Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Jun 23

    Question: Like many students, I am looking forward to some time off from school and perhaps a summer job. What are the most important things I should know before I get that first job?

    Answer: Here are seven of the most important tips I could think of:

    1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct; visit the Withholding Calculator on IRS.gov. If you don’t expect to owe taxes, then you can choose to write “exempt” on the W-4 and not have any taxes withheld.
    2. Whether you are working as a waiter or a camp counselor, you may receive tips as a part of your summer income. All tip income you receive is taxable income and therefore subject to income tax.
    3. Many students do odd jobs over the summer to make extra cash. Earnings you receive from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
    4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for Social Security benefits. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security and Medicare taxes withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
    5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
    6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as a self-employed for federal tax purposes if you meet the following conditions:
      – You are in the business of delivering newspapers; – All your pay for these services directly relates to sales rather than to the number of hours worked; You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.
    7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

    Do you have a question for the Taxpert that you’d like to see answered in a future Taxing Times? Or perhaps just an issue you’d like the Taxpert to address? Send the Taxpert a note to Taxing Times, 1050 Hillcrest Rd., Ste A, Mobile, AL 36695 or an email to taxpert@CPAMobileAL.com.

  • 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.♦

  • Mar 17

    Inevitably, the question I get asked when I work with people dealing with severe IRS problems is “Can you keep me out of jail?” It’s one of the big fears about finally facing up to and doing something about the problem.

    Not filing your tax returns IS considered a crime. You CAN go to jail if you have not filed your tax returns OR if you’ve filed them inaccurately. You can receive one year of prison time for each year of unfiled returns and procrastinating just increases the chances of going to jail.

    The IRS doesn’t take kindly to non-filers they have to chase down. And believe me, they will eventually chase you down. Just because it’s been a few years since you’ve filed and nothing has happened, doesn’t mean you’ve slipped through the cracks. People rarely slip through the cracks. Why go through life looking over your shoulder wondering when the other shoe is going to drop, when the IRS is finally going to catch up with you and demand their money? Life’s too short to live that way.

    Even if it’s been years since you filed returns, you can still avoid prison. The more willing you are to face up to your situation and seek a solution, the more likely the IRS is to work with you. The IRS doesn’t seek to put anyone in jail that voluntarily comes forward and files old returns.

    Owing the IRS money IS NOT considered a crime. The IRS cannot send you to jail for owing money, if you’ve accurately filed your tax returns. But, don’t pop the bubbly just yet. Although jail time is arguably the worst thing that can happen, it’s not the only punishment that the IRS can deliver. By not facing your IRS debt and taking action, you could be staring into the ugly eyes of…

    • wage garnishments;
    • seizure of your car, house, or boat;
    • seizure of your bank account;
    • seizure of other real estate;
    • seizure of your Social Security benefits, 401(k)s, and IRAs;
    • seizure of cash loan value of your life insurance; and
    • seizure of commissions owed to you.

    If you have filed your tax returns accurately but can’t afford to pay the taxes owed, there are ways to pay your debt and avoid those nasty consequences listed above. But, it’s a bad idea to go it alone. Walking into an IRS office and trying to work out a deal is a recipe for disaster. It’s too easy for them to get you to say something you’ll regret later. Seek out a qualified professional you can trust.

  • Apr 15

    The theft of your identity, especially personal information such as your name, Social Security number, address and children’s names, can be traumatic and frustrating. In this online era, it’s important to always be on guard.

    The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.

    Here are seven steps you can make part of your routine to protect your tax and financial information:

    1. Read your credit card and banking statements carefully and often– watch for even the smallest charge that appears suspicious. (Neither your credit card, nor bank– or the IRS—will send you emails asking for sensitive personal and financial information; such as asking you to update your account.)
    2. Review and respond to all notices and correspondence from the Internal Revenue Service. Warning signs of tax-related identity theft can include IRS notices about tax returns you did not file, income you did not receive, or employers you’ve never heard of or where you’ve never worked.
    3. Review each of your three credit reports at least once a year. Visit www.annualcreditreport.com to get your free reports.
    4. Review your annual Social Security income statement for excessive income reported. You can sign up for an electronic account at www.SSA.gov.
    5. Read your health insurance statements; look for claims you never filed or care you never received.
    6. Shred any documents with personal and financial information. Never toss documents with your personally identifiable information, especially your Social Security number, in the trash.
    7. If you receive any routine federal deposit such as Social Security Administration or Department of Veterans Affairs benefits, you probably receive those deposits electronically. You can use the same direct deposit process for your federal and state tax refund. IRS direct deposit is safe and secure and places your tax refund directly into the financial account of your choice.
  • 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.

  • 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.

  • Jul 25

    One of the most important – and troublesome – decisions you’ll have to make as you move toward retirement is when to claim your social security benefits. For a program that’s been around for more than three-quarters of a century, you’d think the answer would be available right at our fingertips. Not so. Many retirees leave tens of thousands of dollars on the table by claiming their benefits too soon or by not coordinating their benefits with their spouse.

