Last week, RLH sponsored the Carroll County (Maryland) 'State of the Budget' Luncheon, an open forum on the Carroll County budget and a transparent presentation of the County's Director of the Department of Management and Budget. The unambiguous and open presentation that happens annually at these meetings caused RLH Managing Partner Karl Lehman to use the firm's allotted speaking time as sponsor to compare the budget process that we see in Carroll County to what we see in Washington, DC.
Thanks to the Carroll County Chamber for putting on the luncheon, and Community Media Center for recording the event. Video provided courtesy of the Community Media Center. To view the 2013 Carroll County Budget Luncheon in its entirety, visit http://www.carrollcountytv.org/streaming/player.asp?id=3619.
Everyone talks about the national debt. It's a topic that almost everyone has an opinion on, regardless of your political leanings. We track it closely by watching the online US Debt Clock, our news media has become astute at reporting how new legislation will affect the national debt, and some of us even follow a daily update of the national debt on Twitter (OK, maybe that's just me).
But what IS the national debt, and how is it calculated? Well, it's actually pretty simple - it is a historical accounting of nearly 237 years of government cash inflows (ignoring debt issuance) less all government outflows over the same period. The difference at the time of this writing is about $16.5 trillion. Putting personal opinions aside on the size of the number (too big? just right? too small?), in my opinion there's a big problem with the calculation itself. The problem is that no other government calculates their debt in this way. Finally, someone with a larger audience than I is making the same argument.
David Walker is a former U.S. Comptroller General who is making waves by going around and saying that the true national debt isn't $16.5 trillion, its $70 trillion. That's not a typo. The sheer size of the number will make most in the general populace laugh off the article and Mr. Walker's claims as absurd. But his methods are not substantially different than those used at the state or local government level.
As stated in the article, to get from a $16.5 trillion debt to a $70 trillion liability, Mr. Walker adds the unfunded liabilities created by Medicare, Social Security and other similar programs. Well, if you pull out a copy of your local government's financial statements, those statements will most likely include liabilities for other post-employment benefits, and by 2015 the unfunded actuarial liabilities for pensions will be also be recorded as a liability, but they are at least disclosed currently. So if the state and local version of Social Security and Medicare is on their books, why aren't we paying attention to the same at the national level?
Over the coming years, millions of baby boomers will reach age 62, the minimum threshold for receiving social security retirement benefits. If recent history is any indication, most of these people (over 70% by some estimates) will take their benefits as early as possible.
But whether you should take social security retirement benefits at the earliest possible age, or defer them until reaching normal retirement age (or even age 70), depends on several factors. Among these are your overall health and life expectancy, your plans to earn income before reaching normal retirement age, anticipated returns on other investments, even your guesses about the future of social security. Like most retirement planning choices, this decision isn't one-size-fits-all.
For some people, deferring social security benefits isn't an option. If your savings won't cover ongoing expenses, you may need to rely on social security income to make ends meet.
But if your circumstances offer more financial flexibility, you may want to consider deferring social security benefits. For each year you delay taking benefits, the payouts increase, up to age 70. Also, if you plan to earn significant income between age 62 and your normal retirement age (age 65 to age 67, depending on the year you were born), putting off your social security benefits may make sense. That's because any benefits in excess of specified limits ($15,120 in 2013) will be reduced. You'll lose $1 of benefits for every $2 in earnings above the limits. Fortunately, you won't lose any social security benefits (regardless of earnings) once you reach full retirement age.
On the other hand, let's say you've accumulated $500,000 in your 401(k) account and expect that account to generate an 8% annual return. Under such a scenario, you might be better off leaving your retirement savings alone and taking your social security benefits early to cover living expenses. Or perhaps your family has a history of health problems and you don't realistically expect to live into your 80s. Again, taking social security benefits at age 62 might be a good choice.
When it comes to retirement planning, there are no guarantees. When deciding whether to defer social security benefits, take a realistic look at your situation, run the numbers, and give it your best shot. For help with this important decision, give us a call.
The 2010 health care reform legislation included several provisions that go into effect this year. Among them is the increase in Medicare taxes for taxpayers with incomes above certain levels. Here is an overview of these two new taxes.
FIRST, the payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. The tax increase will also apply to self-employment income exceeding the threshold amounts.
Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual's filing status. They are not required to inform the employee when they begin the additional withholding, nor are they required to match the additional withholding.
SECOND, there is a new 3.8% Medicare tax on unearned income for single taxpayers with adjusted gross income over $200,000 and married couples with income over $250,000. The tax will apply to the lesser of (a) net investment income, or (b) the amount by which modified adjusted gross income exceeds the $200,000 / $250,000 thresholds. The tax may require adjustments to the estimated taxes paid by an individual, but it does not have to be withheld from wages.
Examples of unearned income include interest, dividends, capital gains, royalties, and rental income. Social security benefits, alimony, tax-exempt interest, and distributions from most retirement plans are examples of unearned income not subject to this new tax.
