan.

5. Cashing out too soon
If you leave your current job or retire, you will need to make a decision about your retirement savings plan money. You may have several options, including leaving the money where it is, rolling it over into another employer-sponsored plan or an individual retirement account, or taking a cash distribution. Although receiving a potential windfall may sound appealing, you may want to think carefully before taking the cash. In addition to the fact that your retirement money will no longer be working for you, you will have to pay taxes on any pretax contributions, vested employer contributions, and earnings on both. And if you’re under age 55, you will be subject to a 10% penalty tax as well. When it’s all added up, the amount left in your pocket after Uncle Sam claims his share could be a lot less than you expected.


Are con artists adopting trendy twists on old scams?

In a word, yes. You may be great at deleting e-mails from Nigerian princes to avoid online phishing, but fraudsters keep coming up with new schemes for prying information or money from potential victims. And while scams sometimes involve hot topics that are getting a lot of attention in the news, which may make them seem legitimate, they still may be based on old-school techniques such as phone calls. If a broker contacts you about investing in high-yielding certificates of deposit, don’t provide any information or send money right away. Why? Because of reports that scammers have been posing as brokers to pitch CDs, claiming to represent a legitimate firm–perhaps even one that you already do business with. They may give you a number to call or offer to have their supervisor send you forms to help you transfer funds in an attempt to acquire data that can be used to steal either your money or identity. Even caller ID can be rigged to fake a firm’s number; check the number independently with the firm’s website or your own records and call directly to verify the caller’s identity.

Another area ripe for fraud is linked to the recent legalization of medical or recreational marijuana in some states. As with any enterprise making headlines, so-called “pump-and-dump” artists have begun touting small, thinly traded companies linked to that industry.  In many cases, they hope to inflate demand and drive up the stock price quickly–the “pump”–and then dump their vastly inflated shares at a profit, leaving their victims holding the bag(gie). Any unproven company in a relatively new industry deserves extra scrutiny of its financials, management, business plan, and other information. Don’t be rushed into a decision just because a stranger tells you the window of opportunity is closing or promises fast profits.  Finally, if you receive a phone call threatening you with jail time or the loss of your driver’s license unless you pay what you owe the IRS, don’t panic, even if they cite part of your Social Security number or you also get a call from your local police department or motor vehicles department that seems to “verify” the claim. Again, your first step should be to contact the IRS,
police, or motor vehicles department on your own, using a phone number you obtained yourself rather than one provided by a caller.


How do I figure the tax on the sale of my home?

In general, when you sell your home any amount you receive over your cost basis (what you paid for the home, plus capital improvements, plus the costs of selling the home) is subject to capital gains taxes. However, if you owned and used the home as your principal residence for a total of two out of the five years before the sale (the two years do not have to be consecutive), you may be able to exclude from federal income tax up to $250,000 (up to $500,000 if you’re
married and file a joint return) of the capital gain when you sell your home. You can use this exclusion only once every two years, and the exclusion does not apply to vacation homes and pure investment properties.  For example, Mr. and Mrs. Jones bought a home 20 years ago for $80,000. They’ve used it as their principal home ever since. This year, they sell the house for $765,000, realizing a capital gain of $613,000 ($765,000 selling price minus a $42,000 broker’s fee, minus the original $80,000 purchase price, minus $30,000 worth of capital improvements they’ve made over the years). The Joneses, who file jointly, and are in the 28% marginal tax bracket, can exclude $500,000 of capital gain realized on the sale of their home. Thus, their tax on the sale is only $16,950 ($613,000 gain minus the $500,000 exemption multiplied by the 15% long-term capital gains tax rate).

What if you don’t meet the two-out-of-five-years requirement? Or you used the capital gain exclusion within the past two years for a different principal residence? You may still qualify for a partial exemption, assuming that your home sale was due to a change in place of employment, health reasons, or certain other unforeseen circumstances.  Special rules may apply in the following cases:
• You sell vacant land adjacent to your residence
• Your residence is owned by a trust
• Your residence contained a home office or was otherwise used for business purposes
• You rented part of your residence to tenants
• You owned your residence jointly with an unmarried taxpayer
• You sell your residence within two years of your spouse’s death
• You’re a member of the uniformed services


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