Carlsbad CA Estate Planning

Social Security and Medicare and the Impact on Retiree Taxes

 

“Medicare has a series of income limits that trigger increasingly higher payments for retirees. And it’s not just the rich who are affected.”

 

A 70% increase in Medicare premiums to $559 was a complete surprise to a woman who became a single taxpayer when her husband died. She felt like she was being punished for being a widow, she said in a recent article titled “Retirees, Beware These Tax Torpedoes” from Barron’s. With a 2018 modified adjusted gross income of $163,414, a combination of required minimum distributions, Social Security and her husband’s pensions, she went from being in the third-highest Medicare bracket into the second highest Medicare bracket. All it took was $414 dollars to exceed the $163,000 limit.

This is not the only tax trap awaiting unwary retirees. Lower- and middle-income taxpayers get hit by what’s commonly referred to as “tax torpedoes,” as rising income during retirement triggers new taxes. That includes Social Security income, which is taxed after reaching a certain limit. The resulting marginal tax rate—as high as 40.8%—is made worse by a Medicare surtax of 0.9% on couples with taxable income exceeding $250,000. Capital gains taxes also increase, as income rises.

There are a few steps that retirees can take to avoid or minimize these taxes for next year. The simplest one: delay spending from one year to the next and be extra careful about taking funds from after-tax accounts.

What hurts most is if you’re on the borderline of a bracket. Just one wrong move, like selling a stock or taking a distribution, puts you into the next bracket. You need to plan carefully.

One thing that won’t be a concern for 2020 taxes: required minimum distributions. While many retirees get pushed into tax traps because of taking large RMDs, the emergency legislation passed in response to the coronavirus crisis (the CARES Act) eliminated RMDs for this year.

However, the RMDs will be back in 2021, so now is a good time to start thinking about how to avoid any of the typical tax torpedoes. RMDs used to start at age 70½; the SECURE Act changed that to 72.

If you don’t need the money from an RMD in 2021, one workaround is to take it as a qualified charitable distribution. That avoids triggering higher taxes or higher future Medicare premiums. The administrator of the tax-deferred account needs to be instructed to make a donation directly to a charity.

An even better strategy: take steps long before Medicare income limits or tax torpedoes hit. If you can, live on after-tax savings, Roth IRA accounts or inherited money. Spend that money first, before tapping into tax-deferred accounts. You can then take advantage of being in a lower tax bracket to convert money from tax-deferred money to convert to Roth IRAs.

Another story of a tax hit that was avoided: a man with an income of about $80,000 prepared to take $4,000 from a tax-deferred account for a vacation. The couple’s normal top tax bracket was 12%, but they hit the income limit on Social Security taxes. The $4,000 in additional income would have caused $3,400 in Social Security income to be taxed, making his marginal tax rate 22.2% instead of 12%. With the help of a good advisor, the couple instead took $3,000 from a Roth IRA and sold a stock position for $1,000, where there were practically no capital gains generated.

Incomes at all levels can be hit by these tax and Medicare torpedoes. A skilled advisor can help protect your retirement and Social Security funds.

Reference: Barron’s (July 6, 2020) “Retirees, Beware These Tax Torpedoes”

Possible Pitfalls for Special Needs Planning for Parents

 

“Both the state and federal government, administered through the Social Security Administration (SSA) and Medicaid provide disabled individuals with a variety of life enhancing, and sometimes life sustaining, public benefits.”

 

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are “needs tested,” where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

“Needs testing” is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

Maybe You’re Only a Little Retired Now

Montefiore, a large hospital located in the Bronx, N.Y., is one of many organizations developing informal programs to rehire some retired employees. Administrators noticed that half of its nurses were nearing 50. It didn’t have a nursing shortage and wanted to prevent one. It now routinely brings back retired nurses on a freelance basis. It’s good for the hospital and the retirees, who can supplement their pensions.

As reported in The New York Times in an article titled “In a Tight Labor Market, Retirees Fill Gaps Their Previous Employers Can’t,” not every person who retires is ready to do so—and not every employer is ready to let them go. In a tight labor market, firms find recent retirees increasingly attractive.

This has become more common than at any other time since the Great Recession, says Kathleen Christensen, who funds research on aging and the American labor market at the Alfred P. Sloan Foundation.

There’s a shortage in many sectors, including construction and transportation, so the attitude toward older workers is changing.

One large northeastern power company is also bringing back retirees, using their years of experience to train younger employees. This company’s management deliberately stays in touch with retirees, allowing some to work part time and taking others on, as needed, for short term projects. Since they are brought back on as contractors, not employees, they continue to receive their pensions.

