We are all consumers and before I purchase anything of significance I look up reviews on line to make sure I’m getting the right product. One area of frustration has always been the healthcare industry, specifically hospitals. The assumption is that most insurance plans will cover, most if not all, of the hospitals in your area. Therefore we aren’t really shopping for price as much as quality of care.
This last week Medicare, by far the largest medical insurance payee, released its first ratings of more than 3,500 hospitals across the country. The ratings, based on patient reviews range from 0 – 5 stars. Medicare notes that “As for the stars themselves, a one-star rating doesn’t mean that you will receive poor care from a hospital It means that hospitals that received two or more stars performed better on this particular measure of patient experience of care.” This site no only rates hospitals in various categories but allows you to compare hospitals in a specified area.
While on the Medicare site you’ll also see:
- Nursing Home Compare
- Home Health Compare
- Dialysis Facility Compare
- Medicare Plan Finder
- Supplier Directory
Here is the Medicare Ratings Site.
Here is a sample of hospitals in my area:
Do you know how the Foreign Tax Credit works, you should, it can cost you a lot of money.
Here is another tax tip for those investors who are looking for dividends and have foreign dividend paying investments in a tax deferred account. When you own a stock in a company based in a foreign country you may have to pay a foreign tax on a dividend or capital gain. These tax rates are all based on US treaties. Whether you know it or not these foreign taxes are automatically deducted from your dividend payment before you even receive it in your account.
The good news is that the IRS will give you a tax credit for all Foreign Tax paid, it actually goes on 1040 Line 48. However, this ONLY works if you hold these investments in a taxable account. if you have these investments in a tax deferred account, you will still pay the foreign tax, but not get the Foreign Tax Credit.
Here are some examples of foreign withholdings on Dividends:
Australia – 30%
Brazil – 15%
Canada – 15%
Chile – 35%
Chine – 10%
France – 25%
Germany – 26%
Ireland – 20%
Japan – 10%
South Korea – 27.5%
UK – REITS only – 20%
Keep in mind that this is a Tax Credit, it reduces your actual taxes not just reduces your income.
Be careful under what account you invest in foreign company’s that pay dividends.
If you are over 66 (and under 70) and not yet getting Social Security you can easily get a $15 – $25,000 loan from Social Security. It’s actually very easy to do and there is no penalty whatsoever. You just have to completely pay it back within exactly 12 months and no longer. It is best done at the very start of the year so that your 1099-SA (Social Security tax form) will show a full repayment in the same year. Just file form SSA-521.
I actually did this in 2014. I filed and received my Social Security benefits effective January 2014 and stopped my benefits, repaying it all in December 2014. Each month I received my $2,600 benefit (the maximum payment allowed in 2014). Separately I paid my $104/mo Medicare payment and did not have any Federal Tax withheld. The net effect was that this money was invested in the market, I didn’t calculate exactly how much I made off of this loan but my overall investments were up double digits for the year. This was probably the easiest $2,000 or so I ever made.
Unfortunately you can only do this one time!
As you probably know from reading my other articles, I have no intentions of taking my Social Security benefits until I’m 70 years old since they grow tax free at 8%/year plus a cost of living increase compounded.
The lost of a spouse in retirement can result in the following tax shock:
- No longer able to file as Married Filing Jointly, may have to file as Single, the highest tax bracket.
- Loose 50% of the Personal Exemptions.
- Loose 50% of the Standard Deduction.
- Loose 33% of dual Social Security benefits.
- Possible loss of spouse’s private pension, depending on plan.
- Higher tax bracket may raise the marginal tax rate.
As you get older and are either retired or are planning your retirement you will undoubtly work out a retirement plan that should also include a tax plan. Bad tax planning is almost as bad a bad retirement planning. There are major tax filing issues for those who become a widow(er), the loss of both a personal exemption and a 50% less standard deduction. After a death, you can bet that the survivors’ marginal tax rate will increase and you need to plan for this in your calculations.
First let’s look at what happens in the tax years after a spouse passes away;
- In the tax year of the passing, if you did not remarry by December 31st, you can claim Married Filing Jointly, and your normal 2 exemptions. You may only do this one time.
- After the initial tax year, if you have a dependent child living in your house and your spouse died in one of the past two years you may qualify as a Qualified Widow(er).
- With the above dependent child or any qualified other dependant, after the 2nd year , may qualify to file as Head of Household.
- With no dependent child, you immediately become Single status for tax purposes, the most expensive tax bracket there is.
Here is how it affects the Standard Deductions in 2014:
Married Filing Jointly $12,400
Married Filing Separately $6,200
Head of Household $9,100
In addition for tax year 2014, the personal exemption amount is $3,950 per person, losing a spouse provides ½ the former exemption. Let’s also assume that both husband and wife were collecting Social Security, the passing of a spouse typically reduces the total annual Social Security amount by 33%.
