Is Your Social Security Taxed -- And if So, What Can You Do?
Depending on your total income, the government will tax your social security income up to 85%. Let's see how this happens and what you can do about it.

Your 'base' income along with your filing status determines how much of your social security is taxed. Your base income is your adjusted gross income plus any tax free bond interest plus 50% of your social security income.

Simply compare your base income to certain threshold amounts depending on your filing status - (1) single or head of household; or (2) married filing jointly. If you are filing married filing separately, 85% of your social security will always be taxed.

Single or head of household thresholds	Married filing jointly thresholds	Fraction of your Social Security Income Taxed
Less than $25,000	Less than $32,000	No tax on your Social Security income
$25,000 to $34,000	$32,000 to $44,000	50% of Social Security income or 50% of amount PI exceeds threshold - whichever is less

The table centered above gives the threshold incomes that you compare your base income with for each filing status, with the resulting fraction of your social security that is taxed.

If your base income falls within an intermediate range for you filing status, then either 50% of the excess of your base income over the lower threshold OR 50% of your social security income -WHICHEVER IS LESS - will be taxed.

If your base income is greater than your filing status' high threshold, most instances produce 85% tax on social security.

So depending on your income level, when extra taxable income comes in during the year - say from stock sales - you need to pay the tax on those sales, but that income pushes up the tax on your social security. That is a double whammy on your tax bill.

So what can you do to minimize taxation of your social security?

In years where selling stocks or other actions will push your social security into a higher taxable level, you may want to put off that sale until another year. So to the extent that your income options permit it, you will group your taxable sales into alternate years where social security will be taxed at 85%, but in the off years it will be taxed at 50% or less, hopefully.

Give us a call or fill out the reply coupon so we can help you adjust your investment options and transactions to minimize the double whammy effect.

Take Full Advantage of Your Home Sale Capital Gain Tax Exclusion
During their retirement years, most seniors will sell their home. They may do it to move into a condo now that the kids are gone, or because they need to move into a nursing home. With house prices rising as they have, seniors will most likely have a gain. If that is the case for you, make sure you realize when and how much of that capital gain you can exclude from your taxable income in the year of sale.

IRS regulations allow you to exclude up to $250,000 of the gain on the sale of your main home if all of the following are true

1. You meet the ownership test (see below).
2. You meet the use test, and (see below).
3. During the two-year period ending on the date of the sale, you did not exclude gain from the sale of another home?

The Urban-Brookings Tax Policy Center says the AMT hit 3.6 million out of the nation's 131 million taxpayers filing for tax year 2005 (filed in early 2006), and could affect 31 million by 2010 if nothing is done.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you separately meets those three conditions above.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true:

1. You are married and file a joint return for the year.
2. Either you or your spouse meets the ownership test.
3. Both you and your spouse meet the use test.
4. During the two-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

Lastly you will meet the ownership and use tests if during the five-year period ending on the date of the sale, you:

• Owned the home for at least two years (the ownership test), and
• Lived in the home as your main home for at least two years (the use test).

Realize that you do not need to live in the house for two consecutive years - just for a total of two years within a five-year period. Secondly, you do not have to live in it during your ownership. You may perhaps have lived in it as a rental for a total of two years before or after you owned it - but within that same five years.

Seniors may sell their home and then move into a condo and then out of it a couple of years later. A careful understanding of this exclusion law will allow them to preserve exclusion of any capital gains from taxation.

Give us a call so we can help you decide when and how best to plan the sale of your home or condo.

Know Whether Your Roth IRA Distribution Will Be Taxed
If you are like millions of other Americans who have contributed to Roth IRA accounts, you can feel good knowing that any distribution you take from it will not have to be reported as income on your tax return this year (assuming that your distributions are "qualifying distributions)." But you may not be aware that there are a few exceptions to this rule (distributions which are not "qualifying distributions"), one of which can apply even after you have reached age 59½. While these exceptions are not very common, Roth IRA owners should be aware of them when they apply.

