Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Oct 13

    As we transition from our income earning years to our retirement years we begin to realize that each period has a different set of tax pitfalls. Here are 5 of the most common. Each of which can be avoided with a little planning.

    Missing the tax impact on Social Security
    A portion of your Social Security benefits may be taxable. The formulas are complicated (see example later), but in general terms, if your “Modified Adjusted Gross Income” (MAGI) exceeds $25,000 ($32,000 for joint filers) then it’s likely 15% of your Social Security benefits will be taxable at your ordinary income rates. If your “provisional income” exceeds $34,000 ($44,000 for joint filers) then up to 85% of your benefits could be taxable. Receiving income such as retirement benefits or IRA distributions which cause your income to jump from one level to the next can have a severe impact. You’ll pay income tax on the distribution, plus you’ll increase the portion of Social Security benefits which are taxable, sometimes doubling the tax burden.

    Missing the difference between growth, income, and cash flow
    Growth is what you need your portfolio to do in order to have enough money to last your entire retirement. Income is what you will have to pay taxes on, and cash flow is the after tax cash you have to spend on your needs and desires. The goal is to have sufficient cash flow to live your life like you want while paying the least amount of tax possible, and, at the same time, leaving enough in your portfolio for it to continue to grow at a rate that keeps up with, or exceeds, inflation.

    Missing a required minimum distribution
    Failure to take a required minimum distribution could subject you to penalties as high as 50 percent of the missed distribution. You must take required minimum distributions from any qualified plan or traditional IRA once you reach age 70 ½, and every year thereafter. Don’t rely on your bank, or broker, or anybody else to remind you about this. They will not pay the penalty for you! Roth IRAs are exempt from this requirement.

    Missing beneficiaries on qualified accounts
    Without a named beneficiary, the money in a qualified account reverts to your estate. The name, or names, listed on the account supersedes anything named in your will or trust, so it’s also a good idea to name a successor beneficiary.

    Missing the right beneficiaries
    It is generally best to name individuals as beneficiaries instead of your estate or a trust. You also want to avoid multiple beneficiaries with wide age differences. The minimum distribution will be determined using the “life span” of the oldest beneficiary. To avoid this pitfall, consider dividing your IRAs into separate accounts, each with a different beneficiary.

    For those two of you who are interested, here’s the example I promised:
    John and Jane Smith have an adjusted gross income of $44,000 for 2016. John receives Social Security benefits of $7,200 per year and together they receive $6,000 a year in interest from tax-exempt municipal bonds. On their joint return, the couple would make the following calculations:

  • Sep 29

    Claiming Your Homestead Exemption Can Save You Thousands

    Sometimes you rock along from year-to-year doing the same ole thing because it’s what worked in the past… or someone once told you that’s the way things were. Well, things change. Every day. If you’re over 65, or disabled, and are still paying the property taxes you were paying before that milestone, you may be paying too much.

    According to information obtained from the Mobile County (AL) Revenue Commissioner’s office, all property owners 65 or older are eligible for an exemption from all State property taxes. County, School, and Municipal taxes still apply. The exemptions apply even if only one of the owners of a jointly owned property meet the qualifications.

    To apply for this exemption:

    • You must be 65 years old,
    • Own and occupy the property as your primary residence, and
    • You must visit one of the Revenue Commissioner’s offices to present proof of age and sign an assessment sheet.

    Low income property owners 65 and older may also be eligible
    to claim exemption from a certain portion of the County, School,
    and Municipal property taxes. To qualify you must be 65 years
    old, own and occupy the property as your primary residence,
    and your taxable income must not exceed $12,000 – bring your
    tax return as proof.

    If either you or your spouse is totally and permanently disabled or legally blind, you may be eligible for a complete exemption from all property taxes on your residence regardless of your age or income.

    Homestead exemptions granted on the basis of income or disability must be renewed each year and it is the responsibility of the property owner to claim the renewal. If you do not receive an exemption renewal form by mail, you will need to contact the County Revenue Commissioner to have a duplicate form sent to you, or you may visit an office in person.

    Exemptions cannot be granted retroactively or after the December 31 deadline.

    For more information, contact our office or your local County Revenue Commissioner.

  • Jul 21

    Many Americans appear to be living one big expense away from disaster. A 2014 Federal Reserve poll discovered the startling fact that almost half of all U.S. households could not come up with $400 to cover an emergency expense. They would need to sell something, or borrow cash, to do so.

