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Breaking Down the Taxpaying Population: Where Do You Fit In?Money Concepts                                                ...
Should You Make Large Gifts in 2012?                                   Currently, the exemptions for federal gift tax,    ...
Withdrawals from Traditional IRAs                                In these challenging economic times, you may        • Cer...
Money Concepts                                      Do I have the right type of life insurance?Linda Wells                ...
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Sept 2012 newsletter


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Sept 2012 newsletter

  1. 1. Breaking Down the Taxpaying Population: Where Do You Fit In?Money Concepts Every quarter, the the year. Statistics of Income The roughly 1.3 million returns showing AGI ofLinda Wells Division of the Internal at least $343,927 made up the top 1% of all101 Devant St. #603 Revenue Service (IRS) filers. This group reported 16.9% of total AGI; inFayetteville, GA 30214 publishes financial other words, over $1.3 trillion of the $7.8 trillion678-817-0210 statistics obtained from tax in AGI reported was reported by the top 1% of and information returns770-461-2954 filers. This group was responsible for 36.73% of that have been filed with the total income tax for the the federal Recent reports reflect data There were just under 138,000 tax returns with gleaned from 2009 AGI exceeding $1.4 million. These returns, individual federal income making up the top 0.1% of all filers (thats the tax returns. These reports top one-tenth of one percent), accounted for offer a snapshot of how Americans break down approximately $610 billion in AGI (about 7.8% as taxpayers. of all AGI), and paid just over 17% of the total income tax. Sources for data: IRS Statistics of Income Bulletin, Spring 2012 and Winter 2012, Not all high-income returns showed tax Washington, D.C.; IRS, Data on the 400 There were just over 3.9 million returns filed Individual Income Tax Returns Reporting the with AGI of $200,000 or more. Of these returns, Largest Adjusted Gross Incomes, 2009 Update 20,752 (0.529%) showed no U.S. income tax to Statistics of Income Bulletin, Spring 2003, liability. Why did these returns show no income Washington, D.C. tax? The IRS report that provided the data The big picture noted that high-income returns generally show no income tax as a result of a combination of Individuals filed roughly 140 million federal factors, including deductions for charitable income tax returns for 2009. Of those returns, contributions, deductions for medical and dental just under 82 million (approximately 58%) expenses, and partnership and S corporation reported federal income tax greater than net losses. zero--representing the lowest percentage of taxable federal income tax returns in 24 years. Average tax rates Half of all the individual income tax returns filed Simply dividing total income tax paid by total showed adjusted gross income of under amount of AGI results in the following average $32,396. (Adjusted gross income, or AGI, is federal income tax rates: basically total income less certain • Top 0.1%--Average federal income tax rate of adjustments--e.g., deductible contributions to a 24.28% traditional IRA.) As a whole, this bottom-50% group accounted for just 13.5% of the total AGI • Top 1%--Average federal income tax rate of reported on all federal income tax returns. Put 24.01% another way, 86.5% of AGI was concentrated in • Top 5%--Average federal income tax rate of the top 50% of returns filed. 20.46%September 2012 • Top 10%--Average federal income tax rate of A look at the topBreaking Down the Taxpaying 18.05%Population: Where Do You Fit In? What did it take in AGI to make the top 5% of all individual filers? Probably not as much as • Top 50%--Average federal income tax rate ofShould You Make Large Gifts in 2012? you think. If your return showed AGI of 12.5%Withdrawals from Traditional IRAs $154,643 or more, you would have been one of the almost 6.9 million filers comprising the topDo I have the right type of life insurance? 5%. This group reported about $2.5 trillion in AGI--31.7% of the total AGI reported--and was responsible for 58.7% of the total income tax for Page 1 of 4 See disclaimer on final page
  2. 2. Should You Make Large Gifts in 2012? Currently, the exemptions for federal gift tax, credit but not the state death tax credit, is estate tax, and generation-skipping transfer $4,795,000. The result is essentially the same (GST) tax are at historic highs, and the gift, as if you had not made the taxable gift in 2012 estate, and GST tax rates are at historic lows. and your taxable estate is $10 million in 2013. But, in 2013, the exemptions are scheduled to Example(s): Assume the same facts as above, substantially decrease, and the tax rates are but with no claw back. Estate tax, after scheduled to substantially increase. This raises reduction by the unified credit but not the state the question of whether 2012 might be a good death tax credit, would be $2,750,000. So, the time to make large gifts that take advantage of federal estate tax is $2,045,000 lower if there is the current exemptions while they are still no claw back. available. Guidelines for large gifts in 2012 Looking into the future If you expect that you can keep your estateOther gift considerations When you transfer your property during your down to around $1 million ($2 million total for• While it might seem obvious, lifetime or at your death, your transfers may be both spouses if you are married) using annual gifts should only be made if subject to federal gift, estate, and GST tax. exclusion gifts (generally, up to $13,000 per you can afford to part with (Your transfers may also be subject to state