Social Security a Federal Benefit?

There has been an email floating around urging the recipients to forward it to their friends, disputing that Social Security is a "Federal Benefit Payment", see below.

While it's probably politically incorrect to disagree with that allegation since most people do believe they are just receiving what they have already paid into the system when they retire, unfortunately, that is simply not true.

Today, most new Social Security recipients receive their full benefit when they reach age 66.  The average life expectancy in the U.S. today is 78.5 (see http://www.cdc.gov/nchs/fastats/lifexpec.htm).  So on average, a recipient receives 12.5 years of full benefit.

Let's just accept, for now, the example given in the email, an average worker making 30K a year over a 40 year working life would have paid in $180,000 between his own contribution and his employer's matching contribution.  Amortize that $180,000, earning 3%, over 12.5 years, the monthly payment is 1,440.51, not the $3,277 amount claimed by the email.

And $375 per month for 480 months at 1% per annum (0.0833333 per month) would yield $221,209.30, not the $1.3 million figure the email alleges.  http://easycalculation.com/mortgage/future-value-for-ordinary-annuity.php

On top of that, there are several other errors in the assumptions made by email.

Social Security is calculated based on the highest 35 years of indexed earnings (http://www.ssa.gov/oact/progdata/retirebenefit1.html).  There is a maximum amount of wages subject to Social Security called the wage ceiling.  The wage ceiling did not reach $35,000 until 1983, or 30 years ago. Additionally, the email assumes a combined social security tax rate of 15% for all those years.  The fact is the Social Security tax rate is much lower than that during the last 35 years.  Other than 2011 and 2012 where workers enjoyed a 2% Social Security tax holiday, the maximum tax rate since 1990 for employee has been 6.2%.  So even if one includes the employer matching contribution, the tax rate was no more than 12.4%.  The combined tax rate 35 years ago in 1978 was 7.1%, with the employee paying 3.55% and the employer paying 3.55% (http://www.ssa.gov/oact/progdata/taxRates.html).  So the $180,000 amount is way over-stated.

On top of that, to include the employer matching fund in the calculation is questionable.  Without a federal mandate, I am not aware of any employer who is that generous, matching employee's contribution dollar for dollar.  Even if one considers the employee has earned that matching contribution, the employee has not paid any income tax on that matching contribution.  Besides, most people I know live well beyond age 78.5.

Social Security is also skewed toward low income taxpayers.  Basically, it's a set of calculations that helps level the playing field between lower wage earners and higher wage earners. For instance, low wage earners who retired at age 66 will receive benefits of about 56 percent of their pre-retirement income; for medium wage earners, the figure is about 34 percent; and for high wage earners, it is just over 15%.  Let's take a look at an example:

For a worker with average indexed monthly earnings (AIME) of $3,585 retiring in 2013, he would receive $1,605.90 per month, calculated as follows: 90% of $791 + 32% of ($3585 - $791), rounding the result down to the nearest dime.

For those with AIME over $4,768, they only receive 15% of the excess.  See http://www.ssa.gov/oact/cola/piaformula.html.

There is also a "special minimum" benefit for certain individuals who've had long periods of relatively low earnings.

There are additional Social Security benefits.  For example, a worker whose spouse does not work outside the home or works very little outside the home, his/her spouse is entitled to 50% of the worker's monthly benefit amount.  And when a worker dies, his/her surviving spouse may be able to take over the decedent's Social Security benefits.  There are also benefits for an eligible divorced spouse.  A child under age 18 is entitled to collect Social Security if the worker becomes disabled.  And of course, there is a Social Security Disability Benefit for the worker as well.

And now, there have been rumors that future Social Security may be based on needs, i.e., means testing.

So my conclusion is that Social Security is a Federal Benefit Program, even though we contribute into it while we work.  The benefits for most people are far greater than what they have contributed.  Lastly, Social Security has always been labeled a "Federal Benefit Payment", this is not new.

Here is the email:


SOCIAL SECURITY NOW CALLED 'FEDERAL BENEFIT PAYMENT' ENTITLEMENT!


Have you noticed, your Social Security check is now referred to as a "Federal Benefit Payment"?

I'll be part of the one percent to forward this. I am forwarding it because it touches a nerve in me, and I hope it will in you. Please keep passing it on until everyone in our country has read it.

The government is now referring to our Social Security checks as a Federal Benefit Payment. This isn't a benefit, its earned income! Not only did we all contribute to Social Security but our employers did too.

It totaled 15% of our income before taxes. If you averaged $30K per year over your working life, that's close to $180,000 invested in Social Security. If you calculate the future value of your monthly investment in social security ($375/month, including both your and your employer's contributions) at a meager 1% interest rate compounded monthly, after 40 years of working you'd have more than $1.3+ million dollars saved!
This is your personal investment.

Upon retirement, if you took out only 3% per year, you'd receive $39,318 per year, or $3,277 per month. That's almost three times more than today's average Social Security benefit of $1,230 per month, according to the Social Security Administration (Google it - it's a fact).

And your retirement fund would last more than 33 years (until you're 98 if you retire at age 65)! I can only imagine how much better most average-income people could live in retirement if our government had just invested our money in low-risk interest-earning accounts.

Instead, the folks in Washington pulled off a bigger Ponzi scheme than Bernie Madoff ever did. They took our money and used it elsewhere. They "forgot" that it was OUR money they were taking. They didn't have a referendum to ask us if we wanted to lend the money to them.

And they didn't pay interest on the debt they assumed. And recently, they've told us that the money won?t support us for very much longer. But is it our fault they misused our investments?

And now, to add insult to injury, they're calling it a "benefit," as if we never worked to earn every penny of it. Just because they "borrowed" the money, doesn't mean that our investments were a charity!  Let's take a stand.

We have earned our right to Social Security and Medicare. Demand that our legislators bring some sense into our government.  Find a way to keep Social Security and Medicare going, for the sake of that 92% of our population who need it.

Then call it what it is: Our Earned Retirement Income.

99% of people won't forward this.
Will you?