The boom in online shopping has had an impact on delivery services. UPS has organized a program to recruit retirees. Management sought to bring back retired workers and has also tapped the older workers in construction to help with new facilities that are being built.

In other words, when you retire, don’t be surprised if you’re asked to come back.

One thing to keep in mind if your retirement includes going back to work: how will your income impact your Social Security benefits and your overall retirement plan? Sit down with an experienced estate planning attorney to find out how your new life as a freelancer or independent contractor will impact your tax liability, your government benefits and your estate plan.

Who knew that working would make retirement fun again?

Resource: The New York Times (July 15, 2018) “In a Tight Labor Market, Retirees Fill Gaps Their Previous Employers Can’t”

Think 61 is Your Golden Retirement Number? Think Again

If you work for a living, chances are good you like to daydream about what your life will be like during retirement. We all do it and so do younger workers who have yet to pay their dues.  However, according to a survey from Bankrate, as reported in The Motley Fool’s article titled “Americans’ Ideal Retirement Age–and Why It’s Not Realistic,” adults across the board think that 61 is the ideal age to retire.  Is that realistic?

Unless you can live without Social Security during retirement, 61 is not your magic number. Most American retirees can’t live on Social Security alone and those benefits have a major impact on the ability of most retirees to keep up with their bills.  However, eligibility doesn’t start until age 62. The people in the survey either didn’t know they can’t collect Social Security until they turn 62 or they are assuming they can get by without it.

The average Social Security benefit check is just more than $1,400, which adds up to about $17,000 a year. If you are among those who have little or no money set aside for retirement, that’s a lifeline.

A large number of working Americans are way behind in their retirement savings. It’s estimated that around 42% have fewer than $10,000 set aside for the future. How will they retire at all, much less retire at age 61?

Even if you can manage to keep working until age 62, filing at that age has its own issues. Today’s workers need to wait until their Full Retirement Age, or FRA, in Social Security’s terms, to receive their full monthly benefit. The difference is large enough to make it worth the wait.

Assume that your full retirement age is 67, but you retire at age 62. Instead of $1,400, your monthly benefit would be $980.

However, what if you are among those who really want to retire at 61? You’ll need to have started with saving and investing for retirement at a relatively young age and have been willing to take a very aggressive position in your investments. If you started at age 26, with a goal of retiring at age 61, and you are employed by a company with an employee sponsored 401(k), you’d have had to contribute $1,500 a month for thirty-five years to amass enough money—if your investments were earning a steady 7%.

If retirement is around the corner, one thing you can do is make sure your estate plan is in place. Therefore, whatever assets you have, will be distributed according to your wishes. Make sure you have also taken care of having a power of attorney and healthcare directive in place. Speak with an estate planning attorney to make sure these documents are prepared correctly.

 

Reference: The Motley Fool (July 18, 2018) “Americans’ Ideal Retirement Age–and Why It’s Not Realistic”

Major Social Security Raise Possible

Every year the Social Security benefits that millions of senior citizens receive on a monthly basis are supposed to increase with the cost of living. However, it has long been pointed out that it does not really happen.

The methods used by the federal government to determine cost of living adjustments are not an accurate reflection of the purchasing power of recipients. For example, since 2000 benefits have risen 43%, but senior buying power has risen 86% according to advocates.

The average increase in benefits in the last few years has only been 1%, since overall official inflation rates have been low.

That could change next year, according to Barron's in "Big Social Security Bump Could Be Coming."

Early signs indicate that a benefit increase of 2.1% is coming next year.

That is good news for seniors who have seen their benefit dollars pay for fewer and fewer of their expenses.

The bad news is what that might mean for the health of the Social Security system itself. It needs to be adjusted to make sure the Social Security Trust Fund does not run out of money in the next couple of decades, which would result in automatic steep benefit cuts.

Benefit increases are only expected for now.

No official announcement will be made until October.  Therefore, seniors should not plan for raises yet.

Reference: Barron's (June 6, 2017) "Big Social Security Bump Could Be Coming."

Online Social Security Changes Again

It is relatively easy to log in to the Social Security Administration and get access to all of the information about your account. A few basic details are all that is required.

This has led to concerns about privacy and identity theft.

Since it does not take much for a legitimate user to log in, it does not take very much for thieves to log in either. The agency attempted to fix this problem in 2016, by requiring a two-step verification process before account access was granted.

That was short-lived, however, as many people were unable to log in to their accounts.

The agency is going to try again with a modified process, as Investment News reports in "Social Security Administration steps up online security."

In its last attempt, the agency sent users a code via cellphone to verify their accounts before they could log in. That was a problem, since many elderly people do not use cellphones.