The delayed passage of the American Taxpayers Relief Act of 2012 has put the IRS behind schedule. Due to several provisions of the law affecting 2012 tax returns, the IRS could not open the Form 1040 filing season for the majority of taxpayers until late January.
Starting Sunday, February 10, the IRS will start processing tax returns that contain Form 4562 (Depreciation and Amortization), and on Thursday, February 14, the IRS plans to start processing Form 8863 (Education Credits).
Those taxpayers filing Form 5695 (Energy Credit) and Form 3800 (General Business Credit) will not be able to file until late February or possibly not until March.
The IRS said that taxpayers will receive refunds faster by e-filing and using direct deposit.
As the politicians in Washington start once again to tackle the same old problems, you're likely to hear more about a new way of measuring inflation called the "chained CPI."
The standard way to measure inflation has been with the consumer price index (CPI). The CPI has been used to calculate annual adjustments to social security benefits, federal pensions, military and veterans' benefits, and tax brackets, exemptions, deductions, and credits. According to some experts, the consumer price index currently used overstates increases in the cost of living.
So how is the "chained CPI" different? It makes different assumptions about how people spend. An oversimplified example: If a severe freeze drives up the cost of oranges and orange juice by 20%, people are likely to switch to a cheaper alternative, say, apples and apple juice instead of continuing to pay the higher price for oranges. This keeps spending more level than the regular consumer price index would indicate.
A switch to the chained CPI would mean that those government payments linked to inflation would rise more slowly. Applied to the tax code, the chained CPI would mean smaller inflation adjustments to tax brackets and other tax numbers, resulting in higher taxes than by using the regular CPI.
The IRS is reducing the recordkeeping required for the home-office deduction, effective for 2013. Taxpayers who qualify may use a new optional deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.
Taxpayers opting for the simplified deduction cannot depreciate a portion of the home as they can under the other method. However, business expenses not related to the home, such as advertising, supplies, and employee wages, are still fully deductible.
This simplified option is available starting with the 2013 tax return which will be filed in 2014.
The IRS had to delay the start of this year's tax filing season until it completed programming changes made necessary by the late passage of the "American Taxpayer Relief Act of 2012" (signed into law on January 2, 2013).
Normally, farmers and fishermen are not required to make quarterly estimated tax payments if they file their tax return and pay taxes due by March 1 of the following year. The filing delay created by the new law meant that several tax forms needed by these taxpayers would not be ready on time.
As a result, the IRS has announced an extension of the March 1 filing deadline for farmers and fishermen to April 15.
The filing extension will apply to all farmers and fishermen, not just to those who use late-released IRS forms.
To qualify as a farmer or fisherman for 2012, at least two-thirds of the taxpayer's gross income for 2011 or 2012 must have come from farming or fishing.
A number of tax breaks that had expired at the end of 2011 or were to expire at the end of 2012 were extended by the recently passed law, the "American Taxpayer Relief Act of 2012." Keep these deductions and credits in mind as you gather the paperwork for filing your 2012 tax return. Those that apply to you or your business could cut your 2012 tax bill.
FOR INDIVIDUALS. The law restored for 2012 through 2013 the following tax breaks:
FOR BUSINESSES. Included in the law's provisions were the following items that could affect your business:
For assistance in identifying and utilizing all the tax deductions, both new and old, to which you are entitled, please give us a call.
The timing of taxable income and deductions for federal income tax purposes is relatively straightforward. Generally, income is taxable in the year it is earned and received. Likewise, deductible expenses incurred and paid this year can offset taxable income on this year’s return. The Internal Revenue Code is riddled with exceptions, but these basic rules usually apply, especially for calendar-year taxpayers.
The tax law also includes several provisions commonly referred to as “carrybacks” and “carryforwards” (or “carryovers”). As their names imply, the tax item can be carried back to a prior year or carried forward to a succeeding year.
Two items that are often carried forward by individuals are capital losses and excess charitable deductions. For instance, capital losses realized in 2012 offset capital gains plus up to $3,000 of ordinary income for the year. If you have an excess capital loss of $10,000, you can carry forward $7,000 to 2013 after offsetting $3,000 of ordinary income in 2012.
Similarly, your current deduction for charitable donations may be limited by one or more percentage thresholds in the law. For example, donations of appreciated property are generally limited to 30% of your adjusted gross income (AGI). If you exceed the 30%-of-AGI limit this year, you may carry over the excess for up to five years.
Carrybacks aren’t as common, but may also be available in certain situations. Take a “net operating loss” (NOL) sustained by your small business. If you have an NOL in 2012, you can carry back the loss for two years. Thus, you’re effectively able to reduce your tax liability for one or two of the previous years for a refund of taxes already paid. Then you can carry forward any remaining NOL for up to 20 years. If it suits your purposes, you can elect to waive the NOL carryback. For more information on carrybacks and carryforwards, give us a call. We can help you make the best tax return choices for your situation.
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