Is a Reverse Mortgage the Solution?

For many the transition to retirement means adjusting to a fixed income that is often lower than the income you received while employed. To make matters worse, the most valuable asset you have is usually your home, but it cannot be readily turned into cash. To help with this lack of financial liquidity, banks offer reverse mortgages as a way to tap into the equity of your home.

How a reverse mortgage works

A reverse mortgage is a special bank loan to a qualified senior citizen (age 62 and over) that enables older homeowners to tap the equity they have in their home. Importantly, no repayment of the loan is required until the home is no longer the borrower’s primary residence. This means you can receive cash today based upon the equity of your home without making loan payments. The bank receives repayment for their loan out of the proceeds obtained when the home is sold at a later date.

Why does the bank do this?

First, the bank charges up-front fees to create the reverse mortgage.

Second, the bank still receives their interest, service fees and principal. They just need to be patient as the payments occur after the borrower leaves the home (usually when the house is sold).

Third, the bank has little risk. The bank is insured by a federal agency so their risk is controlled and they are guaranteed repayment.

What are the advantages?

• You can use the equity of your home without the burden of house payments or selling your home.
• You retain title to your home.
• It is a HUD program, ensuring Federal compliance and consistency within the program.
• Eligibility has few restrictions. You must be over 62, occupy the property as a primary residence, and own the home free and clear (or have little remaining balance on the mortgage).
• Most single-family dwellings qualify (up to a four unit dwelling).
• The amount that can be borrowed is based upon a HUD formula that uses the age of the youngest homeowner, interest rate, and appraised value of the home. There are also upper borrowing limits.
• Cash advances from the program can be used for any purpose.
• The income is tax-free and will not impact Social Security, Medicare, or Medicaid benefits.

What are the Pitfalls?

• The closing costs for a reverse mortgage are high. While all but the application fee can usually be folded into the reverse mortgage, the cost should be weighed against the outright sale of the home.
• Passing your home to your beneficiaries becomes limited. Once you move or pass away the reverse mortgage becomes payable. Your inheritance would then be reduced by the amount owed.
• What is the plan? If you are planning to move in the near future it may be better to sell your home to tap the equity versus undertaking the expense of a reverse mortgage.
• Is it a legitimate reverse mortgage? Make sure the reverse mortgage program is a HUD program. If not, the program may contain some unforeseen risks.

While not for everyone, reverse mortgages are an option to use the equity of your home if you are retired and on a fixed income. If you are interested, most programs provide a free face-to-face counseling session from an independent counselor prior to a bank being allowed to offer the reverse mortgage.

Tax Breaks for Education

Studies by the Government Accounting Office (GAO) show that many taxpayers who are eligible for education related tax relief don’t take advantage of it. The key reasons are:

There are too many programs. If one includes tax credits, expense deductions, and special savings programs, there are more than ten different tax breaks for education.

The rules vary. Each educational tax break comes with a different set of rules. Different qualifying income levels, the age of a student, the level of education, the timing of expenses and their interrelationship all make navigation of your options complex.

To help clarify your options here are three of the most popular educational tax breaks and some related tips.

• American Opportunity Tax Credit (AOTC). This is a maximum $2,500 credit for a student who could be you, a spouse, or a dependent of yours. The student must be enrolled at least half-time and the credit is available for up to four years of post-secondary education (college). This credit is a per student credit and may be refundable for up to 40% of the credit amount.
  Income limit: $90,000 single; $180,000 married filing joint
• Lifetime Learning Credit (LLC). The LLC is a maximum annual per taxpayer credit of $2,000. It is available to a student who is you, your spouse or a dependent. It covers any stage of post-secondary education as long as the student is enrolled in courses that lead to a degree, certificate or credential. The credit applies to 20% of the first $10,000 in qualified expenses.
  Income limit: $65,000 single; $130,000 married filing joint
• Tuition and Fees Deduction. This on again, off again tax benefit is still available for your 2014 tax return. While not currently available for 2015, this deduction has been extended so many times, that it may be extended once again. This deduction can cut as much as $4,000 off your taxable income.

Which is right for you?