    Retirees cannot rely on conventional wisdom! Simplistic rules such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

    The decision is extremely crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as widowers and the poverty rate for elderly single women is 23% compared to just 5% for retired couples.

    Full retirement age is the age at which a person may first become eligible for full Social Security benefits. That’s 66 for people born between 1943 and 1954, then creeping up to age 67 for those born later than 1959.

     

    Determining Full Retirement Age
    Year of Birth* Full Retirement Age (FRA)
    1943 – 1954 66
    1955 66 and 2 months
    1956 66 and 4 months
    1957 66 and 6 months
    1958 66 and 8 months
    1959 66 and 10 months
    1960 and later 67
    *If you were born on January 1st of any year you should refer to the previous year.
    Source: ssa.gov/retire2/retirechart.htm

     

    You can claim as early as 62, but your benefit will be slashed by 25 percent if your full retirement age is 66. In contrast, your benefits escalate by 8 percent for every year you postpone taking your benefits between 66 and 70.

    It’s a relatively easy case to make for delaying your Social Security benefits until 70. If you choose to work past the normal retirement age and delay receiving benefits while working, the benefits paid later will be higher based on three factors: (a) the additional years of earnings, hopefully replacing lower earnings during the 35-year calculation period; (b) increases in the indexing amounts used to calculate the primary insurance amount (PIA), and (c) the delayed retirement credit.

    Originally, your monthly benefits were adjusted so that you would receive the same amount in total lifetime benefits no matter whether you chose to begin receiving benefits at age 62, full retirement age, age 70, or any age in between. But, things change and it doesn’t really work that way anymore.

    Let’s say your normal retirement age is 66 and your monthly Social Security benefits starting at that age will be $2,000. If you choose to begin benefits at age 62, your monthly benefit will be reduced by 25 percent to $1,500.

    If you postpone your benefits until age 70, the delayed retirement credit would increase your monthly benefits to $2,640. Your benefit amount will be 32 percent more (4 years times 8%) than what you would have received at 66.

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    Is it better to begin receiving Social Security benefits early since it’s “free money” or is it better to delay as long as possible and receive a larger benefit for a shorter period of time. It depends on a number of factors such as your health, family longevity, ability or desire to work in retirement, current cash needs, other sources of income, and of course, the amount of your benefits.

    Unfortunately, studies suggest that those who take early retirement benefits out of financial necessity continue to struggle and often find themselves in tougher times as they struggle to live on their permanently reduced benefits.

    It is clear, however, that those claiming benefits early may be leaving tens of thousands of dollars on the table.

  • Jun 13

    What’s the proper place for Social Security in a retirement plan? Aside from what I am writing about below, Social Security cannot be passed to heirs (notwithstanding spousal death benefits).

    That’s one disadvantage, but it’s not the only one…

    Imagine a man named Bill Fredericks, born in 1948, who is celebrating his 66th birthday today by filing to collect Social Security at full retirement age. Bill’s final salary was $50,000 per year, although when he started working in 1968 he was only earning $7,304 annually.

    For the past 46 years Bill has had Social Security withheld from his paycheck. When he first started, the total Social Security tax was only 7.6%, which for Bill was $46.26 of his $609 monthly paycheck. On his last pay stub, the government collected 12.4%, or $516.67 of his $4,167 monthly salary.

    Because Bill was not subject to the current 12.4% tax during his entire working career, his Social Security benefit will receive a more generous return than any of today’s young people will receive.

    Social Security tax is split into an employee portion and an employer portion. But practically speaking for the employer, both portions are just additional costs of hiring the employee. Some say neither gross nor net wages would change if technically the employee or the employer were paying the entire amount.

    Bill’s lifetime Social Security taxes totaled $152,068. In today’s dollars, it means Bill paid $260,163 to Social Security. This qualifies Bill to receive $24,180 a year, just under half of his former salary. When he dies, only if Bill has a surviving spouse whose earning record was smaller than his, will this benefit survive him.

    Many have said that Social Security is a perfectly suitable option for a real retirement account. But the real way to test is what would have happened had Bill been allowed to keep his Social Security benefit and invest it in a private IRA account.

    I got some help and computed this hypothetical return in an age-appropriate portfolio between the S&P 500 Stock Index and the US Aggregate Bond Index. With only a monthly contribution of his Social Security taxes, by age 66, Bill’s portfolio would have grown to $1,431,487.

    With a safe withdrawal rate at age 66 of 4.43%, this IRA would give Bill an income of $63,415 per year rising with inflation. On average this withdrawal rate would be sustainable until Bill’s 101st birthday. But at his average life expectancy at age 84, he would leave an estate that would still be over a million dollars in today’s dollars.

    Social Security offers Bill only $24,180 a year, half of his former salary. In contrast, (according to my simple math) his IRA account would allow him to retire with $1.4 million, and a 27% raise, as well as leaving a legacy for his heirs. (Mild disclaimer here — these are based on average returns, and it does not constitute a “guarantee”.)