    If you find yourself belonging to that category, then I have some ideas (11 of them, in fact) I think will help. In my experience, if you want to get out of a hole, you study the behavior of those who have already made it out. And you do everything you can to copy that behavior.

    Yes, some people have been fortunate enough to inherit wealth, etc. But many, MANY more of those who have wealth came about it in a different way.

    Now, so that YOU do not find yourself in the unfortunate place of not being able to scrape up $400 in an emergency … read this now.

    Becoming a household that will be able to ride through instability and uncertainty is only going to become MORE important in future years, not less. So, that being the case, here is a portrait of those who are able to achieve this status.

    You’ll notice that these are just as significantly about your mindset as you relate to your finances, as about your behaviors.

    Here’s what the Financially Secure look like …

    1) He always spends less than he earns. In fact, his mantra is that over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

    2) She knows that patience is truth. The odds are you won’t become a millionaire overnight. If you’re like her, your security will be accumulated gradually by diligently saving your money over multiple decades.

    3) He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

    4) She realized early on that money does not buy happiness. If you’re looking for financial joy, you need to focus on attaining financial freedom.

    5) He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

    6) She’s a big believer in paying yourself first. It’s an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

    7) She also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply “declare” to the universe that you want to be financially free. This is not a “Secret”.

    8) When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

    9) He realizes that stuff happens, and that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner, and can be triggered from multiple sources: the death of the family’s key breadwinner, divorce, or disability that leads to a loss of work.

    10) She understands that time is an ally of the young. She was fortunate (and smart) enough to begin saving in her twenties, so she could take maximum advantage of the power of compounding interest on her nest egg.

    11) He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four. Little about external “signals” of wealth actually matter to him.

    And a little bonus, if you will: She doesn’t pay taxes which could have been avoided with a simple phone call to her tax professional. She plans ahead, before tax time.

    “You cannot control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you.” – Brian Tracy

  • Apr 14

    When was the last time you reviewed your will? People generally make wills to guarantee the proper disposition of their money and property, which is why it’s a good idea to consult your CPA when it’s time to create or update your will.

    We recommend that you revisit your will every time you experience a major life event, such as marriage, the birth of a child, retirement, or other significant milestones. Even if there is no meaningful change in your life, it’s smart to review the document every couple of years to ensure it still addresses all your estate concerns and reflects your wishes. Changes in the value of your investments – such as stock portfolio or real estate – may also require adjustments in your estate plan.

    Reviewing your will may raise questions about various areas of your financial life, including your retirement or estate planning, college savings, or other financial concerns. Be sure to turn to us for the perspective and advice you need to make the best choices.♦

  • Jan 6

    A thoughtful estate plan can make your heirs lives easier. But it is your parents’ estate planning that will make your life easier.

    Not every family has fostered the ability to speak openly in love. But if you have begun that process, here is an outline of what grown children need to know about their parents’ business. In fact, adults of any age should update their estate plan every year.

    And, as a parent, if you are willing to share some of this information with your children—especially if one of them is also the executor of the estate— they’ll appreciate having the facts and be more prepared emotionally when the time comes. They will know your wishes ultimately anyway, and good communication will lessen any surprises ahead of time. They will benefit from knowing the answers to the following questions:

    Do you have enough saved for a comfortable retirement? Many financial planners use a safe withdrawal rate by age to make sure the clients will still have enough money toward the end of their retirement. But, this isn’t always the case, and is worth looking into. If your spending is under this withdrawal rate, you have more than enough and probably can leave a legacy to your heirs. But, if you are over this rate, you may run out of money and have to compromise your standard of living abruptly. It may be uncomfortable, even embarrassing, for parents to share their finances with their children, but grown children often want to know how their parents are doing.

    Where are the important documents? The five documents your children should be able to retrieve quickly are: a will; a living will; a power of attorney; a directory of basic information; and the latest end-of-year financial statements.

    The directory of information should list the assets of your estate, along with the account or policy numbers and contact phone numbers. It also helps to indicate your intentions for the distribution of each asset, which will help confirm you have the correct titling and beneficiary designations on every portion of your estate.

    You may have structured your will to divide your estate equally among your children. But, if you have tried to make it easy for one child to access your bank accounts by adding his or her name, you have overridden your estate plan and left that child joint tenancy with complete rights of survivorship. This can be a problem.