The first (and most common) exception occurs when a Roth distribution is taken after age 59½, and the earnings within the account are included in the distribution. A mandatory five-year holding period applies for all income and gains realized inside a Roth IRA. Suppose you contribute $4,000 each year into your Roth IRA for four years. Over that time, the account earns an additional $4,000, bringing the total account balance to $20,000. Even if you are 59^1/2 or older, if you withdraw the entire account balance at once, then the $4,000 of earnings will be taxed as ordinary income. However, if you wait another year, then those earnings will be tax-free as well. This five-year holding period starts over for each new contribution made; therefore, all earnings posted from each of your annual contributions will have its own five-year period that must be satisfied. This ultimately means that most final distributions that are taken from Roth IRAs will likely have some earnings that are taxable, except for those who have not contributed to their Roths within the previous five years. The 10% early withdrawal penalty will additionally apply for any withdrawal of earnings taken before age 59^1/2.

Earnings are also taxable for virtually all other exceptions to the early withdrawal penalty, such as death or disability. There are, in fact, no exceptions to the five-year rule, regardless of age or reason for withdrawal. The following table quantifies the rules for taxation of earnings from Roth IRAs.²

Taxation of Roth IRA Distributions

	Roth IRA Earnings Withdrawn Within the First Five Years		Roth IRA Earnings Withdrawn After Five Years
Distribution Purpose	Are Earnings Taxable?	Will the 10% Penalty Apply?	Are Earnings Taxable?	Will the 10% Penalty Apply?
On or Before Age 59 ½	Yes	No	No	No
Before Age 59 ½, See Penalty Exception 1-7	Yes	Yes	Yes	Yes
On or Before Age 59 ½	Yes	No	No	No
Death	Yes	No	No	No
Disability	Yes	No	No	No
1st Time Home, $10K limit	Yes	No	No	No
Equal Periodic Payments (72t)	Yes	No	Yes	No
Medical Expenses Above 7.5% AGI	Yes	No	Yes	No
Insurance Premiums by Unemployed	Yes	No	Yes	No
Higher Education Expenses	Yes	No	Yes	No

2 For more information on the taxation of Roth IRA distributions, see IRS tax topics 428 and 558 at www.irs.gov.

Don't Necessarily Roll All Your 401(k) into an IRA
You are approaching your retirement or have arrived. What do you do with all those contributions you and your employer have made to your 401(k)?

You basically have two choices. You can keep it with the employer or roll it over to an IRA. But first, consider some of the ramifications on a rollover to an IRA.

Under an IRA, you can invest your proceeds in a variety of options. It puts you solidly in control of your investment. However, money that comes out of an IRA is taxed at ordinary income tax rates which can be as high as 35% and not at the lower capital gains rates. And you will pay an additional 10% penalty tax for taking distributions before you turn 59½, unless you qualify for a hardship withdrawal or other exception.

Or, you can leave it with your company and take out your yearly amount and pay tax on it. But unless you are 55 or older, you will pay a penalty on what you take too.

But there is another way which may be advantageous in your situation.³ It uses both these options, but with a tax advantage if you have a lot of your company's stock in your 401(k) along with other contributions. If so, you can take advantage of paying the lower capital gains rate on the net unrealized appreciation (NUA) of that stock.

To do this, you need to split the 401(k) into a company stock part and everything else. Now take the 'everything else' part and roll that directly into an IRA. Have your company transfer that money directly to your IRA - and not to you first.

If you have the company pay it to you, 20% of it will be withheld for tax purposes. And then if you want to preserve a no tax transfer, you will have to roll it all into an IRA within 60 days and include that 20% withheld amount, but now paid out of your pocket. You can get that 20% that was withheld for Uncle Sam when you do your taxes for that year. Of course that is the hard way to roll it over.

Now with the part of the 401(k) that is all company stock, you can take it all as a lump sum distribution within that tax year. On the amount originally invested in those shares, you will pay ordinary income tax today. But later, you will pay tax on the unrealized appreciation, but it will be at the capital gains rate (currently 15% federal).

Give us a call so we can help you make a decision suitable for your situation and show you some IRA investment strategies too.