    According to my calculations, it seems pretty clear that workers under age 60 should tilt heavily toward stock investments. Even if Bill had blindly invested in 40% bonds, his portfolio would still have grown to $1,186,472 — a yearly income of $52,561, rising with inflation.

    Social Security should be seen as an option of last resort for today’s workers. The unfortunate fact is that every 46-year investment horizon since Social Security was made law would have produced better returns had the withdrawals been invested privately. Even the Social Security withdrawals of average workers would produce millionaires if they were allowed to be saved and invested in private accounts.

    That’s why I recommend my clients and their friends to view Social Security as a tax, and not as a savings or retirement account. That way, we are able to not rely on it solely for our future lifestyle options, and can receive whatever benefit might remain in the future as a “bonus”.

    Even if peeling off a few hundred dollars per month (hopefully more!) might seem like a stretch at this point in your career, it is worth it to ensure that you don’t have to subsist under a massive pay cut after your prime working years have completed.

    The best part is that your future self will thank you!

  • Sep 20

    “Without risk, faith is an impossibility.” -Søren Kierkegaard

    School is back in session and summer is unofficially over (I know —  big relief for many parents and others out there!). It all happens so … fast.

    And so does moving towards retirement.

    And I know for a fact that many people both among our current client base, and outside of it, are worried about it. It’s almost a cliché these days, to be honest, among those of us professionals in the tax and financial world.

    And while some tax professionals lie awake thinking about their own retirement accounts, we spend our time worrying about our clients’.

    Because, to be honest, the national numbers aren’t good.

    Forty-two percent of those surveyed in a recent Bloomberg national poll said that they need to increase their retirement savings this year, but can’t afford to do so. A subsequent National Institute on Retirement Security (NIRS) poll produced similar results. NIRS found that those near retirement have only $12,000 in total individual retirement account and defined contribution plan balances.

    For younger workers, the news is worse. Their median retirement accounts balance was just $3,000. Overall, according to the NIRS survey, the retirement savings gap for working-age households is $14 trillion.

    Whoa! That’s a lot of old folks who’ll be eating cat food. And that’s not to make light of it. But these numbers are shocking, are they not?

    Knowing how much you should save for retirement is critical. But what if you are late getting started? The longer you delay, the shorter the time that compound interest can do its magic on your savings.

    We typically recommend that you save 15% of your take-home pay each year. Money in the bank isn’t compounding. So invest the money in an age-appropriate portfolio and reevaluate regularly. Make sure your investment choices have low fees and expenses. Assuming you start at age 25, you should have sufficient assets to retire at age 65 after 40 years.

    Retirement planning is like the pioneers who set forth on the Oregon Trail. The hardy souls who began their journey in early spring had to average 15 miles a day to reach their goal. But those who delayed until summer needed to maintain a faster pace. The same is true of saving for retirement.

    Beginning at age 25 and retiring at 65, the appropriate savings rate is 15.4%. But starting just five years earlier, you could reach the same goal by saving just 11.1% each year. Because starting early is more important than saving more.

    If you start at age 20, you will have saved nearly an entire year’s salary by the time the couple delaying is putting in their first 15%. In fact, the family starting earlier will be ahead of the family starting later all the way up until age 65. This is true even though they will be saving 5.3% less of their salary each year.

    Deferred consumption is the definition of capital. When a family defers consuming and saves and invests instead, they put that capital to work. Having more money invested early means their investments are making money and adding to their savings, which reduces the amount they need to add. Money makes money.

    Late April or early May was the best time of year to begin the arduous trek to the West. If you waited too long, you would have to push farther each day or risk getting trapped in the mountains by an early snowstorm.

    The same is true of retirement planning. The later you start in life, the higher the percentage of your lifestyle you must save. Starting at age 25 you should save 15.4% of your lifestyle each year to reach financial independence by age 65. For every year you delay, add about 1% in your 20s and 2% in your 30s.

    Starting at age 30, we suggest you save 21.4% each year. By age 35 it rises to 30.1%. And at age 40 it is 43.2%. Saving half your salary is difficult at any age. Lowering your standard of living to begin saving at age 40 is even more challenging.

    By age 45 the percentage rises to 64.2%, and at age 50, you must save 100% of your lifestyle to reach retirement at age 65.

    Saving 100% of your lifestyle sounds impossible, but it is not. If you earn $100,000 after taxes, you must limit your lifestyle to $50,000 and save the remainder. This strategy will allow you to retire at age 65 with a lifestyle of $50,000.

    Changing your lifestyle by spending less and saving more is always the fastest way to catch up from a slow start. Most important, it reduces the amount you must save to reach financial independence. Lowering your lifestyle is like traveling twice as fast and cutting half the distance you need to reach your destination.

    Social Security can also provide a larger percentage of your retirement. If you are willing to retire on an average monthly income of $1,230, you probably don’t need to save at all. But that certainly is not what any financial planner would recommend.

    So start early, and enjoy a more leisurely trip. But if you have delayed, don’t give up. Make a commitment to adjust your lifestyle as needed.

    And lastly — do let us know if we can help you. It’s what we’re here for.