The Internal Revenue Code is not ordinarily thought of as a gift that keeps on giving, but, with 2005 having given way to 2006, it does contain several sections which provide for keeping more of what you will be earning and saving more for your retirement—on a tax-sheltered basis—out of what you keep.
They also provide, in some cases, for siphoning slightly more of what you earn—as your income increase with inflation—but these cases are far less numerous.
Therefore, as you make spending and saving plans for 2006, it should be helpful to note of significant federal income tax changes that became effective on New Year’s Day, such as:
Tax rates: For married couples filing jointly and surviving spouses, for example, the 25p percent marginal tax rate begins to apply to those with taxable income of from $61,301 to $123,700, instead of $59,401 to $119,950, after adjustment for inflation. For single taxpayers, the 25 percent bracket was increased to taxable income of $30,651 to $74,200, from $29,701 to $71,950. Similar changes were made for lower and higher tax brackets, and for married individuals filing separately, heads of household, and trusts and estates. (See IRS Form 1040 booklet and the Internal Revenue Service’s Web site, http://www.irs.gov.)
Social Security and Medicare: The Social Security tax rates for employers and employees were maintained at 6.2 percent, but the maximum amount of salaries and wages subject to the tax was raised from $90,000 to $94,200. The maximum earnings for beneficiary under full retirement age were increased from $12,000 to $12,480 annually.
The additional Medicare hospital tax on both employers and employees of 1.45 percent also was unchanged, but monthly Medicare Part B premiums went up from $78.20 to $88.50.
Standard deduction: The standard deduction for married taxpayers who do not itemize deductions and who file jointly, as well as for qualifying widows and widowers, was increased to $10,300 from $10,000, for single taxpayers and married taxpayers filing separately to $5,150 from $5,000, and for heads of household to $7,550 from $7,300.
Deductions for use of car: Standard rates per mile of deductions for use of a car for business purposes was changed to 44.5 cents from 40.5 cents in 2005’s first eight months and 48.5 in the last four and for medical or moving purposes, to 18 cents from 15 and 22 cents, respectively. The rate for use of a car for charitable purposes was held at 14 cents per mile except for taxpayers using a vehicle only in connection with aid to Hurricane Katrina victims, whose deduction is 70 percent of the business mileage rate in effect on the date of the contribution.
Long-term care insurance deductions: Limits on annual deductions for premiums for eligible long-term care insurance policies were raised across the board—for those over 70, from $3,400 to $3,530; for those 61 to 70, from $2,720 to $2,830, and for younger taxpayers, significantly less.
Exemptions: The amount that may be deducted for each exemption was increased from $3,200 to $3,300, as were the levels of adjusted gross income at which exemptions begin phasing out, from $218,950 to $225,750.
Retirement plan contributions: Just when slippage in average annual returns on stock and bond investments underscores the importance of having more money at work for a retirement nest egg, the annual limit on contributions to IRS-qualified retirement plans has gone up again, making it easier.
Under salary reduction agreements permitting deferral of income taxes for contributions to 401(k)s, 403(b)s, SAR-SEPs, and the Thrift Savings Plan for federal employees (456(b)s), participants may now contribute $15,000 instead of $14,000, some or all of which may be matched by employers. The limit on additional “catch-up” contributions to 401(k), 403(b) and 457(b) plans by individuals of 50 or older was raised from $4,000 to $5,000, with a resulting higher limit on total contributions of $20,000. The 2006 limit on contributions to traditional and Roth IRAs is $4,000, the same as 2005; but the “catch-up” limit was lifted, from $500 to $1,000.
Gift tax: The annual exclusion from gift tax was increased from $11,000 to $12,000 per person.
Estate tax: The exclusion from federal estate tax of estates’ market values was raised from $1.5 million for people dying in 2005 to $2 million for people dying in 2006, and the maximum tax rate for taxable estates was reduced from 47 percent to 46 percent.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided byBold Financial Planning, LLC, a local member of the FPA.
Few areas of financial planning are more complicated for parents than ensuring that their children will have enough money to pay for tuition, room, board, books, transportation and other related expenses.But the payoff—the likelihood that a good college education will expand their children’s opportunities to enjoy gratifying careers and higher lifetime incomes—is worth planning for.
What makes the task so complicated is that, on the average, college bills have been rising—and continue to rise—faster than after-tax personal income. Even more challenging, especially when college is still years away, is the uncertainty inherent in the never-ending kaleidoscopic changes among government and college financial aid programs and relevant federal and state income tax provisions—not to mention lower real after-tax returns on savings and investments.
Parents unable or unwilling to plan until a child is a high school junior may have to contend with less uncertainty, but, deprived of the prospects of many years of even average returns on their savings and investments, they have the disadvantage of having to cough up a lot of money out of assets and current income in a short time.
Those who start as soon as a baby is brought home from the hospital may maximize the benefits of compounding interest or equity returns—even if only at lower rates —over at least 18 years, but they are aiming at unknowable targets which even skilled financial planners can’t forecast with certainty. Among them: Will the baby grow up to be a prospect for Harvard—with its high costs—a community college, or a vocational school?
In the face of all the unknowns the best that parents and planners can do is start with what is known—such as the year in which the child is expected to start college—and split the others between the likely and the unlikely. The year provides not only the probable period for accumulating asset to meet college expenses, but also the probability and extent of other liabilities, including retirement.