Fiscal cliff confusion on Form 1040

http://economy.money.cnn.com/2012/12/28/reserving-space-for-fiscal-cliff-on-form-1040/

Obama not making new 'cliff' offer

http://news.yahoo.com/ap-source-obama-not-making-cliff-offer-205757717--politics.html

IRS Proposed Regulations on Obamacare

CCH Explanation:
http://www.cchgroup.com/wordpress/index.php/tax-headlines/federal-tax-headlines/irs-releases-proposed-regulations-answers-questions-on-net-investment-income-tax-and-additional-medicare-tax-nprm-reg-130507-11-nprm-reg-130074-11-notices/

New 3.8 Percent Tax on Investment Income
http://www.parkertaxpublishing.com/public/REG-130507-11.pdf

0.9 Percent Additional Medicare Tax
http://www.parkertaxpublishing.com/public/REG-130074-11.pdf

2.3% Excise Tax on Medical Device
http://www.irs.gov/pub/irs-drop/n-12-77.pdf

Rules Relating to Additional Medicare Tax
https://www.federalregister.gov/articles/2012/12/05/2012-29237/rules-relating-to-additional-medicare-tax

http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions

Disclosure of tax return information on eligibility requirements for health insurance affordability programs
http://www.irs.gov/pub/irs-drop/reg-119632-11.pdf

Additional Requirements for Charitable Hospitals
http://www.irs.gov/pub/irs-drop/reg-130266-11.pdf

Here is a link to the IRS web site on its various news releases and guidance on Obamacare:
http://www.irs.gov/uac/Affordable-Care-Act-of-2010:-News-Releases,-Multimedia-and-Legal-Guidance

Alternative minimum tax may get new patch

http://www.sfgate.com/business/networth/article/Alternative-minimum-tax-may-get-new-patch-4083552.php
Kathleen Pender, Chronicle Columnist


Nobody likes the alternative minimum tax - an alternative tax system that was originally designed to make sure wealthy people who used a lot of esoteric tax shelters paid some federal income tax. Most of those shelters are gone now and the AMT is mainly hitting higher-income people who pay a lot of state income and real estate taxes and, to a lesser extent, families with a lot of children.

Taxpayers are supposed to compute their taxes under both the AMT and the regular system and pay whichever is higher. Although AMT rates are lower - the top rate is 28 percent compared with a maximum rate of 35 percent under the regular tax system (or 39.6 percent if the Bush tax cuts expire) - fewer deductions are allowed under the AMT.

The result is that most higher-income people owe AMT, especially if they live in high-tax states. Nationwide, only 2.8 percent of tax returns filed in 2010 owed AMT, but 4.5 percent of those coming from California did. Among those in California with adjusted gross income between $200,000 and $1 million, about 85 percent owed AMT. Above $1 million it is somewhat less common because the super-rich often owe more under the regular tax system.

The AMT has been in the news lately because Congress still has not passed a so-called patch that would prevent it from reaching further down into the middle class and hitting an estimated 33 million taxpayers in 2012 compared with about 4 million in 2011. Most people think Congress will pass a patch.

What's less well known is that for some people, the AMT has a silver lining. Assuming Congress passes a patch for 2012 and 2013, people who are in AMT and stay in AMT will be somewhat protected from an increase in regular income tax rates if the Bush-era tax cuts expire.

That's because they will still be paying a top AMT rate of 28 percent even if the top regular rate goes to 39.6 percent. This won't be true for everyone in AMT; people who fall out of the AMT could see their taxes go up.

To understand why, you have to know how the tax is computed.

To calculate AMT, you start with your taxable income under the regular tax system, then add back deductions not allowed under the AMT. This includes state and local income and property taxes, miscellaneous itemized deductions and the personal exemptions you get for yourself, spouse and dependents.

How AMT works

From this, you subtract a flat amount known as the AMT exemption (which phases out over a certain income level).

If what is left is greater than zero, you calculate a tentative AMT at a rate of 26 percent up to a certain amount of income and 28 percent over that. If this is bigger than your regular income tax, you pay the excess as an additional tax. That additional tax shows up on tax returns as alternative minimum tax.

The amount can be substantial: In 2010, people with $200,000 to $500,000 in adjusted gross income who were subject to AMT paid an extra $6,150, on average.

The Bush tax cuts reduced regular marginal tax rates, but left the AMT, including the exemption amount, alone. As regular taxes came down and people's incomes grew, more people got pushed into AMT.

Several patches

To prevent it from falling into the middle class, Congress has been passing temporary, one-year increases in the exemption amount at the end of each year. This is the patch.

For 2011, the exemption was $74,450 for married couples filing a joint return and $48,450 for singles. If Congress passes a patch for 2012, which is expected, those amounts would rise about 2.4 percent for 2012 and the AMT would hit roughly the same number of people as in 2011.

Without a patch, the amounts would revert to $45,000 for couples and $33,750 for singles - and throw about 29 million more people into AMT.

Among people with $75,000 to $100,000 in income, the percentage subject to AMT would rise from 1 percent to 52 percent, and their average tax increase would be about $1,600, according to Bob McIntyre, director of Citizens for Tax Justice. Even so, the bulk of the alternative minimum tax - 82 percent - would still be paid by people making more than $100,000, he says.

Congress is expected to patch the AMT by raising the exemption amount this year, but what happens next year?

If Congress approves another patch for 2013 but the Bush tax cuts expire and regular rates go up, many people who are in AMT will be somewhat protected from higher taxes if they are still in AMT next year; their tax rate will still be 28 percent.

Unusual possibilities

People who are in AMT now but go back into the regular tax system if the Bush tax cuts expire would see a tax increase. This could, perversely, make them "nostalgic for the AMT," says Patrick Geddes, chief investment officer with Aperio Group.

This could happen to people who are on the borders of AMT at both the high and low end of the income spectrum.

Republicans have proposed extending all of the Bush tax cuts; President Obama favors letting taxes go up only for people making more than $250,000 (married) or $200,000 (single).

If Obama's plan wins, some people with incomes above $200,000/$250,000 won't be affected because they will still be in AMT, paying a top rate of 28 percent (assuming that rate does not change). "If you are deep into AMT, you are not going to be affected," Geddes says. "AMT may make the debate (over marginal tax rates) moot for a lot of high-end taxpayers."

Take a hypothetical married couple with two children and $400,000 in income, including $5,000 in long-term capital gains and $5,000 in qualified dividends. They have $70,000 in itemized deductions, including $45,000 in state income and property taxes.

In 2012, they would owe $93,900 in taxes, according to CCH, a tax information firm.

In 2013, under the Obama plan, their regular marginal rate would rise to 36 from 33 percent, but they would still be in AMT. Their tax bill would go up by $900, less than a 1 percent increase.

(The example assumes the AMT exemption is patched at $78,750 for 2012 and 2013 and that capital gains are taxed 20 percent and dividends are taxed as ordinary income in 2013.)

What happens to any individual depends on their unique circumstances. Taxpayers can use calculators at the Tax Policy Center (calculator.taxpolicycenter.org) or Tax Foundation (mytaxburden.org) to estimate their tax under various scenarios, but it helps to know something about taxes and the policy options.

If Congress overhauls the tax system, all bets are off. The AMT could be abolished or replaced with some better way of making sure that the super-rich don't pay a lower effective tax rate than people earning less.

Who pays AMT?

Only 2.8 percent of federal tax returns filed in 2010 owed alternative minimum tax, but 4.5 percent of returns from California had it. AMT is most common among taxpayers with $200,000 to $1 million in income.