3 All information taken from IRS Publication 575.

Stop Paying Credit Card Interest to Increase Your Retirement Income
Retirement income is often fixed income. Make the most of it by not wasting it unknowingly on credit card debt payments. Credit cards are convenient and safer than carrying a lot of cash. Use them to buy what you want, but pay the balance off at the end of the month. If you are not, you may not be aware of how much income your credit card interest is eating up.

Under conventional loans, your monthly payments are determined by the:

• amount of principal to be repaid,
• rate of interest on the unpaid principal-the annual percentage rate (APR), and
• number of monthly payments.

The more you borrow, the larger your monthly payment will be over a set number of months at a fixed rate. If the number of months is increased, the monthly payments will be reduced. Likewise, a lower rate will lower the monthly payments. Most importantly, you can see just how much loan interest you will pay.

But consumer revolving credit, like credit card debt, often obscures the number of payments due, as well as the interest rate. Paying the minimum monthly payment could result in years of repaying even a small debt and costing you much more than if you took a conventional loan.

As an example, if you pay only the 'minimum payment' each month, it can take a very long time to clear your balance. If you have a $3,000 balance at 18.9 percent interest and you pay $50.00 toward the balance each month (a typical minimum payment), it will take you 15 years and six months to pay off your debt, costing you $6,279.85 in interest charges.

If you plan to do more than just pay the minimum in the example above, you could pay $60 each month instead of $50. In this case it would take you 8 years and four months to pay off your $3,000, costing you $2,947 in interest charges.

So carrying a credit card balance really eats into your income. Especially high interest cards make the items you purchase much more expensive than their sales price. Many credit cards have high interest rates, and some interest rates continue to climb the further behind you fall in making payments.

If you cannot pay it all off right away, then call the company and request that the interest rate be lowered. Tell them you are considering transferring your balance. If you have been a good customer and paid on time, they may lower your rate to keep you as a customer. Or, find one or two low-rate cards and cancel all the others. Switching from a high-rate credit card to a low-rate card can easily save you $200 or more a year.

Give us a call. We can help you arrange you finances so you don't have to rely on maintaining a credit card balance.

Refinance Your Rental Property for More Retirement Income
Need more retirement income? Tap into your rental property without selling it. Selling means paying taxes and losing your rental's income and your future appreciation. If your rental's value has appreciated since you bought it, you can get more money out of it two ways through refinancing. You will pay no taxes and maintain your property's worth to you.

Lower interest rates since buying property
If interest rates have dropped since you originally bought or last mortgaged the property, you can refinance that loan in two ways. First, suppose you refinance only the present balance so that your monthly mortgage payments are reduced under a reduced rate. This reduces your rental monthly expense, giving you an increased net income for your retirement needs.

Second, you refinance but increase your mortgage balance so the new monthly payments are the same as the old payments. Of course, you can take the net increase of the new mortgage balance over the old one for cash, and your monthly expense remains the same. Since this money comes from borrowing, it triggers no taxes. It is yours to spend or reinvest elsewhere - as in bonds - for more monthly income.

Higher rental income for improvements
Even if interest rates are about the same as for you present mortgage, you can create more money from higher rents by improving or refurbishing your rental property. You still need to refinance your rental to a higher mortgage balance. If interest rates are the same, this will increase your monthly payments. But if you use the excess loan money to improve the property, you can justify increasing the rents.

Even if interest rates are about the same as for you present mortgage, you can create more money from higher rents by improving or refurbishing your rental property. You still need to refinance your rental to a higher mortgage balance. If interest rates are the same, this will increase your monthly payments. But if you use the excess loan money to improve the property, you can justify increasing the rents.

Of course, if the refinancing interest rates in this second scenario are lower than the original loan, you will have all that much more money to use.

Health Care

In each of these cases, you have increased your cash or income, yet maintained your rental property for its future appreciation and future rental income. Note that refinances will incur fees and commissions and refinancing for more than your current balance will increase your debt, which may not be appropriate

Give us a call so we can show you current mortgage rates and how you may take advantage of your property's equity.