    Titling and beneficiary designations are legal estate planning actions. It’s best to review them with your legal advisor. Various types of assets are best designated differently in the estate plan. This is not the occasion for do-it-yourself thrift. It is a rare family that has compiled and reviewed a complete list of estate assets: bank accounts, investment accounts, retirement accounts, real estate holding, life insurance, health savings accounts, and so on.

    Are there any special bequeaths? Any promises you have made should be documented. Your good intentions won’t matter if you aren’t around to implement them. If you have promised money to a charity, and want that obligation kept, document it. If you have promised to loan a child money, document it. If you have promised to help fund your grandchildren’s college education, document it. Without documentation, none of these promises can be kept if you aren’t around to make the decisions.

    Are there plans to remarry? If parents have remarried, intergenerational estate planning is even more critical. Prenuptial agreements and careful estate planning are required in the case of second marriages, to avoid disinherited children or grandchildren from the first marriage. The default is rarely a good option.

    Do you have any prepaid funeral arrangements? Do you want to be buried or cremated? Do you have any preferences for a memorial service? Although it may seem macabre to plan your own funeral, a memorial service takes time and thought. It will be that much more special and comforting to your family when it is filled with your favorite music and readings. Encourage your children’s interest in your estate planning. Most of the time, their intentions are honorable. They may simply want to understand your values and therefore your wishes.

  • Mar 18

    “When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.” – Chinese Proverb

    Retirement used to mean not only a complete withdrawal from the workforce, but often a retreat from life. Even the word “retire” has the connotations of shuffling quietly off to bed.

    We call that traditional concept a “cliff retirement” because it is so abrupt. One day you are working full-time, and the next you are playing full-time (or slumped in your chair watching TV feeling unwanted and over the hill).

    We all need meaning and significance in our lives. And close social relations are an intrinsic part of our humanness. For many people, work provides meaning, significance and social relationships.

    Try this retirement planning exercise. Draw a large circle and write the names of 10 people inside the circle to whom you are genuinely close. Don’t include any relatives. To a certain extent, they have to love us, and although our connections with our families can be very nurturing, it is often friends who really help to validate us and widen our horizons.

    Now cross out any of the 10 names you know through your work, which might eliminate half or more of the people you listed. Thus a cliff retirement can devastate not only your meaning and purpose, but your social network as well. Retirees who no longer work at all say their close friends dwindle to an average of about nine people.

    As a result of their isolation, people who opt for a cliff retirement often deteriorate quickly and die relatively young. Financial planning is easy when you die young, but we don’t recommend it.

    Here are some suggestions to consider as you approach what is traditionally considered retirement age.

    Consider postponing retirement. Delaying retirement until age 70 increases your Social Security benefits and also shortens the time you will be withdrawing from your portfolio. It gives you additional years to save and your portfolio more time to grow. By delaying retirement from age 65 to 70, you may have more than a 50% higher standard of living when you do stop working.

    Or instead of taking a cliff retirement, think about retiring gradually. Move from full-time to 30 hours a week, and then to half-time. With this less hasty transition you can maintain contact with the people and purposes that give your life meaning, and also have the time to develop goals and a network of relationships for your later years.
    Envision your final years not as retirement, but as financial independence. Now that you don’t need to work exclusively for money, make a list of activities where you would like to focus your energies and use your skills and experience.

    Consider developing a health and fitness routine. If work kept your mind and body engaged, you will need to replace that activity with other pursuits. Again, going part-time allows you the luxury of processing the transition and adjusting to a new lifestyle.

    Challenge and reexamine those stereotyped and overly rigid assumptions about retirement. A book on the subject I highly recommend is Retire Inspired by Chris Hogan. One of Chris’ impactful messages is that retirement is not an age, it’s a number. “It’s an amount you need to live the life in retirement that you’ve always dreamed of.” The book is a $24.99 value, but, because I’m on Dave Ramsey’s tax and accounting team, I was able to purchase a few copies at a huge discount. For the first 15 people who ask, I’ll give you a copy. Not an eBook, but a genuine, off the presses hardback copy. Call the office, send me an email or just drop by, but when they’re gone, they’re gone.

     

    Of course crunching the financial numbers is critical as you begin to contemplate retirement, or any kind of financial or tax planning. But your personal calling, support network, and health and well-being are just as important. In the end, a holistic approach to your life is always the best starting place.