Adjusted gross income	Calif. returns with AMT	U.S. returns with AMT
$0-75,000	0.1%	0.1%
75,000-100,000	1.3	0.8
100,000-200,000	9.6	5.9
200,000-500,000	85.4	74.4
500,000-1 million	86.6	67.3
Over 1 million	40.0	28.6
Total	4.5	2.8

Source: Internal Revenue Service statistics

Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: kpender@sfchronicle.com Blog: sfgate.com/pender Twitter: @kathpender

Variable Annuities

I have been saying variable annuities are probably the world's worst investments for a long time.  Here is an article from Smart Money Magazine that says basically the same thing:
http://www.smartmoney.com/retirement/planning/whats-wrong-with-variable-annuities-9512/

And the Securities and Exchange Commission has various articles on variable annuities too.
http://www.sec.gov/answers/varann.htm
http://www.sec.gov/investor/pubs/varannty.htm

This Forbes article gives nine reasons why you need to avoid variable annuities:
http://www.forbes.com/sites/feeonlyplanner/2012/07/02/9-reasons-you-need-to-avoid-variable-annuities/

MetLife has scaled back the sale of these policies, read this November 19, 2012 article from the San Francisco Chronicle:
http://www.sfgate.com/business/bloomberg/article/Variable-Annuity-Sales-Fall-Most-Since-2009-as-4050978.php

And the Wall Street Journal chimed in with this May14, 2012 article:
http://online.wsj.com/article/SB10001424052702303916904577376193314287640.html

New Taxes caused by Fiscal Cliff

Because of the inability of the two political parties to work together in Washington, President Obama signed into law the Budget Control Act in 2011 in order to raise the nation’s debt ceiling.  That law calls for an automatic cut of about a trillion dollars from the federal budget across the board over ten years.  This automatic cut, commonly known as “sequestration”, was never intended to take effect.  But since Washington is still in a gridlock, we are now faced with this fiscal cliff.

What the fiscal cliff will do on top of the spending cuts is to potentially raise taxes by more than $500 billion in 2013 – an average of almost $3,500 per household.  Much of it will come from the expiration of the so called “Bush tax cuts”.

Here is a partial list of the tax increases, not in any particular order:

• The maximum capital gains will generally go up from 15% to 20%
• Tax rate for qualified dividends will increase from 15% to the taxpayer’s highest marginal tax bracket
• The lowest tax bracket will rise from 10% to 15%
• The highest tax bracket will go from 35% to 39.6%
• Employees’ portion of social security tax rate will go up from 4.2% to 6.2%
• Teachers will lose their $250 deduction for non-reimbursed classroom supplies
• Higher education tuition will no longer be deductible against gross income
• The American Opportunity tax credit for higher education will expire and the Hope tax credit will return
• Maximum annual contribution to a child’s education IRA will decrease from $2,000 to $500
• Child tax credit will drop to $500 from the current $1,000 per qualified child
• Maximum dependent care expenses allowed will decrease from $3,000 to $2,400 per child for up to two children
• Marriage penalties will be re-introduced for lower tax brackets
• Phase out of itemized deductions and personal exemptions will return
• Exemption for alternative minimum tax (AMT) will drop dramatically, from $74,450 in 2011 to $45,000 in 2012 for married couples and from $48,450 in 2011 to $33,750 in 2012 for singles
• Taxpayers age 70½ or older can no longer give money directly to charities from their IRAs and deduct the donation against gross income on page 1 of Form 1040
• §179 deduction for businesses will drop from $500,000 to $139,000
• Bonus depreciation will decrease from 100% to 50%
• Certain incentives for employees to take public transit will expire
• Homeowners with cancelled mortgage debt will face higher hurdles to exclude the forgiven amount from income
• Mortgage insurance premium will no longer be tax deductible
• No more deduction for sales tax in lieu of state income tax
• Lifetime exemption will drop from $5,120,000 to $1,000,000

How the Fiscal Cliff May Affect Your Taxes

See also http://www.bankrate.com/finance/taxes/fiscal-cliff-expiring-tax-laws.aspx

Potential 2013 tax rates:
http://www.forbes.com/sites/moneybuilder/2012/11/01/2013-federal-income-tax-brackets-and-marginal-rates/

http://finance.yahoo.com/news/how-the-fiscal-cliff-may-affect-your-taxes.html
By Kay Bell | Bankrate.com

In a few weeks, tax laws U.S. taxpayers have enjoyed for more than a decade are scheduled to expire. Along with long-standing and historically low tax rates, several popular tax credits and deductions already have or will soon expire.

That scenario is being described as a fiscal cliff. And if American taxpayers are nudged over that cliff by Congressional inaction, most of them will face dramatically higher tax bills.

Estimates by tax policy groups and government accountants put the total tax cost at more than $500 billion in 2013.

That averages out to almost $3,500 per household, according to calculations by the Tax Policy Center. Middle-class taxpayers are likely to see an average increase of almost $2,000.

Using Tax Policy Center data and hypothetical taxpayers, Bankrate shows what some tax bills might look like if lawmakers don't soon put up a guardrail at the fiscal cliff's edge.

The single tax filer

Joe is single and has an adjusted gross income of $60,000 a year. As is the case among two-thirds of the tax-paying population, Joe claims the standard deduction.

After subtracting the projected 2013 personal exemption of $3,850 and standard deduction of $6,050 for a single taxpayer, Joe's taxable income comes to $50,100.

If the current tax laws are extended beyond 2012, that would mean $8,900 of Joe's income would be taxed at only 10 percent, and his top tax rate would be 25 percent. This would leave him with a tax liability of $8,465.

If the current rates expire, however, Joe's tax bill would be $863.50 higher.

The reason? There would no longer be a 10 percent rate, making more of Joe's earnings taxed at 15 percent, and his top tax rate would be 28 percent instead of 25 percent.

Married couple filing jointly

Jane and Bill have two kids: 10-year-old Jimmy and 8-year-old Sarah. Both parents work, bringing home a combined adjusted gross income of $175,000. They don't yet own a home, so without mortgage interest to deduct, they're still claiming the standard deduction.

If the current tax laws stay in place, their four personal exemptions totaling $15,400 plus the $12,100 standard deduction will get them to $147,500 in taxable income, resulting in a tax liability of $28,803.

But Jane and Bill wouldn't have to send the Internal Revenue Service that much. Thanks to the $1,000 per-child tax credit, their final tax bill would be $26,803.

If the tax laws expire, however, Jane and Bill's tax bill will go up by $6,304 to $33,107. That takes into account that the child tax credit would return to its pre-tax-cut level of just $500 per kid.

One reason for the increased tax bill is the return of the marriage tax penalty. This is where a couple pays more taxes by filing one joint return than they would if they filed two returns as single taxpayers. Wider tax brackets and a larger standard deduction for married couples now help ease the penalty.

Instead of facing a top tax rate of 28 percent, Jane and Bill would be in the 31 percent tax bracket if the tax cuts expire.

Single parent head of household

Kathryn is a divorced working mom of 7-year-old Jonah. She makes $75,000 a year via her salary and alimony payments.

By filing as head of household, Kathryn's standard deduction of $8,900 and personal exemptions totaling $7,700 for herself and her son get her to $58,400 in taxable income.

Taxes on that amount are currently collected at the 10 percent, 15 percent and 25 percent rates, giving Kathryn a tax bill of $9,125. She knocks $1,000 off that thanks to the child tax credit.