Know Your Housing Options for Evaluating Long-term Care Costs
You or your spouse will eventually become less able to live independently. Knowing your options for alternative living arrangements helps you evaluate your long-term care costs (LTC). Here are some options of roughly increasing LTC for you:

Living With Your Adult Children

You may move into your adult child's residence - perhaps an accessory apartment attached to it.

Home Sharing

As an older homeowner who prefers not to live alone (or who needs the income) you can rent rooms in your home to others, or share it with someone in exchange for assistance with cooking, cleaning, etc.

Foster Care

Some families will take in an older person who needs some help with daily living. This foster family provides services such as cooking meals and doing laundry. You may become a surrogate family member and receive emotional support and companionship as well as housing.

Board and Care Homes

These provide a room, meals, and help with daily activities. They are generally smaller than assisted living residences. Be aware that these homes are not always licensed. In some states, they provide some nursing services, but they are not medical facilities.

Congregate Housing/Senior Retirement Communities

If you are mobile and can take care of yourself, you can live in your own apartment in these buildings. But you share most meals in a central dining room and receive housekeeping services. They often provide a variety of social and recreational activities too.

Rental fees vary widely, and meals and other services are usually extra. Some residences receive public subsidies that keep rents down, but these often have long waiting lists and stringent income requirements.

Assisted Living Residences

These provide housing for those who cannot live independently, but do not need skilled nursing care. The level of assistance varies and may include help with bathing, dressing, meals, and housekeeping. Costs at assisted living residences vary greatly depending upon the services required.

Nursing Homes

This is an option for those who need skilled nursing care and substantial, long-term assistance. You are provided with medical and personal care and meals. Bedrooms and baths may be private (for private-pay residents) or shared. Medicare may provide brief, short-term coverage following a hospitalization. Medicaid may offer coverage to residents who meet medical and financial eligibility requirements.

Continuing Care Retirement Communities

These facilities offer a variety of housing options and services all on the same campus. They are designed to meet the changing needs of older people. A resident who starts out living independently in a separate apartment may move to an assisted living unit when he or she needs help with daily activities, and may stay periodically in the nursing unit when he or she needs ongoing skilled nursing care. Although prices vary by facility, this may not be an affordable choice for some older persons. A large entrance fee and costly additional monthly charges are common.

Gives us a call or fill so we can help you evaluate costs and possible LTC insurance for your anticipated needs.

A New Type of Trust May be Able to Solve Many Estate Planning Problems
Many wealthy Americans today are worried about what will happen to their estates after they are gone. Although many different types of trusts have been designed to help alleviate this problem, a new type of trust, called the "inheritor's trust" has a level of flexibility that is unmatched by other estate planning vehicles. This type of trust is a dynastic trust, similar to many other types of dynastic trusts, except that this trust is a "stand alone" trust that allows for changes in investment strategies, as long as the beneficiary is willing to discuss the situation with his or her grantors.

This type of trust can potentially provide substantial benefits for those seeking long-term, multigenerational planning, such as the type designed to avoid the generation-skipping transfer tax. It can also protect against divorce, creditors, and estate taxes. Any parent that is currently gifting assets to their children on any kind of regular basis should seriously consider establishing one of these trusts. The key difference between this type of trust and other trusts is that the beneficiaries must be willing to talk openly with their grantors regarding how they want the money invested or handled.

In order to establish an inheritor's trust, an irrevocable dynasty trust must be established first. The inheritor is more often than not the trustee, and must usually choose a close friend or confidant to be the distribution trustee. This trustee has absolute control over what kind of distributions are made from income and principal. However, this transference to a third-party trustee is exactly what makes the assets of the trust so secure from creditors. Beneficiaries have absolutely no legal right to force any kind of distribution from the trust, which renders creditors unable to force any type of distribution from the trust as well. It is important to select the correct state to create the trust in, as the validity of these trusts will vary according to state law.

If you are worried about your estate tax situation, or whether your beneficiaries will be able to do what they want with your assets once you are gone, call us. We can review your situation and help you to determine whether you would benefit from an inheritor trust or another estate planning technique.