  • Dec 11

    Congress just changed the Social Security benefit rules. On October 30, Capitol Hill lawmakers approved a two-year federal budget deal. As part of that agreement, they authorized the most significant change to Social Security policy seen in this century, disallowing two popular strategies people have used to try and maximize retirement benefits.

    The file-and-suspend claiming strategy will soon be eliminated for married couples. It will be phased out within six months after the budget bill is signed into law by President Obama. The restricted application claiming tactic that has been so useful for divorcees will also sunset.

    This is aggravating news for people who have structured their retirement plans – and the very timing of their retirements – around these strategies.

    Until the phase-out period ends, couples can still file-and-suspend. The bottom line here is simply stated: if you have reached full retirement age (FRA) or will reach FRA in the next six months, your chance to file-and-suspend for full spousal benefits disappears in Spring of 2016.

    Spouses and children who currently get Social Security benefits based on the work record of a husband, wife, or parent who filed-and-suspended will still be able to receive those benefits.

    How exactly did the new federal budget deal get rid of these two claiming strategies? It made substantial revisions to Social Security’s rulebook.

    One, “deemed filing” will only be allowed after an individual’s full retirement age. Previously, it only applied before a person reached FRA. That effectively removes the restricted application claiming strategy, in which an individual could file for spousal benefits only at FRA while their own retirement benefit kept increasing.

    The restricted application claiming strategy will not disappear for everyone, however, because the language of the budget bill allows some seniors grandfather rights. Individuals who will be 62 or older as of December 31, 2015 will still have the option to file a restricted application for spousal benefits when they reach full retirement age (FRA) during the next four years.

    Widows and widowers can breathe a sigh of relief here, because deemed filing has no bearing on Social Security survivor benefits. A widowed person may still file a restricted application for survivor benefits while their own benefit accumulates delayed retirement credits.

    Two, the file-and-suspend option will soon only apply for individuals. A person will still be allowed to file for Social Security benefits and voluntarily suspend them to amass delayed retirement credits until age 70. This was actually the original definition of file-and-suspend.

    Married couples commonly use the file-and-suspend approach like so: the higher-earning spouse files for Social Security benefits at FRA, then suspends them, allowing the lower-earning spouse to take spousal benefits at his or her FRA while the higher-earning spouse stays in the workforce until 70. When the higher-earning spouse turns 70, he/she claims Social Security benefits made larger by delayed retirement credits while the other spouse trades spousal benefits for his/her own retirement benefits.

    No more. The new law says that beginning six months from now, no one may receive benefits based on anyone else’s work history while their own benefits are suspended. In addition, no one may “unsuspend” their suspended Social Security benefits to get a lump sum payment.

    To some lawmakers, file-and-suspend amounted to exploiting a loophole. Retirees disagreed, and a kind of cottage industry evolved around the strategy with articles, books, and seminars showing seniors how to generate larger retirement benefits. It was too good to last, perhaps. The White House has wanted to end the file-and-suspend option since 2014, when even Alicia Munnell, the director of the Center for Retirement Research at Boston College, wrote that “eliminating this option is an easy call … when to claim Social Security shouldn’t be a question of gamesmanship for those with the resources to figure out clever claiming strategies.”

    Gamesmanship or not, the employment of those strategies could make a significant financial difference for spouses. Lawrence Kotlikoff, the economist and PBS NewsHour columnist who has been a huge advocate of file-and-suspend, estimates that their absence could cause a middle-class retired couple to leave as much as $70,000 in Social Security income on the table.

    What should you do now? If you have been counting on using file-and-suspend or a restricted application strategy, it is time to review and maybe even reassess your retirement plan. Talk with a financial professional to discern how this affects your retirement planning picture.

  • Nov 30

    It’s likely you’ve been bombarded with investment advice from every direction. Whether it’s “financial experts” from the media or on a commercial, it seems everyone is offering an opinion regarding your financial future. Regardless of these “expert” opinions, as your advisor I understand your unique financial situation, and can offer a recommendation that will truly benefit you.