But if the tax cuts expire, Kathryn's tax liability will be $1,435 more -- $9,560 -- in 2013. The bigger bill comes from losing the expired 10 percent and 25 percent tax rates, putting more of her income into the 15 percent and 28 percent tax brackets.

And just like all parents, married or single, Kathryn will only get a $500 child tax credit for her son starting in 2013.

Expiration of capital gains rates

If any of our hypothetical 2013 taxpayers have investments in a taxable brokerage account, their tax bills next year will be higher.

Long-term capital gains and certain dividend payments are taxed at lower rates than the regular, ordinary income rates, which now top out at 35 percent. Most taxpayers pay capital gains taxes at the 15 percent rate. Taxpayers in the 10 percent and 15 percent brackets don't owe any taxes on their gains.

But if today 's lower rates expire, the capital gains rates will go to 20 percent for most investors and 10 percent for those in the 15 percent tax bracket.

And dividends will lose their favorable tax treatment entirely. These payments will return to being taxed as ordinary income, meaning that taxpayers making enough to put them into the highest income tax bracket in 2013 would pay taxes on dividends at the top 39.6 percent income tax rate.

In addition, a provision in the health care reform law, often referred to as Obamacare, will kick in next year. This new 3.8 percent surtax will apply to capital gains, dividend and interest income of more than $250,000 for married couples filing jointly or $200,000 for other taxpayers.

Payroll tax holiday over

Every person who collects a paycheck knows that taxes reduce take-home pay.

In addition to income taxes, both federal and where applicable state, payments toward Social Security and Medicare, known as FICA taxes, are collected via withholding.

So that workers would have more money to spend and give the economy a boost, Congress enacted a 2 percent cut in the Social Security taxes paid by workers. This so-called payroll tax holiday has been in effect since 2011 but is scheduled to expire Jan. 1, 2013.

That means every worker will pay more taxes in 2013. The increase could be substantial for high-income earners.

Individuals who make up to the Social Security wage base of $113,700 next year will pay $7,049.40 in taxes for the retirement system. That's $2,425 more than this year because the wage base was slightly smaller ($110,100), and workers paid just 4.2 percent of their income toward Social Security instead of the regular 6.2 percent level that returns in 2013.

Other expiring tax breaks

While the possibility of higher tax rates gets most of the attention as taxpayers near the fiscal cliff, many other provisions could cause higher taxes if they are allowed to end Jan. 1, 2013.

In addition to losing half of the current child tax credit, parents would get reduced savings from the child care tax credit.

Students looking for the $2,500 American opportunity education tax credit would find instead its predecessor the Hope credit, which maxes out at $1,800.

Lower paid workers could still claim the earned income tax credit, but eligibility requirements would be tougher and credit amounts lower.

The estate tax would apply to more property left at death, affecting estates worth more than $1 million instead of the current $5.12 million exclusion amount. The tax rate also would rise from the current 35 percent to 55 percent.

Higher-income taxpayers who itemize would again see their overall Schedule A claims reduced by 3 percent. A similar reduction also would apply to personal exemption amounts for wealthier filers.

And legislation to increase the alternative minimum tax income exclusion amount must be approved retroactively for 2012 as well as for 2013, or tens of millions more taxpayers will face higher tax bills because of this parallel tax.

IRS Warns AMT Could Affect 60 Million Taxpayers Unless Patched

http://www.accountingtoday.com/news/IRS-Warns-AMT-Taxpayers-Patched-64643-1.html

Washington, D.C. (November 13, 2012)

By Michael Cohn

 

The head of the Internal Revenue Service told lawmakers that if Congress fails to extend the traditional patch for the Alternative Minimum Tax, approximately 60 million Americans could be affected and about 33 million taxpayers could pay the AMT for tax year 2012.

In a letter to the leaders of the tax-writing House Ways and Means Committee and the Senate Finance Committee, Acting Commissioner Steven T. Miller also warned that tax season could be delayed for up to a month next year if Congress does not act soon.

“A number of other tax provisions affecting individuals also expired at the end of 2011,” he wrote. “These include tax deductions for educators' out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes. The last provision is of particular importance to taxpayers in states with no income tax.

"These tax law changes are generally not as complex and do not present anything near the operational risk associated with the AMT patch," Miller added. "Two years ago, Congress enacted legislation extending these provisions retroactively in mid-December 2010. As a result, the IRS made the necessary changes to its forms and systems, and delayed the opening of the 2011 filing season by four weeks for approximately 9 million affected taxpayers. If the IRS were presented with a similar scenario of late enactment of tax extenders legislation this year, I would anticipate a similar outcome. There would be some inconvenience and delayed refunds for a substantial number of taxpayers, but the overall risk to the tax filing season would be manageable.”

Congress has returned to session this week after the elections with taxes among the top items on its agenda. The so-called “fiscal cliff” is looming with the expiration of the Bush-era tax rates and dozens of other traditional “tax extenders” at the end of the year, along with the prospect of automatic cuts in both defense spending and discretionary spending unless Congress and the Obama administration can agree on a deficit reduction plan. The nation is also once again approaching its borrowing limit and Congress will soon need to agree to raise the debt ceiling.

Miller noted that the expiring tax provisions have added uncertainty for next tax season. “This year has been particularly challenging due to several unresolved tax issues,” he wrote. “When Congress takes action well after this planning process is underway, there is potential for substantial disruption to the filing season ahead. As Congress returns this week, I wanted to provide you with a detailed description of the effects on IRS operational planning if the current uncertainty regarding the AMT and extenders continues.”

Miller noted that the AMT applies to individual taxpayers with incomes above specific thresholds set by law, but for many years, Congress has been enacting "patches" to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on Dec. 31, 2011.

“More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly,” he explained. “Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012—$33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.”

Miller also pointed out that the AMT patch has historically been accompanied by a special tax credit ordering rule that applies to all taxpayers claiming certain tax credits, whether they owe the AMT or not. “The ordering rules change the order in which a number of popular tax credits are applied against tax liability, and how they may be used to offset both regular and alternative minimum tax,” he explained. “Taken together, the changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers—nearly half of all individual income tax filers. In addition, the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS's critical filing season technology systems.”

In prior years—most recently in 2007 and 2010—Congress allowed the AMT patch to lapse for more than 11 months, but then retroactively reinstated it, Miller observed. “In both 2007 and 2010, the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.”

To stay consistent with past practice, Miller said he has instructed the IRS staff again this year to leave its core systems "as-is" with respect to the AMT, and hold off on the substantial design and engineering work that would be required in order to revert the core tax systems back to 1998 law, which will otherwise apply for 2012 in the absence of any action by Congress. “Therefore, if Congress enacts an AMT patch, including both increased exemption amounts and the special tax credit ordering rules, before the end of the 2012 calendar year, the IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers,” he said. “However, if there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.”

Without an AMT patch, Miller noted, about 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012). “In addition, in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes,” he added.” Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later. Tens of millions of these taxpayers would unexpectedly have to pay additional income tax for 2012, leaving them with a balance due return or a much smaller refund than expected.