Determining which program is right for you takes tax planning. Remember you may not double dip expenses OR programs. This means you may not use the same qualified educational expense for multiple programs (including applying the expense to any scholarship or other benefit). However, if you have more than one student, you can apply different programs to different students. Other considerations;

• The LLC is per taxpayer while the AOTC is per student.
• The income limitations are highest for AOTC.
• If considering graduate studies, you may wish to first use the AOTC as it is limited to four years of post-secondary studies.
• The LLC and AOTC are almost always a better option than the Tuition and Fees deduction. This is because a tax “credit” directly reduces tax, while the deduction reduces income.
• Remember there are other educational tax benefits. Some of these other programs include student loan interest deductions, using Coverdell Savings or 529 Savings programs, employer educational assistance, and special deductibility of certain US savings bonds.

Common Missing Tax Return Items

Want your tax return filed quickly and without error? Looking for a quick refund? Then double-check this list of items that are often overlooked. These missing items often cause delays in getting your tax return filed and your much anticipated refund into your hands.

• Missing W-2 or 1099. Using last year’s tax return, make sure all prior W-2s and 1099’s are received and applied to your tax return. Missing items will be caught by the IRS’s mismatch program.
• Missing 1095-A. If you have health insurance through an Exchange, you will need this form to file your tax return.
• Missing or invalid Social Security Number. E-filed tax returns will come to a screeching halt with a missing or invalid number.
• Dependent already claimed. Your return cannot be filed if there is a conflict in this area.
• Name mismatch. If recently married or divorced, make sure your last name on your tax return matches the one on file at Social Security.
• Inconsistent information. Most tax software programs will check a tax return for inconsistencies. When one occurs, they must be resolved prior to filing your tax return.
• No information for a common deduction. If you claim a deduction you will need to provide support to document the claim.
• Missing cost information for transactions. Brokers will send you a statement of sales transactions. If you do not also provide your cost and purchase information, the tax return cannot be filed.
• Not reviewing your return and signing your e-file approval. The sooner you review and approve your tax return, the sooner it can be filed.
• Forms with no explanation. If you receive a tax form, but have no explanation for the form, questions could arise. For instance, if you receive a retirement account distribution form it may be deemed income. If it is part of a qualified rollover, no tax is due. An explanation is required to file your information correctly.

Hopefully, by knowing these commonly missed pieces of information you can prepare to have your tax filing experience be a smooth one.

The Benefits of a Sole Proprietor

In the eyes of the IRS, if you are a sole proprietor you have an audit target on you. This is because the audit rates on those who have a schedule C (sole proprietor) in their 1040 tax return are much higher than those who don’t. In addition, sole proprietors generally have more personal legal liability as there is no legal entity between you and those who wish to sue your business. So does that mean there are no advantages to forming a small unincorporated business? Absolutely not. Here are some benefits of running your company as a sole proprietor.

	You can hire your kids. One of the key benefits of being a sole proprietor is you can hire your kids and not have to pay Social Security and Medicare taxes for their work. While there are exceptions, this can save your small business over 7.65% on their wages.
	Your kids benefit too. If the pay to your kids is less than $6,200, this income is not taxed to them at the federal level. Remember, their work must reflect actual activity and reasonable pay. Why not hire your kids to do copying, act as a receptionist, provide office clean up, advertising and other reasonable activities for your business?
	Fewer tax forms and filings. Sole proprietors can add their business activity as a schedule with their 1040 tax return. Sub chapter S corporations, C corporations, and partnerships must file separate tax returns, which make compliance a lot more complicated. It is also harder to close these entities should things not go as planned.
	More control of revenue and expense. As a sole proprietor, you often have more control over the taxable income of your small business. You can determine the timing of your business expenses to help manage your annual taxable income. The same is often true with booking your income.
	Hire your spouse. If handled correctly, a spouse hired as an employee can work to your advantage as a sole proprietor. As long as the spouse is truly an employee of the business, the sole proprietor can benefit as a member of their employee’s (spouse’s) family benefits. This can include potential medical expense reimbursements.

Maximizing Your Refund Power

One of the highlights of the year for many Americans is the receipt of a refund check from the IRS. Before you run out and book a big vacation with this new found wealth, here are some ideas to consider for your refund.