    First things first. In order to avoid some of the bumps and pot holes along the way, let me lead you through a conversation to zero in on your unique needs. This will allow me to create an investment strategy designed to meet those specific areas, rather than sifting through the latest trends and investment hype. I can achieve this level of personalization by considering your:

     

    • Investment goals
    • Comfort level
    • Expectations
    • Tax implications
    • Risk analysis
    • Income needs
    • Family dynamics
    • Time horizon

     

    Leveling the Investment Playing Field

    Providing a sound wealth management roadmap begins with understanding your cash flow. It’s impossible to make any sound investment recommendations without having a clear picture of how your money is being spent. While cash flow is a critical component to any plan, there’s also another telling indicator to review – debt. Gaining a pulse on how you managed debt will help me devise a plan that factors in your credit history and overall financial decision-making preferences.

    By evaluating how you spend your money each month, I may be able to identify opportunities for improving your cash flow. This may include simple tax strategies and debt management solutions such as refining, debt consolidation, or changing tax withholdings. You may discover there’s more money to invest toward your financial goals than you originally thought.

    Establishing a Comprehensive Plan

    One thing is for sure – life is filled with a series of unexpected events. That’s why it’s important to help you consider potential risks when devising a financial plan. Even the most well-intentioned plans can crumble in a second when faced with a sudden death, disability, or long-term care need. Part of providing you with a comprehensive plan means knowing the possibilities that could threaten your financial future.

    Learning more about your situation enables me to identify potential risks and establish plans that will meet your needs now, and into the future. While you may believe your current insurance policy will provide ample security, it may not be enough. By taking a closer look, I will be able to provide you with insights as to whether your current plan is appropriate or needs modifications. This approach will be invaluable in protecting your most important asset – your family.

  • Aug 7

    Taxpayers born before July 1, 1945 must generally receive payments from the individual retirement arrangements (IRAs) and workplace retirement plans by December 31.

    Known as required minimum distributions (RMDs), these payments must normally be received by the end of the year. However, there is a special rule which allows first-year recipients, those who reached 70 ½ during 2015 to wait until April 1, 2016 to receive their first RMD. Meaning, if you were born after June 30, 1944 and before July 1, 1945, you are eligible for this special rule which allows you to defer your first payment.

    Note: If you defer your first payment until 2016, you will still be required to take your 2016 RMD in 2016, so you will receive two payments in one year.

    The required distribution rules apply to traditional IRAs, but not Roth IRAs. They also apply to various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

    The RMD for 2015 is based on the taxpayer’s life expectancy on December 31, 2015, and their account balance on December 31, 2014.

  • Apr 3

    Does that tax refund burn a hole in your pocket every year? Is it spent before you ever get it? The average tax refund for the American family is a little less than $3,000. However, consumer behavior studies show that tax refunds could be contributing to your bad finances.

    Studies have shown that people spend money at the rate in which they earn it; therefore tax refunds are usually spent at a faster rate.

    Many people use these refunds for desired wants, car repairs, vacations, and so on. I know I’m guilty of falling into the urge of the splurge and spending my refund before giving it some serious thought. After spending the refund on that luxury vacation or the newest electronic, you sit back and a week later, reality sets in…

    You’re back at work or the newness of your latest electronic device has worn off. Or you increase your debt by purchasing that beloved item because you just can’t wait. However, when your refund comes you can’t pay off the debt because now you “have” to use that money on something else. I have three better ways to use your refund:

    • Pay down debt. Just think of all the money you could possibly save if it wasn’t going to those unnecessary high interest rate fees. Being debt free is a much better feeling than anything you could possibly get from that splurge.
    • People are starting to live longer these days, so what’s a better way to invest your refund than to put it into an individual retirement account (IRA)? I came across this wonderful example on MSN Money that illustrates the possible savings and return on investment:
      • “Putting that amount aside in an IRA would give you an immediate deduction that could reclaim as much as $1,000 in tax savings—and you still would have your original $3,000. If you put it into a dividend fund or other investment that pays just 5%, you will have a total of $6,000 in 14 years and $12,000 in just under 30 years.”
    • The last way to better use your refund money is to fund your emergency savings account. The future is always unknown, so an emergency savings fund is a grand way to utilize your tax refund. Experts suggest that you have enough in your emergency savings account to pay six months worth of expenses.

    Let’s be different from all the consumer behavioral studies and think before we randomly spend our tax refunds. Let’s reflect on the value of our money and put it to better use than the urge to spend it as soon as we get it.

    Now, I know that many of your friends, neighbors and even your families might poo-poo these suggestions, but, as Dave Ramsey says, “If you will live like no one else, later you can live like no one else.”