When you do your retirement planning make sure you also look at tax planning for a surviving spouse and leave instructions behind on how best to deal with this issue.
First read my post on the April 1st deadline for taking your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s.
Here is the tip for reducing a potential tax bite from your Social Security benefits.
First of all, a portion of your Social Security benefits may be taxable if your Adjusted Gross Income (the very last line on your 1040) excluding your Social Security benefits for the year plus
- Any tax-exempt interest you earned, plus
- 50% of your Social Security benefits.
Combine these and it becomes your “combined income”, if it is below $32,000 (married filing jointly), none of your Social Security benefits will be taxed.
- For every dollar of “combined income” above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $44,000 of combined income (married filing jointly).
- For every dollar of combined income above $44,000 (married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.
So what is the tip and what does it have to do with your RMD? Simple, if you have a medium to larger amount of tax deferred investments in IRA’s and 401K’s don’t delay your first RMD to the following year. For example if you have $500,000 in tax deferred accounts your annual RMD might be $17,000, and if you have $50,000/yr Social Security benefits you’ll already be in the 50% bracket of Social Security being taxable. However if you take your first RMD in the following year you just moved some of your Social Security to the 85% bracket.
The best thing to do for many people is take your first RMD in the year you turn 70 ½, don’t wait till April 1st of the following year.
If you miss the April 1st date you will be taxed at a 50% penalty rate!
April 1st might be a good day to play a trick on a friend or family member, but if you turned 70 ½ during 2014, April 1st is a very serious date.
For those that crossed the 70 ½ mark, April 1st is the deadline to take your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s. Roth IRA do not require a RMD and therefore there is a planning strategy to convert tax deferred accounts into Roth’s. Keep in mind that the annual requirement for the RMD is December 31st of the same year and only in the first distribution can you delay it till April 1st. Therefore if you wait till April 1st this year, you’ll have to take another distribution for 2015 before December. This in total could amount to a 7% withdrawal from April-December 2015 which for some people is both a lot of money and a potentially large tax bill. Keep in mind that all distributions from a tax deferred account are taxed as “ordinary income”, no special breaks for dividends or LT capital gains. Fidelity Investments reports that over 40% of the people needing to take their first distribution have not done so as of a few weeks ago. The IRS says, “If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.”
This can get a little complicated, but if you have multiple IRAs, you should calculate the RMD separately for each account – but you can withdraw the total amount from a single IRA. In addition,, if you have different types of tax deferred plans – such as an IRA and 401(k) the RMDs must be taken separately from each kind of plan.
Many people believe the old adage that Social Security is not taxed. Years ago these benefits were not taxed, but today they can be depending on other factors.
Here are the rules for 2014 tax on Social Security, based on your filing status:
- Your combined income* is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- If your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.
Married Filing Jointly
- If you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
- If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable.
Married Filing Separately
- You are out of luck, all of your benefits are usually taxable.
- Keep in mind that Married Filing Separately is a really bad classification and has a lot of tax penalties.
For every dollar of extra income you earn above the lower threshold, $0.50 of your Social Security benefits will be subject to tax. Above the upper threshold, each extra dollar of income adds $0.85 to the total benefits that the IRS will tax.
How to Calculate Combined Income
Your adjusted gross income
+ Nontaxable interest (like tax-exempt income from municipal bond interest)
+ ½ of your Social Security benefits
= Your “Combined Income
First look at this chart, this stock hasn’t moved more than $1.00 in the last 3 years. Why would you possibly want to own it in your portfolio? Because it is a “money machine”!!!!
This is an excellent example of a “preferred stock” that is a money machine. It pays a current 7.70% quarterly dividend that is a “qualified dividend” for tax purposes. The dividend is fixed at $2.03/year. It trades under the symbol BCSPRD (Fidelity) you can look it up on Yahoo Finance under BCS-PD. Barclays Bank is a UK based and worldwide financial powerhouse. It carries a S&P BB rating (not bad at all). At this current yield, you will double your investment every 9 years by just re-investing your dividends each quarter. This preferred was originally issued at $25/share and 8.13% yield. As it rose in price to $26.xx the yield dropped to the current 7.7%. If you bought it at the initial $25 price you would still be getting the 8.13% yield.
For those of us who need a well balanced portfolio and are always looking for non-volatile stocks that are also tax friendly, preferred stocks are a great choice. I have allocated a portion of my core portfolio to quality preferred stocks with high-yields. In general, they don’t go up or down in price but they sure crank out their nice steady dividends.
Preferred stocks act almost like a bond. They have coupon values, fixed dividends, call or expiration dates and so forth.
You can learn more about Preferred Stocks by checking out these sites.
