Wednesday, July 25, 2012

7 Social Security sins
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.

Tuesday, July 24, 2012

What to do when the IRS insists on canceled checks
by Robert Moïse, CPA, Charleston, S.C. 
Published July 01, 2012
Editor: Valrie Chambers, Ph.D., CPA

Practice & Procedures
The Check Clearing for the 21st Century Act (Check 21 Act), P.L. 108-100, was signed into law on Oct. 28, 2003, and went into effect on Oct. 28, 2004. For most consumers, this means that they now receive scanned images of their canceled checks in bank statements rather than the actual canceled checks; in some cases, they are not receiving even those. However, during an IRS audit, some IRS requests for information insist on substantiating expenditures with front-and-back copies of canceled checks.

The Check 21 Act enables banks to handle more checks electronically so they can process them more quickly and efficiently (Check 21 Act, §2). Moving paper checks is costly and slow. When a paper check is first deposited or cashed at a bank, a picture of the front and back of the check is captured and, from that point on, the image is transmitted electronically. With agreements between banks and their customers, except where the banks have agreed to provide canceled checks in their statements, the Check 21 Act permits the banks to provide either the original check or a “substitute check” (defined below) “or, by agreement, information relating to the original check (including data taken from the MICR [magnetic ink character recognition] line of the original check or an electronic image of the original check), whether with or without subsequent delivery of the original paper check” (Check 21 Act, §3(18)). After doing this, the bank generally is allowed to destroy the original check as provided in its customer agreement.

What happens when the IRS conducts an examination and asks for a canceled check to substantiate payment of an expense? Usually, as it has been doing for many years, the IRS accepts a copy of the canceled check. So taxpayers must take extra care to protect the copies of checks that may accompany their bank statements. Of course, the bank normally has quick access to copies of these checks. In rare instances where the IRS demands more than the copy of the canceled check included in the bank statement, taxpayers can request a substitute check from the bank. A substitute check is legally the same as the original check if it accurately represents the information on the original check and includes the following statement: “This is a legal copy of your check. You can use it the same way you would use the original check” (Check 21 Act, §§4(b)(2), 4(e)).

If a taxpayer receives a substitute check that is not legally the same as the original check and suffers a loss related to the substitute check, the Check 21 Act provides the taxpayer with a special procedure that can be used for restitution (Check 21 Act, §6(a)). 

The IRS has indicated that it generally will accept photocopies of substitute checks as proof of payment. However, as has been IRS policy for copies of canceled original checks, if an IRS auditor suspects that the copy is not genuine, he or she may ask the taxpayer to order the actual substitute check from the bank. The taxpayer’s general recordkeeping obligations under the tax law are satisfied by keeping the bank statements.
Note that the Check 21 Act procedure is far different from the electronic check conversion process that has been in use for many years, in which a bank customer’s check is converted to an Automated Clearing House (ACH) debit. The money is taken out of an account, or the taxpayer may authorize an electronic check and pay a bill by telephone or online. Customers’ rights using ACH debits and electronic checks are far different from their rights under the Check 21 Act, since the only record of an electronic check may be the notations on the bank statement.

The key points to remember with the Check 21 Act are:
  • If a taxpayer is receiving canceled checks now, that will continue until the bank sends notification to the contrary.
  • If taxpayers have online access to bank statements, they should download and save the electronic copy of the statements and checks as a backup.
  • Banks are not required to keep original checks for any specific length of time, and the Check 21 Act does not add any retention requirement.
  • Banks are required to notify customers if they change the way they have been providing canceled checks or copies.
  • Banks may provide a substitute check but are not required to do so. Customers need to understand what their bank will provide.
  • Even if the bank does provide a substitute check with the proper language, it may charge for this service.
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Robert Moïse is a partner with WebsterRogers LLP in Charleston, S.C. Prof. Chambers and Mr. Moïse are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at

Sunday, July 22, 2012

2012 tax rates

Internal Revenue Service 2012 tax table:

Tax BracketMarried Filing JointlySingle
10% Bracket$0 – $17,400$0 – $8,700
15% Bracket$17,400 – $70,700$8,700 – $35,350
25% Bracket$70,700 – $142,700$35,350 – $85,650
28% Bracket$142,700 – $217,450$85,650 – $178,650
33% Bracket$217,450 – $388,350$178,650 – $388,350
35% BracketOver $388,350Over $388,350

And here are a few related points:
  • The personal and dependency exemption will rise to $3,800
  • The standard deduction for married filing jointly will rise to $11,900
  • The standard deduction for singles will rise to $5,950

Friday, July 20, 2012

California insurance department warns of fake checks

The California Department of Insurance says bogus checks bearing the name of the department and purportedly signed by the Insurance Commissioner Dave Jones are being circulated.