	Pay down credit card debt. Lenders are continually increasing fees and interest rates, making credit card debt more expensive than ever. If you have large credit card debts consider using the bulk of any refund toward paying down the balance.
	Add to your emergency fund. It is recommended that you have enough money in savings to pay your bills in an emergency. How much is enough? That differs from person to person, but many recommend saving six months to nine months worth of expenses. Consider placing some of your refund into this emergency account.
	Any other debt? Look to paying down your auto loans, home mortgage, student loans and other debt. Pay those loans with the highest interest first. Remember, it is nice to head into your retirement years without having to worry about debt payments.
	Save for retirement. Consider placing some of your refund into your retirement savings accounts. This way your refund will continue to grow and will pay you back when you retire.
	Buy something you need. If you have been saving for a new car, a new house, or a new appliance put some of your refund towards this planned purchase.
	Don’t forget to spend some on you. While spending all of your refund on a trip or a big-ticket item is not usually a great idea, give yourself permission to spend part of your refund on something fun. But consider limiting the amount to a set percentage of your refund check. That way you will feel better about spending the rest of it wisely and not feel like you are depriving yourself.

Tax-Related Identity Theft

This week is Tax Identity Theft Awareness Week — and a good time to think about what you can do to prevent Tax Identity Theft. This week I will be sharing articles and tips on how to avoid it and how to spread the word so that your family and friends do fall victim. The following article is based off an article published by the Federal Trade Commission.

An identity thief may use your Social Security number to get a tax refund or a job. Contact the IRS if they send you a notice saying their records show:

• you were paid by an employer you don’t know
• more than one tax return was filed using your Social Security number

Uncovering Tax-Related Identity Theft

The IRS uses your Social Security Number (SSN) to make sure your filing is accurate and complete, and that you get any refund you are due. Identity theft can affect how your tax return is processed. An unexpected notice or letter from the IRS could alert you that someone else is using your SSN, however, the IRS doesn’t start contact with a taxpayer by sending an email, text or social media message that asks for personal or financial information. If you get an email that claims to be from the IRS, do not reply or click on any links. Instead, forward it to phishing@irs.gov.

If someone uses your SSN to file for a tax refund before you do, the IRS might think you already filed and got your refund. When you file your return later, IRS records will show the first filing and refund, and you’ll get a notice or letter from the IRS saying more than one return was filed for you.

If someone uses your SSN to get a job, the employer may report that person’s income to the IRS using your SSN. When you file your tax return, you won’t include those earnings. IRS records will show you failed to report all your income. The agency will send you a notice or letter saying you got wages but didn’t report them. The IRS doesn’t know those wages were reported by an employer you don’t know.

Dealing With Tax-Related Identity Theft

If you think someone used your SSN for a tax refund or a job — or the IRS sends you a notice or letter indicating a problem — contact the IRS immediately. Specialists will work with you to get your tax return filed, get you any refund you are due, and protect your IRS account from identity thieves in the future.

1. Contact the Internal Revenue Service.
   IRS Identity Protection Specialized Unit
   1-800-908-4490
   1. Report the fraud.
   2. Send a copy of your police report or an IRS ID Theft Affidavit Form 14039 [PDF] and proof of your identity, such as a copy of your Social Security card, driver’s license or passport.
2. Update your files.
   1. Record the dates you made calls or sent letters.
   2. Keep copies of letters in your files.

Other Steps to Repair Identity Theft

After you contact the IRS, it’s important to limit the potential damage from identity theft:

• Put a fraud alert on your credit reports.
• Order your credit reports.
• Create an Identity Theft Report by filing an identity theft complaint with the FTC and filing a police report.

Getting Organized for 2014 Tax Filing

Now that the tax laws for 2014 have been put to bed, it is time to start gathering your tax records for 2014 and taking steps to get your tax house in order for 2015. Here are some ideas to help you.

Look for your tax forms. W-2s, 1099s, 1098s and the new 1095-A’s will start hitting your mailbox. Look for them and get them organized. Create a checklist of the forms to make sure none is missing. If you used the new Affordable Care insurance exchange to purchase your health insurance you will also be receiving a new 1095-A form that recaps this activity.

It is all in a name. If you were recently married or had a name change, file your taxes using the correct name. File the name change with the Social Security Administration as soon as possible, but be aware of the timing with a potential name conflict with the IRS. Any name mis-match could cause a rejection from the IRS and create an audit trigger.