For millions of other taxpayers, refunds would be delayed.

“Finally, because the AMT patch already expired at the end of 2011, there is no ability to consider partial year extensions of the AMT (since by the end of 2012 it would have already lapsed for an entire year),” he noted.

Lawmakers greeted the news with dismay. “Congress must act now to address our unfinished business and give middle-class families certainty by extending this expiring relief,” said Ways and Means ranking member Sander Levin, D-Mich., in a statement.  “Just as there is no reason not to extend the middle class tax cuts immediately, there is no reason Congress does not act on a bipartisan basis as it has in the past to fix the AMT. The consequences of inaction would be enormous for millions of middle class taxpayers. Extending AMT relief will prevent a substantial and unexpected tax increase on millions of Americans.”

Fiscal Cliff Explained

http://www.forbes.com/sites/rickungar/2012/11/10/the-fiscal-cliff-explained/

http://blogs.wsj.com/washwire/2012/10/01/study-fiscal-cliffs-broad-tax-hit/

http://www.sacbee.com/2012/11/15/4986952/fiscal-cliff-could-knock-counties.html

Retroactive tax increase passes with passage of Prop 30

Proposition 30 retroactively increases income taxes effective January 1, 2012. The measure creates three new personal income tax brackets for rich residents and adds a quarter-cent to the sales tax. The higher tax rates, which hit single filers making $250,000 and up and married taxpayers earning at least $500,000, last for seven years, and push the top tax rate to 12.3% for filers earning $500,000 and above, or $1 million per couple.

Proposition 30 also increases the state sales tax rate by 0.25% for four years, beginning January 1, 2013, bringing the standard statewide rate to 7.50% (currently 7.25%)..

Governor's Ballot Initiative
10.3% (1% increase) on income of:	$250,001–$300,000 for single/MFS; $340,001–$408,000 for HOH; and $500,001–$600,000 for MFJ.
11.3% (2% increase) on income of:	$300,001–$500,000 for single/MFS; $408,001–$680,000 for HOH; and $600,001–$1,000,000 for MFJ.
12.3% (3% increase) on income of:	More than $500,000 for single/MFS; More than $680,000 for HOH; and More than $1,000,000 for MFJ.

(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)

Affordable Care Act Changes in 2013

http://blog.accountants.intuit.com/?p=18853

The Affordable Care Act was enacted on March 23, 2010 and includes the following important tax provisions that take effect in 2013.

Increased tax for high-earning workers and self-employed
The Medicare payroll tax is the main source of financing for Medicare’s hospital insurance trust fund. This fund is responsible for paying the medical expenses for beneficiaries who are age 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax with workers and employers each responsible for half or 1.45%. Self-employed individuals pay both halves or 2.9%. The Medicare tax is levied on all wages or earned income without limit.

Under the new law, there will be an additional .9% hospital insurance tax (2.35% in total) that will apply to wages received in excess of $250,000 for married filing joint; $125,000 for married filing separate; and $200,000 for other filing statuses. This additional .9% tax applies to the employee’s portion of the Medicare payroll tax and is collected by the employer for wages in excess of $200,000. Self-employed individuals are also responsible for the additional .9% hospital insurance tax.

Surtax on unearned income of higher-income individuals
Currently, the Medicare payroll tax only applies to wages or earned income. Under the new law, the Medicare tax will also apply to investment income of individuals, estates and trusts. The surtax is set at 3.8% of the lesser of: 1) the taxpayer’s net investment income; or 2) the excess of modified adjusted income over $250,000 for married filing joint or qualified widow, $125,000 for married filing separate, and $200,000 for other filing statuses. For example, if a married couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new surtax.

Net investment income includes interest, dividends, royalties, rents, gross income from passive activities and the net gain from disposition of property (other than trade or business). Investment income is reduced by any allocable investment deductions. Income from tax-deferred retirement accounts (401(k) plans) or excluded items (interest on tax-exempt bonds) is not included in the definition.

Higher threshold for deducting medical expenses
Currently, taxpayers can take an itemized deduction for unreimbursed medical expenses only to the extent that expenses exceed 7.5% of the taxpayer’s adjusted gross income. Under the new law, the AGI floor is raised from 7.5% to 10%. The AGI floor for individuals age 65 and older remains at 7.5% through 2016, then it is increased to 10%.

Dollar cap on contributions to health FSAs
A Flexible Spending Arrangement (FSA) is an tax favored account and is established through an employer’s cafeteria plan. Under an FSA, an employee can set aside a portion of earnings to pay for expenses, such as medical, dependent care or other expenses, as established in the cafeteria plan. Currently, there is no limit on contributions to health FSAs. Under the new law, allowable contributions to health FSAs will capped at $2,500 per year and indexed for inflation after 2013.

Deduction eliminated for retiree drug coverage
A sponsor of a retiree prescription drug plan is eligible for subsidy payments received from the Health and Human Services department. The subsidy is equal to a portion of the retiree’s gross covered prescription drug costs. Subsidies are excludable from the taxpayer’s gross income.

Under current law, a taxpayer may claim a business deduction for any covered retiree prescription drug expenses. Under the new law, amounts otherwise allowable as a deduction for retiree prescription drug expenses must be reduced by the excludable subsidy payments received. In effect, this provision eliminates the double benefit the taxpayer may receive.

2013 SDI rate released

http://www.caltax.com/Flash%20E-Mail/Pages/2012-222013SDIratereleased.aspx

The EDD has announced the 2013 SDI rate and wage base:

	SDI rate	Maximum wage base	Maximum payment
2013	1.0%	$100,880	$1,008.80
2012	1.0%	$95,585	$955.85

2013 Social Security Changes

http://www.ssa.gov/pressoffice/factsheets/colafacts2013.htm

Cost-of-Living Adjustment (COLA):
Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2011 through the third quarter of 2012, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 1.7 percent COLA for 2013. Other important 2013 Social Security information is as follows:

Tax Rate:	2012	2013
Employee	7.65%*	7.65%
Self-Employed	15.30%*	15.30%
NOTE:  The 7.65% tax rate is the combined rate for Social Security and Medicare.  The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below).  The Medicare portion (HI) is 1.45% on all earnings.
* The Temporary Payroll Tax Cut Continuation Act of 2011 reduced the Social Security payroll tax rate by 2% on the portion of the tax paid by the worker through the end of February 2012.  The Middle Class Tax Relief and Job Creation Act of 2012 extended the reduction through the end of 2012.  Under current law, this temporary reduction expires at the end of December 2012.
Maximum Taxable Earnings:	2012	2013
Social Security (OASDI only)	$110,100	$113,700
Medicare (HI only)	N o   L i m i t
Quarter of Coverage:	2012	2013
Earnings needed to earn one Social Security Credit	$1,130	$1,160
Retirement Earnings Test Exempt Amounts:	2012	2013
Under full retirement age NOTE: One dollar in benefits will be withheld for every $2 in earnings above the limit.	$14,640/yr. ($1,220/mo.)	$15,120/yr. ($1,260/mo.)
The year an individual reaches full retirement age NOTE: Applies only to earnings for months prior to attaining full retirement age. One dollar in benefits will be withheld for every $3 in earnings above the limit. There is no limit on earnings beginning the month an individual attains full retirement age.	$38,880/yr. ($3,240/mo.)	$40,080/yr. ($3,340/mo.)
Social Security Disability Thresholds:	2012	2013
Substantial Gainful Activity (SGA)      Non-Blind      Blind	$1,010/mo. $1,690/mo.	$1,040/mo. $1,740/mo.
Trial Work Period (TWP)	$720/mo.	$750/mo.
Maximum Social Security Benefit: Worker Retiring at Full Retirement Age:	2012	2013
	$2,513/mo.	$2,533/mo.
SSI Federal Payment Standard:	2012	2013
Individual	$698/mo.	$710/mo.
Couple	$1,048/mo.	$1,066/mo.
SSI Resources Limits:	2012	2013
Individual	$2,000	$2,000
Couple	$3,000	$3,000
SSI Student Exclusion:	2012	2013
Monthly limit	$1,700	$1,730
Annual limit	$6,840	$6,960
Estimated Average Monthly Social Security Benefits Payable in January 2013:	Before 1.7% COLA	After 1.7% COLA
All Retired Workers	$1,240	$1,261
Aged Couple, Both Receiving Benefits	$2,014	$2,048
Widowed Mother and Two Children	$2,549	$2,592
Aged Widow(er) Alone	$1,194	$1,214
Disabled Worker, Spouse and One or More Children	$1,887	$1,919
All Disabled Workers	$1,113	$1,132

IRS announces inflation adjustments for 2013

http://www.journalofaccountancy.com/News/20126688.htm

On Thursday, the IRS released its annual revenue procedure making inflation adjustments to the gift tax annual exclusion and other items for tax years beginning in 2013 (Rev. Proc. 2012-41).

The gift tax annual exclusion will increase from $13,000 to $14,000 in 2013 and the amount of foreign earned income that taxpayers can exclude increases from $95,100 to $97,600. The amount used to reduce the net unearned income reported on a child’s tax return to calculate the kiddie tax increases from $950 to $1,000. Other inflation-adjusted amounts include the alternative minimum tax exemption for the kiddie tax, the private activity bond volume cap, the limitation on eligible long-term care premiums, high-deductible health plan definitions, the threshold for required reporting of receipt of large gifts from foreign persons, and 20 other provisions.

Rev. Proc. 2012-41 does not include the inflation adjustments for the tax tables, the Sec. 23 adoption credit, the Sec. 24 child tax credit, the Sec. 25A Hope scholarship and lifetime learning credits, the Sec. 32 earned income tax credit, the standard deduction, the Sec. 68 overall limitation on itemized deductions, the Sec. 132(f) qualified transportation fringe benefit, the Sec. 137 adoption-assistance exclusion, the Sec. 151 personal exemption, the Sec. 179 election, the Sec. 221 interest on education loans, and the unified estate credit, all of which will be addressed in separate guidance, the IRS said. Many of these items are scheduled to expire or change at the end of the year, and the IRS may be waiting to see what actions Congress takes in its lame-duck session.

The IRS also announced the 2013 contribution limits and other figures for pension plans and other retirement-related items (IR-2012-77). The elective deferral (contribution) limit for employees who participate in Sec. 401(k), 403(b), or 457(b) plans and the federal government’s Thrift Savings Plan increases from $17,000 to $17,500. The catch-up contribution limit under those plans for those age 50 and over is unchanged at $5,500.

On Tuesday, the Social Security Administration announced that the Social Security wage base for 2013 will be $113,700 (up from $110,100 in 2012).

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor

Also see http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Why the Health Care Tax Credit Eludes Many Small Businesses

http://www.cnbc.com/id/49178782
By: Robb Mandelbaum, The New York Times

The Agenda has now profiled three small businesses that are struggling in different ways with providing health insurance to employees. (Previous related stories: Small-Business Health Care Profiles) The companies are very different — they trade in very different parts of the economy, and couldn't be located much further apart geographically — but they do have one thing in common: Though all three have fewer than 25 employees, not one has qualified for the tax credit in the Affordable Care Act that was intended to help small businesses pay for health insurance. Indeed, the credit is one element of the controversial health law that has already fallen short of expectations.

Estimates of the number of businesses eligible to take the tax credit have ranged from 1.4 million to 4 million companies, but in May, the Government Accountability Office reported that only 170,300 firms actually claimed the credit in 2010. Of these, only a small fraction, 17 percent, were able to claim the whole credit.

For eligible companies, the credit effectively refunds 35 percent of health insurance expenses between 2010 and 2013.* After 2014, the credit increases to 50 percent and is available for any two consecutive years. The credit is fully available to companies with 10 or fewer full-time employees and average wages below $25,000. It phases out as the number of employees rises to 25 and wages grow to $50,000. In 2009, there were about 4.6 million companies with fewer than 10 employees, according to the Census Bureau, and 5.7 million with fewer than 100.

The credit was aimed squarely at the smallest companies, which rarely offer health insurance to employees. However, as we reported two weeks ago, it appears not to have persuaded very many to start offering insurance. The most recent study of employer health insurance from the Kaiser Family Foundation found that just half of all companies with fewer than 10 employees offered insurance, a share that has not moved much since 2005. 

So why has the credit fallen short of expectations? The G.A.O. concluded that the credit was too small to sway business owners. Moreover, it said, claiming the credit is a task so complicated as to discourage many companies from trying. Companies have to determine the number of hours each employee worked in the year, as well as compile information about their insurance premiums. "Small-business owners generally do not want to spend the time or money to gather the necessary information to calculate the credit, given that the credit will likely be insubstantial," the report said, citing conversations with tax preparers. "Tax preparers told us it could take their clients from two to eight hours or possibly longer to gather the necessary information to calculate the credit and that the tax preparers spent, in general, three to five hours calculating the credit."

The G.A.O. report hints at the complexity with this delicious example:

On its Web site, I.R.S. tried to reduce the burden on taxpayers by offering "3 Simple Steps" as a screening tool to help taxpayers determine whether they might be eligible for the credit. However, to calculate the actual dollars that can be claimed, the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information.

It may be tempting to hold the Internal Revenue Service responsible for whatever burden accompanies the tax credit, but in this case, the complexity is written directly into the law. It turns out that legislators wrote the provision in a way that makes it appear more generous than it really is. Many businesses with both fewer than 25 employees and average wages below $50,000 are in fact unable to claim the credit.

Under the law, once such a business has calculated its potential credit, it is required to reduce the credit first to account for any excess employees over 10 and then separately reduce the potential credit to account for any excess average wages paid over $25,000. For many companies, the two reductions exceed the potential credit itself - meaning the business gets no credit.