In planning the financing of a child’s college education, it may be helpful for parents to know how the share of the total cost that they may be required to pay will be determined by the child’s school on the basis of:
What they estimate, when filling out the federal student aid form, to be their “expected family contribution” (EFC), subsequently converted into an “official” EFC.
What the school calculates to be the amount that the family is expected to pay and the amount of federal student aid for which the family is eligible, based on school policies as well as federal law. The calculation takes into consideration more than easily predictable things such as parents’ compensation and assets. For example:
Whether a family has other children who will be going to college—helpful to wealthy as well as poor families;
Whether a child is admitted to a high-cost private university or a state college;
Assets in the child’s name, which may reduce financial aid eligibility.
Whatever the family’s share, the rest—for over one-half of all undergraduate students—comes from financial aid:
Federal programs, which provide two-thirds of all student financial aid through (a) grants, such as Pell grants, that are based on need, cost of attendance, and enrollment status, and (b) direct or guaranteed loans, such as Stafford loans, on which interest may be deferred until graduation and may bedeductible from taxable income up to $2,500 annually. The Free Application fr Federal Student Aid (FAFSA) is a great place to start:http://www.fafsa.ed.gov/.
Loans and grants from universities and colleges. While most of their aid is in the form of loans, grants account for a growing share. Some base their aid on merit as well as need, which may also be helpful to upper-income families.
Scholarships from a large variety of organizations ranging the alphabet from the American Legion to the YMCA. A great Web site for scholarship is http://www.fastweb.com/.
Not knowing years earlier what loan and grant possibilities are likely to be, it is
essential for parents to start early to accumulate the family’s share—after determining whether tax law would make accounts’ ownership by the child, parents, or other relatives more advantageous.
Aside from conventional taxable and tax-exempt investments, there are special tax-sheltered vehicles, such as 529 Plans and Coverdell Education Savings Accounts (ESAs).
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided byBold Financial Planning, LLC, a local member of the FPA.
President Bush signed into law in February the Deficit Reduction Act, otherwise known as the fiscal year 2006 budget reconciliation bill. That law, which contained more than $39 billion in cuts, including $6.4 billion from Medicare and $4.8 billion from Medicaid, has plenty of changes in store for seniors.
Under the new law, for instance, most Medicaid beneficiaries would be required to pay higher co-payments for health care services and could be denied service for lack of payment. Provisions affecting Medicare include higher premiums for beneficiaries, with greater increases for higher-income beneficiaries, and a freeze in payments for home health care providers. The bill also cancels a scheduled cut in Medicare reimbursements to physicians and provides medical care to some hurricane survivors.
Here, according to Bernard A. Krooks, founding member of Littman Krooks in New York City and White Plains and Harry Margolis, founder and president of ElderLawAnswers.com, are the three major changes to Medicaid eligibility rules under the new law.
1. The look-back period will be 60 months for all asset transfers
Under the old law, outright transfers were subject to a 36-month look-back period and transfers to or from certain trusts were subject to a 60-month look-back period.
Under the new law, the look-back period – though some asset transfers will be grandfathered – has been increased from 36-months to 60 -months for all transfers. And all transfers made within the look-back period will have to be documented and explained to Medicaid authorities.
2. Start of eligibility deferred
Under the old law, the “penalty period” for institutional Medicaid started on the first day of either the month in which the transfer is made or the first day of the following month. But the new law postpones the beginning date for any transfer penalty to the first day of the month in which the individual is (1) in a nursing home or receiving “waivered” home care, (2) has spent down his or her savings, and (3) would be eligible for benefits but for the transfer.
States do have, however, the option of starting the penalty period in the month of asset transfer or in the month following asset transfer. For example, in New York, it's the month following the month of transfer and in Massachusetts it's the first day of the month in which the transfer occurs.
The point, basically, is this: Imagine you transfer $50,000 that would normally disqualify you for 12 months based on your state’s costs. Before, if you transferred $50,000, you’d be free and clear after a year (measuring from transfer date). Now, the measuring doesn’t even start until the person would otherwise be eligible (but for the transfer), so they will have to wait an entire year from the date they are already impoverished and seeking care, or will have to wait for the five-year period (from #1 above) to expire. This could even unwittingly affect gifts for someone made years earlier before they even anticipated needing Medicaid.
The upshot of this change? Individuals, in most states, must own less than $2,000 in non-exempt resources when applying for Medicaid. To establish this date, the nursing home resident or any prospective applicant must apply for Medicaid coverage and be approved (but for the transfer).
3. Equity in home will count
Under the old law, a person's home was exempt regardless of value, if certain conditions were met. Under the new law, the equity in a Medicaid applicant's otherwise exempt home will be countable to the extent it exceeds $500,000.Thus, a person with equity in a home of more than $500,000 would not be eligible for Medicaid. Of note, states will have the option to raise the limit to $750,000.
Seniors and their adult children may need to consult with qualified and competent professionals who can evaluate issues and recommend potential solutions, including long-term care insurance, reverse mortgages and home equity loans.
Another provision of the new law will give all states the authority to set up Long Term Care Partnership programs, or programs that encourage residents to buy private long-term care insurance by relaxing Medicaid nursing home benefit qualification rules for private policy holders who exhaust private benefits. Up till now, only California, Connecticut, Indiana and New York have been permitted to operate partnership programs.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided byBold Financial Planning, LLC, a local member of the FPA.