CDI said the fraudulent checks are being presented as a "payment" or "refund" from CDI. Department officials said CDI does not issue such checks and is warning consumers and businesses to be on alert.

To date, checks have been found in California and five other states, with values between $2,000 and $5,000.

Consumers or business operators with suspicious checks are being asked to contact CDI at (909) 919-2200.

Read more here:

Monday, July 16, 2012

Healthcare law's surtax could affect a few home sellers in 2013,0,7914992.story
By Kenneth R. Harney

The vast majority of people who sell their primary residences next year won't be affected by the 3.8% levy, which takes effect Jan. 1.

WASHINGTON — When the Supreme Court upheld the healthcare reform law on federal tax grounds, it re-stoked a housing issue that had been relatively quiet for the last year: The alleged 3.8% "real estate tax" on home sales beginning in 2013 that is buried in the legislation.

Immediately following enactment of the healthcare law, waves of emails hit the Internet with ominous messages aimed at homeowners. A sample: "Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? When did this happen? It's in the healthcare bill. Just thought you should know."

Once litigation challenging the law's constitutionality surfaced in federal courts, the email warnings subsided. But with the law scheduled to take effect less than six months from now, questions are being raised again: Is there really a 3.8% transfer tax on real estate coming in 2013? Does it preempt the existing $250,000 and $500,000 capital gains exclusions for single-filing and joint-filing home sellers, as some emails have claimed?

In case you've heard rumors or received worrisome emails about any of this, here's a quick primer:

Yes, there is a new 3.8% surtax that takes effect Jan. 1 on certain investment income of upper-income individuals — including some of their real estate transactions. But it's not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year.

In fact, unless you have an adjusted gross income of more than $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly ($125,000 if you're married filing singly), you probably won't be touched by the surtax at all, though you could be affected by other changes in the code if Congress doesn't extend the Bush tax cuts scheduled to expire at the end of this year.

Even if you do have income greater than these thresholds, you might not be hit with the 3.8% tax unless you have certain types of investment income targeted by the law, specifically dividends, interest, net capital gains and net rental income. If your income is solely "earned" — salary and other compensation derived from active participation in a business — you have nothing to worry about as far as the new surtax.

Where things can get a little complicated, however, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200,000 or $250,000 thresholds. The good news: The surtax does not interfere with the current tax-free exclusion on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principal home. Those exclusions have not changed. But any profits above those limits are subject to federal capital gains taxation and could also expose you to the new 3.8% surtax.

Julian Block, a tax attorney in Larchmont, N.Y., and author of "Julian Block's Home Seller's Guide to Tax Savings," says it will be more important than ever to pull together documentation on the capital improvements you made to the property and expenses connected with the house — including settlement or closing costs, such as title insurance and legal fees — that increase your tax "basis" in order to lower your capital gains.

Since the healthcare law targets capital gains, you could find yourself exposed to the 3.8% levy on the sale of your home next year.

Here's an example provided by the tax staff at the National Assn. of Realtors. Say you and your spouse have adjustable gross income (AGI) of $325,000 and you sell your home at a $525,000 profit. Assuming you qualify, $500,000 of that gain is wiped off the slate for tax purposes. The $25,000 additional gain qualifies as net investment income under the healthcare law, giving you a revised AGI of $350,000. Since the law imposes the 3.8% surtax on the lesser of either the amount your revised AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or the amount of your taxable gain ($25,000), you end up owing a surtax of $950 ($25,000 times 0.038).

The 3.8% levy can be confusing and can bite deeper when your taxable capital gains are far larger or you sell a vacation home or a piece of rental real estate, where all the profits could subject you to the investment surtax. Talk to a tax professional for advice on your specific situation.

Distributed by Washington Post Writers Group.