That's what happened to Carrie Van Dyck, who along with her husband owns the Herbfarm Restaurant outside of Seattle. Excluding its owners, the Herbfarm, which we profiled in June, employed the equivalent of about 21 or 22 full-time staff members, who were paid an average wage of about $35,000 - a few thousand dollars over the credit's threshold for 21 employees. The result surprised Ms. Van Dyck, she said recently by e-mail, because "it would seem that we are a pretty typical small, mom-and-pop type business that this should apply to."

Of course, by making the credit less generous, the senators who wrote the law made it less expensive to the United States Treasury. Now it is apparent that credit will be even cheaper than planned: initially it was expected to cost the Treasury $2 billion in 2010; instead it cost the government only a quarter of that.

The law also excludes owners and owners' families from counting toward the credit, which can cut both ways. On the one hand, owners don't count as employees and their salaries are excluded from the annual wages, exclusions that could make some companies eligible for a bigger credit than they might otherwise have gotten. On the other hand, premiums paid for the owners' and their families' insurance aren't eligible for the credit, which for some companies, as You're The Boss commenter JAB recently noted, "greatly reduces the incentive to provide coverage for employees."

The White House has said that the number of businesses claiming the credit for 2011 has grown to at least 360,000, but that is still well below even the smallest estimate of eligible businesses. Some advocates for the law say that more businesses will take advantage of the credit in 2014, when it grows to 50 percent, especially if the new insurance exchanges make it easier and cheaper for small companies to offer insurance.

The Obama administration has proposed making more businesses eligible for the credit, in part by starting phase-outs at higher thresholds, and also by changing the way it is calculated so that every business within the limits, such as the Herbfarm Restaurant, can take some amount of credit.

But judging from the comments of Representative Sam Graves, chairman of the House Small Business Committee, the initiative is unlikely to pass a Republican-controlled House anytime soon. "This tax credit has already largely failed to attract small-business owners, and expanding it will not make the president's health care law affordable," the Missouri Republican said in a statement. "For small employers that do not offer health insurance, tax incentives are unlikely to cause many of them to choose a massive new expense they just cannot afford in the first place." It was Mr. Graves who sought the G.A.O. report.

Of course, a business denied a credit has not been made worse off by the 2010 health law. But the law surely has raised and dashed a lot of hopes, and these are the early days - the sweeping changes that are the law's hallmark don't come until 2014.

*There are, of course, many caveats here, but the main one is that the company has to pay at least half of the premium.

 

Two million more expected to pay penalty under Obamacare

http://money.cnn.com/2012/09/19/news/economy/healthcare-law-penalty/index.html
NEW YORK (CNNMoney) -- Congress' official scorekeeper said Wednesday that roughly two million more Americans will pay penalties under President Obama's health care law for lacking insurance than had previously been estimated.

Under the law, Americans must be insured starting in 2014 or pay a penalty assessed on their tax returns.

Shortly after the legislation passed in 2010, the Congressional Budget Office, working alongside the Joint Committee on Taxation, estimated that in 2016 roughly four million people a year would opt to pay the penalty instead of getting coverage. On Wednesday, the CBO and JCT revised that figure up to six million, citing legislation passed since 2010 as well as the weaker economic outlook.

The groups also pointed to the Supreme Court's decision earlier this year to make the health care law's expansion of Medicaid optional for states.

Of those people who opt for the penalty, 10% are projected to be below the federal poverty level for 2016, which the CBO and JCT estimate will stand at about $12,000 for an individual or $24,600 for a family of four.

In 2014, the penalty will be no more than $285 per family, or 1% of income, whichever is greater. In 2015, the cap rises to $975, or 2% of income. And by 2016, it reaches $2,085 per family, or 2.5% of income, whichever is greater.

The dollar amounts for a single adult would be $95, $325 and $695 during that same time period.

Roughly 30 million non-elderly Americans are projected to remain uninsured in 2016, though most will not be subject to the penalty tax. For instance, the penalty will be waived for people with very low incomes who don't have to file tax returns, those who are members of certain religious groups, or people who face insurance premiums that would exceed 8% of family income even after including employer contributions and federal subsidies.

Penalty payments collected in 2016 are expected to total $7 billion, about $3 billion more than previously estimated.

IRS videos on YouTube

http://www.youtube.com/user/irsvideos/videos

Social Security: Surplus dwindling, huge shortfall looms

http://www.csmonitor.com/Business/Latest-News-Wires/2012/0813/Social-Security-Surplus-dwindling-huge-shortfall-looms

Social Security surplus is projected to run out in 2033, forcing a 25 percent cut in benefits. To fix Social Security, Congress would have to find $8.6 trillion.

By Stephen Ohlemacher, Associated Press / August 13, 2012 

WASHINGTON

As millions of baby boomers flood Social Security with applications for benefits, the program's $2.7 trillion surplus is starting to look small.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government.

Those days are over.

Since 2010, Social Security has been paying out more in benefits than it collects in taxes, adding to the urgency for Congress to address the program's long-term finances.

"To me, urgent doesn't begin to describe it," said Chuck Blahous, one of the public trustees who oversee Social Security. "I would say we're somewhere between critical and too late to deal with it."

The Social Security trustees project the surplus will be gone in 2033. Unless Congress acts, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, triggering an automatic reduction.

Lawmakers from both political parties say they want to avoid such a dramatic benefit cut for people who have retired and might not have the means to make up the lost income. Still, that scenario is more than two decades away, which is why many in Congress are willing to put off changes.

But once the surplus is spent, the annual funding gaps start off big and grow fast, which could make them hard to rein in if Congress procrastinates.

The projected shortfall in 2033 is $623 billion, according to the trustees' latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security's number crunchers because it covers the retirement years of just about everyone working today.

Add up 75 years' worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that's $30.5 trillion in 2012 dollars, or eight times the size of this year's entire federal budget.

In present value terms, the Social Security Administration says the shortfall is $8.6 trillion. That means the agency would need to invest $8.6 trillion today, and have it pay returns of 2.9 percent above inflation for the next 75 years, to produce enough money to cover the shortfall.

That's the rate of return Social Security expects to get from its trust funds. The problem, of course, is that Social Security doesn't have an extra $8.6 trillion to invest.

Social Security Commissioner Michael J. Astrue said he is frustrated that little has been done to solve a problem that is only going to get harder to fix as 2033 approaches. If changes are done soon, they can be spread out over time, perhaps sparing current retirees while giving workers time to increase their savings.

"It won't be easy but it's just going to get harder the longer they wait," Astrue said.

There is no consensus in Washington on how pressing the problem is.

President Barack Obama created a deficit-reduction commission in 2010 but didn't embrace its plan for Social Security: raising the retirement age, reducing benefits for medium- and high-income workers and raising the cap on the amount of wages subject to the payroll tax, all very gradually.

The issue has been largely absent from this year's presidential election. Neither Obama nor his Republican opponent, Mitt Romney, has made it a significant part of the campaign.