recipient per year; effectively, $26,000 for gifts the property. taxes.) Currently, there is a basic exclusion by married couples) and qualified transfers• In general, it is usually amount (sometimes referred to as an exclusion gifts for medical and educational preferable to make as many exemption) that protects up to $5,120,000 from expenses, there may be no advantage to gifts as possible using the gift tax and estate tax, a $5,120,000 GST tax annual exclusion and the making taxable gifts in 2012. If you have a exemption, and a top tax rate of 35%. Unless larger estate, you may wish to consider making qualified transfers exclusion new legislation is enacted, in 2013 the gift tax for medical and educational taxable gifts sheltered by exemptions in 2012, and estate tax exemption will decrease to depending on your evaluation of how the expenses before making taxable gifts that use up the $1,000,000, the GST tax exemption will guidelines here apply to your particular gift and estate tax decrease to $1,000,000 (as indexed), and the circumstances. exemption. Annual exclusion top tax rate will increase to 55%. and qualified transfer If you make taxable gifts sheltered by the gift No one knows what the future holds for these and estate tax exemption in 2012, and the gift exclusion gifts do not use up taxes, but there is a lot of speculation about the gift and estate tax and estate tax rates later increase, the exemption. what Congress might do. Among the possible exemptions decrease, and there is no claw scenarios, tax rates could increase and back, you may save gift and estate taxes by• When you make a gift of exemptions decrease, tax rates could decrease property, your income tax making the gifts in 2012. Even if there is claw basis in the property and exemptions increase, or current tax rates back, your gift and estate taxes will probably be (generally, what you paid for and exemptions could be extended. The no worse than if you hadnt made the gifts. And, the property, with some up question then arises: "Should large gifts be if the gift and estate tax rates later decrease or and down adjustments) is made in 2012 to take advantage of the large stay the same and the exemptions increase or generally carried over to the $5,120,000 exemption while it is still available?" stay the same, your gift and estate taxes will person who receives the gift. When you transfer property To answer that question, you should generally probably be no worse than if you hadnt made at your death, the basis of consider the following: the size of your estate the gifts. the property is usually and the rate at which it can be expected to If you make generation-skipping transfers "stepped up" (or "stepped grow (or decrease), whether you can afford to sheltered by the GST tax exemption in 2012, down") to fair market value at make large gifts, what the future of the transfer and the GST tax rate later increases and the the time of your death. taxes might be, and whether "claw back" would exemption decreases, you may save GST tax apply in future years. by making the GST in 2012. Even if the GST Claw back tax rate later decreases or stays the same and the exemption increases or stays the same, Claw back refers to a situation where the your GST tax will probably be no worse than if benefit of certain tax provisions is essentially you hadnt made the GST in 2012. recaptured at a later time due to changes in tax law. There is some split in opinion as to In each of these scenarios, it has been whether claw back applies to the estate tax. A assumed that values do not appreciate. If the couple of examples will illustrate the difference. property transferred by gift increases in value after the gift, there may also be transfer tax Example(s): Assume the gift and estate tax savings from removing the appreciation from change as currently scheduled in 2013 and the transfer tax system. claw back applies. Assume you make a taxable gift of $5 million in 2012 that is fully protected Youll want to consider how these guidelines for by your gift tax exemption and you have a large gifts in 2012 might apply to your specific taxable estate of $5 million when you die in circumstances. An estate planning professional 2013. Estate tax, after reduction by the unified can help you evaluate them. Page 2 of 4, see disclaimer on final page
  3. 3. Withdrawals from Traditional IRAs In these challenging economic times, you may • Certain distributions while youre be considering taking a withdrawal from your unemployed, up to the amount you paid for traditional IRA. While youre allowed to health insurance premiums withdraw funds from your IRAs at any time, for • Amounts levied by the IRS any reason, the question is, should you? • Distributions that qualify as a series of Why you should think twice substantially equal periodic payments Financial professionals generally recommend (SEPPs) using your retirement funds for one purpose The SEPP exception to the early only--retirement. Why? Because frequent dips distribution penalty into your retirement funds will reduce your ultimate nest egg. Plus, there will be less The SEPP exception allows you to withdraw money available to take advantage of the twin funds from your IRA for any reason, while benefits of tax deferral and any compound avoiding the 10% penalty tax. But the rules are earnings. Depleting your retirement funds too complex, and this option is not for everyone. soon can create a dire situation in your later SEPPs are amounts you withdraw from your years. IRA over your lifetime (or life expectancy) or the joint lives (or joint life expectancy) of you and And then there are taxes. If youve made only your beneficiary. You can take advantage of theIn these challenging deductible contributions to your traditional IRA, SEPP exception at any age.economic times, you