This time around, the agency will let people choose to have the code sent by cellphone or email. It is assumed that if are trying to access their Social Security accounts online, then they will almost certainly have email accounts, even if they do not have cellphones.

This change is scheduled to take effect on June 10, 2017.

Anyone who has problems accessing their Social Security accounts online after that, should speak to an elder law attorney.

Reference: Investment News (May 15, 2017) "Social Security Administration steps up online security."

Forced to Pay for Your Parents

There are many laws on the books that receive very little attention because they are very rarely used. If few ever bother to attempt to enforce a law, then there is usually no reason for people to bring it up.

However, sometimes those laws do eventually become important, because of a general change in circumstances that sees those laws starting to be used more frequently.

An example of this is filial-responsibility laws.

These are laws that have been passed in 28 states that require adult children to provide financial support for their elderly parents, if the parents are unable to pay their own bills, as the Wills, Trusts & Estates Prof Blog discusses in "Filial-Responsibility Laws Could Cost You."

These laws were not used much in the past because government programs for the elderly such as Social Security, Medicare and Medicaid provide financial support for the elderly.

Today, with people saving less and living longer, many elderly people are not able to afford the costs of their own care, which is increasing.

Nursing homes in states with filial-responsibility laws are increasingly looking to enforce them against children with parents who do not pay their bills.

This is yet another reason to make sure that you plan for your retirement and estate. If you do not, your children might be required to pay for you.

Reference: Wills, Trusts & Estates Prof Blog (May 3, 2017) "Filial-Responsibility Laws Could Cost You."

Social Security Myths

The Social Security program seems simple enough. When you reach retirement age, you can stop working and the government will send you a check, the amount of which is based upon your income during your working years.

People understand that much which leads them to believe that they know all they need to about the program.

However, a recent survey found that most people between the ages of 55-61 believe some myths that need to be corrected, as CNBC reported in "The three biggest myths about how Social Security works." The myths include:

• Many people think that when they become eligible for Social Security, the government will know and automatically start sending them a monthly check. That is not true. You need to apply for Social Security and you need to do so, three months before you plan to receive it.
• Another common misconception is the retirement age to receive full benefits. It depends on when you were born.
• People also believe that if an ex-spouse claims Social Security benefits under their work history that it will decrease the amount of their benefits. This is also a myth. An ex-spouse's claim will result in no changes to any benefits that you will receive.

Reference: CNBC (April 25, 2017) "The three biggest myths about how Social Security works."

Millennials Should Pay Attention to Elder Law

People of all generations tend to pay the most attention to the issues that affect them directly and immediately.

Most senior citizens do not think a lot about the cost of a college education and the availability of entry level jobs. Conversely, younger people do not think much about Social Security and Medicare. Each group has more pressing concerns that hold their attention.

However, the younger Millennial generation should pay attention to Social Security and Medicare.

Some people believe that stock markets will be bearish in the next few years.  As a result, Millennials should save 25% of their current income to make sure that their retirement nest eggs grow at the appropriate rate, according to Wealth Management in "Should Millennials Double Retirement Savings Rates?"

Many Millennials will quickly point out that due to other economic factors beyond their control, they cannot afford to save 25% of their incomes, or even the traditional 10-15%.

As a result, people in that age group will be reliant to some extent on Social Security and Medicare when they retire. Since both of those programs face impending financial problems, Millennials need to pay attention to how these programs might change.

They should not consider it just an issue for older people. It will be their issue one day.

Reference: Wealth Management (Jan. 11, 2017) "Ken Thompson's mother says she was cut out of will by late Brooklyn DA's wife."

Human Lifespan Limit Reached

Most people would consider the fact that Americans live a lot longer on average than they used to a wonderful development. Many would like to see that trend continue.

On the other hand, it cannot be denied that extended lifespans have put a strain on many of our important services for the elderly. Medical care for the elderly can be very expensive and that has increased the cost of Medicare.

The longer people live, the longer they collect Social Security and that safety net is under stress as a result.

From that perspective it might seem a good thing that it is unlikely humans will continue to see increasing lifespans in the future, according to a report in the Guardian "Human lifespan has hit its natural limit, research suggests."

It appears biological factors limit the human lifespan to somewhere around 115 years even when people are given the best possible healthcare. If this research holds up to scrutiny, it should assist with planning when it comes to paying for Medicare and Social Security.

Of course, there are some researchers who are looking into ways to overcome the biological obstacles and extend human life even longer. So far, they have not been successful.

Reference: Guardian (Oct. 5, 2016) "Human lifespan has hit its natural limit, research suggests."