California unemployment payouts drop by half

http://economy.ocregister.com/2012/08/09/california-unemployment-payouts-drop-by-half/110796/

California sent out $1 billion in unemployment payments in June, a 50% drop from the peak two years ago, the Employment Development Department reports.

Part of the decline is due to fewer people being unemployed. By EDD’s count, there were 1.97 million Californians who were out of work this June compared to 2.26 million in June 2010 and 2.19 million last year.

However, the biggest reason for the drop in payouts this year is because California fell short in April of the federal eligibility requirements for the maximum 99 weeks of benefits.

Normally, unemployed workers are only eligible for 26 weeks of state aid. But because of the length and depth of the national economic downturn — the U.S. lost nearly 7 million jobs during the 18 months of the official recession — Congress extended unemployment benefits to 99 weeks.

Even though California has the third highest unemployment rate in the country, the state failed in April to meet the complex federal formula for state eligibility.

As a result, benefits in California were cut to 79 weeks in May and more than 90,000 long-term unemployed had their payments cut off.

With 709,000 of California’s unemployed in June out of work more than 52 weeks, thousands of other long-term unemployed are expected to exhaust their benefits each month.

California’s maximum benefits will be further cut to a maximum of 72 weeks in September as part of an overall effort by Congress to reduce the number of people getting aid.

Although the drop in total payouts is welcome news to the state, it does little to affect the projected $10.2 billion deficit in California’s unemployment insurance trust fund.

The state’s trust fund for unemployment payments ran out of money in January 2009, when claims outstripped payments by employers. California has been borrowing money from the federal government to make up the difference since then.

Last year, the state had to start paying back interest on the federal loan — a payment that totaled $303.5 million. Another $313 million in interest is due in September.  The state is making the payments from money borrowed from the California disability insurance trust fund,  which will have to be paid back within four years.

To begin paying off the $10 billion in principal due Uncle Sam, employers are being charged an additional $21 a year per worker this year in federal payroll taxes ($77 per worker total). The state legislative analyst estimates the increased payroll tax will cost California employers an extra $290 million this year and $580.9 million in 2013.

Senate Panel Passes Bipartisan Tax Extenders Bill

The Senate Finance Committee approved legislation Thursday on a 19 to 5 vote extending dozens of tax cuts known as tax extenders, including a two year alternative minimum tax patch.  Other provisions would extend the ability for school teachers to deduct expenses for school supplies, mortgage debt relief to 2013 and the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes, along with the above-the-line deduction for qualified tuition-related expenses and tax-free distributions from individual retirement plan for charitable purposes. Energy-related provisions include an extension of the wind energy production tax credit for one year, through Dec. 31, 2013, while changing the "placed in service" date for the wind energy facility to when construction begins.

For more information, see http://www.finance.senate.gov/newsroom/chairman/release/?id=e3290a69-8fa4-4a6d-8c3a-756ea03a4224

7 Social Security sins

http://money.msn.com/baby-boomers/7-social-security-sins-moneyrates.aspx
You want to maximize your benefits, of course, but how do you do that? First, you avoid -- if you can -- some costly missteps.

Since the first payment was made in January 1937, Social Security has provided a safety net and source of reliable income for retired workers, their spouses and dependents. But getting the most from your Social Security benefits is far from simple.

While you can begin collecting Social Security as young as age 62, your benefits will be smaller than if you had waited to full retirement age (66) or later. But while waiting longer can mean more money monthly, it may result in less money overall if you die early, so selecting the right age to file is a critical component to maximizing your benefits.

Kevin Worthley, a certified financial planner with the Retirement Co. of New England, says it is important to make the right decision about when to file because there are almost no second chances when it comes to Social Security.

"There used to be a strategy called a do-over where recipients could receive benefits early, then years later withdraw their application, repay the benefits received and then reapply for benefits going forward at a higher payout," Worthley says. "The technique was overly promoted and somewhat abused, so the Social Security Administration curtailed the technique recently by only allowing a do-over if implemented within 12 months of the original receipt of income benefits."

So to get it right the first time, avoid committing these seven Social Security sins.

1. Waiting past age 66 to file

Even if you don't intend to collect benefits until after age 66, don't forget to file by the time you reach full retirement age. If you don't wish to collect at that time, simply indicate that you want to suspend your benefits so they can keep growing.

Failing to file by 66 negates the possibility of earning a full lump-sum repayment if you later decide you'd rather have collected those suspended benefits (such as might occur if you suffer health problems in your late 60s). In that scenario, the lump-sum option will award you all you would have collected to that point at once, but this works only if you filed on time.

In addition, using a "file-and-suspend" strategy can also allow your spouse to begin collecting benefits while you continue working.

2. Waiting past age 70 to collect

There is a financial incentive for seniors to delay collecting Social Security past their full retirement age. For each year they wait, their benefits get a bump of between 5.5% and 8%. However, there are no additional benefits for waiting past age 70. At that point, any further delay in collecting simply means money lost.

3. Neglecting spousal benefits

Social Security offers several options for spousal benefits, so don't miss this opportunity to bring in some extra cash if you or your spouse is eligible. For example, if you are collecting benefits and your spouse is at least 62 and isn't collecting benefits, your spouse is eligible for a separate spousal benefit. The beauty of this arrangement is that it doesn't diminish your benefits in any way.

"In addition, a spouse who has reached full retirement age and whose spouse is already receiving a benefit can claim a spousal benefit while continuing to work and letting his or her own benefits grow for the future," says Worthley.

4. Forgetting former spouses

After a divorce, the last thing you may want to remember is your former partner. However, if you were married to someone for 10 years and have been divorced for at least two, you are eligible to collect a spousal benefit from the relationship, provided both of you are eligible to collect benefits. However, this only works if you are unmarried when you file to collect.

In addition, when that former spouse dies, you can begin to collect his or her full level of benefits -- just as you would with a current spouse.

5. Assuming you and your spouse should file at the same time

Filing for Social Security doesn't have to be an all-or-nothing proposition for couples. In fact, using a so-called hybrid strategy can be an effective way to maximize Social Security benefits that the two of you receive. One spouse can file for benefits at a younger age while the other waits until later to maximize benefits.

"This especially works when the husband's benefit is substantially more than the wife's," says Worthley. "Assuming the wife has a higher longevity expectation, she will acquire his higher income benefit for the remainder of her life. Since women generally live longer than men, this nuance can be important."

6. Waiting too long to collect if you already have health problems

While Worthley counts automatically filing at age 62 as a common mistake, it can be a smart move for those with serious or chronic health conditions. If you don't reasonably expect to live into your 70s, filing early may increase your overall payout.

"That said, remember that medical advances are allowing people to live far beyond their expectations," says Worthley. "So, unless your health is debilitating, don't assume your life expectancy will be short."

7. Dying without warning

Remember the bit about later applying for a lump-sum repayment if you deferred your benefits? It doesn't work if you're dead. That means your family will be left out in the cold on those deferred earnings if you don't collect them before you die. While this sin is harder to avoid than the others, making sure to file by at least age 66 can help make you more prepared.