It really is a classic question many investors have. How do I decide what type of stocks, bonds and funds to put into my taxable brokerage account vs. my tax deferred 401K/IRA accounts? The overall idea is to reduce the impact of taxes on your investments. There is no “one size fits all” approach and sometimes your allocation depends on what stage of life you are in. I’ll assume in this article that you are over 50 and planning or are in retirement.
Tax Deferred 401K/IRA Accounts:
- The strategy is to have higher tax items in these accounts.
- Stocks or funds where dividends are taxed as “ordinary income”.
- Mutual Funds or ETF’s that have a high beta, or churn. This means the portfolio can have big tax consequences since they typically have short term capital gains taxed as ordinary income.
- REIT’s and BDC’s, whose dividend payouts are generally considered nonqualified and taxed at ordinary income tax rates.
- Any preferred stock who’s dividends are taxed as ordinary income, i.e. preferred REIT’s.
- Trust preferred’s that are taxed as ordinary income.
- Dividends from some foreign stocks and funds that are taxed as ordinary income.
- Options trading
- Strategy is to have tax friendly assets in this account and also a high degree of control.
- All cash for retirement living expenses or an emergency fund.
- Growth stocks that don’t pay dividends but will be held for long term gains.
- Tax-free bonds and bond funds.
- Unless you are looking for a “no-income” approach, stocks or funds with “qualified dividends”.
- MLP’s, if held for a long time since most distributions are a “return of capital” until the stock is sold.
- Any investment used as a “hedge” such as Gold stocks, inverse S&P etc. since they can be used for an offsetting capital loss at tax time if desired.
ROTH IRA Accounts
- This is the best account to hold high tax items in.
- It is also probably the safest place to shelter future income since the government has constantly changed tax rates and thresholds on taxable and tax deferred accounts (ordinary income tax rates). It’s hard to believe the government would change the tax-free provisions of the ROTH IRA.
2014 was a big year for me personally. It was my first full year in retirement, we moved from Pennsylvania to Florida and I focused a great deal of time fine-tuning my retirement plans. This included an updated Revocable Living Trust, and a written 5 year financial, income, tax and expenses plan. One of the most important tasks was to create an “In Case of Emergency” document.
The “In Case of Emergency” document is a complete explanation of everything someone (like my wife, family or executor of my estate) would ever need to know about everything in my/our lives. It also includes immediate specific steps to take in case something happens to me or “us”. Keep in mind that the emergency may not be your death, but may be you becoming incapacitated, there is a difference.
It is an on-going document that is constantly being updated and enhanced. This document is stored on my computer, on a secure web site and in our safe deposit box. Every family member knows about it and understands what it is.
An “In Case of Emergency” document should include:
- The location and attorney involved with the creation of our Revocable Living Trust, individual Wills, Durable Powers of Attorney, Healthcare Surrogate and other legal documents.
- The names, account numbers, and contacts information for all bank accounts, investment accounts, pensions, and past/current employers. Also confirm the structure of each asset and in the case of IRA’s the beneficiary since these may fall outside of your Revocable Living Trust.
- How income is generated, what steps are necessary to keep income coming in. Budget for living income and expenses. If you are still working, who at work to contact and what benefits might a spouse of a deceased worker get, like unused vacation pay, life insurance etc.
- Location of safe deposit box and the location of the keys. It might be best to give multiple family members access to the box.
- Business owned (if applicable) with complete details on tax and ownership structure, location of stock certificates and other important documents.
- Birthdates, social security numbers and contact information for all family members.
- The location of Tax records, past returns and contact information of tax preparer.
- Social Security information. Explain if any benefits are currently being provided and the strategy for future benefits including how to file for Survivor benefits.
- Your digital information including all login and passwords information, it’s best to have a software program or web site where these are stored and protected. All family members email accounts, your digital photographs, music, key documents on your computer and location of all back-ups.
- Your home information, mortgage holder (if applicable), how payments get made, contact and account information for utilities, trash collectors, newspapers, landscaping and other service providers. How are property, school and other taxes paid?
- Insurance information, including location of policies, account numbers, contacts, etc. Be sure to include homeowners, car, healthcare and life insurance
- Automobile information, including loans (if applicable), location of title, registration #’s, license plate #’s etc.
- List all healthcare providers like family doctors, insurance policy renewal information and an updated history of healthcare issues. Reference any Durable Powers of Attorney, Healthcare Surrogates and other healthcare information.
- Credit Cards, loans and other obligations. List all account numbers, and toll free numbers to call to cancel cards or pay off balances.
- Family cell phone accounts and structure of plans.
- Churches, Clubs and organizations along with contact information
- Neighbors and friends that should be notified with full contact information.
Finally, include a list of specific steps to immediately take in the days after an emergency.