Collect your receipts and sort them. Using last year’s tax return, begin to gather and sort your necessary tax records. Sort your tax records to match the items on your tax return. Here is a list of the more common tax records in no particular order:

	Informational tax forms (W-2, 1099, 1098, 1095-A, plus others) that disclose wages, interest income, dividends, and capital gain/loss activity
	Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items)
	Business K-1 forms
	Social Security records
	Mortgage interest statements
	Tuition paid statements
	Property tax statements
	Mileage log(s) for business, moving, medical, and charitable driving
	Medical, dental and vision expenses
	Business expenses
	Records of any asset purchases and sales
	Health insurance records (including Medicare and Medicaid)
	Charitable receipts and documentation
	Bank and investment statements
	Credit card statements
	Records of any out of state purchases that may require use tax
	Records of any estimated tax payments
	Home sales records
	Educational expenses (including student loan interest expense)
	Casualty and theft loss documentation
	Moving expenses
	Contribution records

If you are not sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction.

Clean up your auto log. You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.

Review and update your withholdings. Make a quick review of your W-2 and decide if now is the time to have your employer update your withholding amounts. A second check might be in order after you file your taxes.

Coordinate your deductions. If you and someone else may share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children.

Review your other information. Do not just focus on tax related items. Review other parts of your financial life for possible organization and updates. This includes insurance, investments, legal documents, safety plans, identity theft protection, credit scores, retirement planning, retirement account contributions and your home’s annual budget.

2015 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2015. The business mileage rate increases by 1.5 cents while Medical and Moving mileage rates are lowered by one cent. Charitable mileage rates are unchanged.

Standard Mileage Rates Mileage Rate/Mile Business Travel 57.5¢ Medical/Moving 23.0¢ Charitable Work 14.0¢

Here are 2014 rates for your reference as well.

Standard Mileage Rates Mileage Rate/Mile Business Travel 56.0¢ Medical/Moving 24.0¢ Charitable Work 14.0¢

Remember to properly document your mileage to receive full credit for your miles driven.

Breaking News: 2015 Pension Contribution Limits

As the end of the year rolls around, if you have not already done so, now is the time to plan for contributions into your retirement accounts in 2015. While Traditional IRA and Roth IRA plan limits are unchanged versus 2014, please note the contribution increases in 401(k), 403(b), 457 and SIMPLE IRAs.

Retirement Program	2015	2014	Change	Age 50 or over catch up
IRA: Traditional	$5,500	$5,500	none	add: $1,000
IRA: Roth	$5,500	$5,500	none	add: $1,000
IRA: SIMPLE	$12,500	$12,000	+$500	add: $3,000 (up $500)
401(k), 403(b), 457 plans	$18,000	$17,500	+$500	add: $6,000 (up $500)

Don’t forget to take advantage of any matching programs offered by your employer as you review your various funding levels.

2014 Planning Note: Remember you have until April 15th, 2015 to make contributions to your Roth or Traditional IRA for the 2014 tax year.

Is it Time to Step in?

Aging and help with financial matters

As the baby boomer generation ages so do the parents of the baby boomers. With this aging process there will come a time when a parent needs help. Much of the focus centers on managing things like transportation, mobility, health care, and home maintenance. Harder to spot is the need to help with bill payments and finances. This is because most of us keep this area of our lives separate from our children. So when is it time to step in and help or to ask for help? There is no right answer, but here are some warning signs that help may be needed.

Taking low-income jobs. If your parents have been retired for quite some time and then start working once again, why are they doing this? For many it is to stay active, but for others it is a necessity to make ends meet. Selling off items. Valuable items sold at garage sale prices could be a warning sign. It is natural to want to de-clutter ones life through gifts to grand kids, donations, and garage sales. But not by being taken advantage of by an opportunistic purchaser of valued possessions.

	Major life changes. If a spouse passes away or there is a change in living situation, this might signal a need for help. Who pays the bills, coordinates filing taxes, or manages the retirement savings accounts? When these life changes occur, it is probably time to have a discussion with your loved ones.
	Being fooled by solicitations. Notice what is sent out in the mail. Many direct mail solicitations are convincing and can easily deceive. Do you see responses to requests for money that is unusual? If you are seeing the barriers to these deceptive mail practices breaking through it may be a sign that help is needed.
	Worry about bills. There are certain bills that are larger than others. If a parent expresses worry about making any of these payments you may need to offer help. Common large bills are property taxes, homeowners insurance, and loan payments.
	Increased clutter. If the area of the home that serves as the office for paying bills starts to look cluttered, it may mean things are overwhelming. A quick look and offer to assist organizing the area may be a good starting point to see if help is needed.

A word for the retiree

Being aware of your circumstances can be of assistance to your children during this transitional time. Consider identifying a trusted adviser who can help with financial matters when you deem it necessary. By planning now, the transition can be a smooth one.