may be then all the funds in your account are subject toconsidering taking a federal income tax when you withdraw them. To avoid the 10% penalty, you must calculatewithdrawal from your They may also be subject to state income tax. If your lifetime payments using one of threetraditional IRA. While youre youve made any nondeductible (after-tax) IRS-approved distribution methods and take atallowed to withdraw funds contributions to your IRA, then each withdrawal least one distribution annually. If you have morefrom your IRAs at any time, than one IRA, you can take SEPPs from justfor any reason, the question you make will consist of a pro-rata mix of taxable (your deductible contributions and any one of your IRAs or you can aggregate two oris, should you? more of your IRAs and calculate the SEPPs earnings in your account) and nontaxable (your nondeductible contributions) dollars. from the total balance. You can also use tax-free rollovers to ensure that the IRA(s) that All your traditional IRAs (including SEPs and will be the source of your periodic payments SIMPLE IRAs) are treated as a single IRA contain the exact amount necessary to when you calculate the taxable portion of a generate the payment amount you want based withdrawal. So you cant just transfer all your on the IRS formulas. nondeductible contributions into a separate IRA, and then withdraw those funds tax free. Even though SEPPs are initially determined And, if youre not yet age 59½, the taxable based on lifetime payments, you can portion of your withdrawal may be subject to a change--or even stop--the payments after five 10% federal early distribution tax (your state years, or after you reach age 59½, whichever is may also apply a penalty tax). later. For example, you could start taking SEPPs from your IRA at age 50, without 10% early distribution penalty penalty, and then, if you no longer need the To discourage early withdrawals from IRAs, funds, reduce the payments (or stop them federal law imposes a 10% tax on taxable altogether) once you reach age 59½. distributions from IRAs prior to age 59½. Not all Short-term loan distributions before age 59½ are subject to this penalty, however. Here are the most important If you only need funds for a short period of time exceptions: you may be able to give yourself a short-term loan by withdrawing funds from your IRA, and • Distributions due to a qualifying disability then rolling those dollars back into the same or • Distributions to your beneficiary after your a different IRA within 60 days. However, watch death the deadline carefully, because if you miss it, • Distributions up to the amount of your your short-term loan will instead be treated as a tax-deductible medical expenses taxable distribution. And keep in mind that you can only make one rollover from a particular • Qualified reservist distributions IRA to any other IRA in any 12-month period. A • Distributions to pay first-time homebuyer violation of this rule can also have serious expenses (up to $10,000 lifetime) adverse tax consequences. • Distributions to pay qualified higher education expenses Page 3 of 4, see disclaimer on final page
  4. 4. Money Concepts Do I have the right type of life insurance?Linda Wells Your need for life insurance permanent insurance pays a death benefit to101 Devant St. #603 changes as your life changes. your beneficiary at your death, but it also You may need less life contains a cash value account funded by yourFayetteville, GA 30214 insurance when youre premium dollars. The cash value portion of the678-817-0210 younger, but as you take on policy grows, tax deferred, as long as the770-461-2954 more responsibilities and as your family grows, coverage remains in force. With the amount and type of life insurance that fits insurance, you can tap the dollars in the your circumstances changes. even while youre alive. You can borrow against There are many different types of life insurance. the policy, and in some cases, withdraw part of But generally, life insurance policies fall into the cash value. Keep in mind, though, that one of two categories, temporary or term unpaid loans and withdrawals will decrease the insurance, and permanent or cash value death benefit available to your beneficiaries, insurance. and reduce the cash value, which may causeAll Securities Through Money the policy to lapse.Concepts Capital Corp., Member Term insurance Whats right for you?FINRA / SIPC Term insurance provides coverage for a11440 North Jog Road, Palm specified period ranging from 1 to 30 years. Think about what protection you need and whatBeach Gardens, FL 33418 Phone: Premiums are typically lower compared to you can afford before you purchase any type of561.472.2000 permanent life insurance. If you die during the life insurance. If you really need insurance butCopyright 2010 Money Concepts coverage period, your beneficiary receives a dont have the discretionary income, termInternational Inc. specified death benefit. If you live to the end of insurance may be your best choice. On the the specified period, coverage ends and the other hand, if you want lifetime coverage andInvestments are not FDIC or NCUA policy has no cash value. youre interested in accumulating cash value,Insured then permanent insurance may make more Permanent insurance sense.May Lose Value - No Bank orCredit Union Guarantee Unlike term insurance, permanent insurance continues throughout your life as long as you pay the premiums. As with term insurance, Should I buy my life insurance through my employer or on my own? Many companies offer their underprotected, especially if you cant purchase workers employer-sponsored an individual policy at a reasonable cost life insurance coverage as part because of your age or changes in your health. of their employee benefits However, you may be allowed to convert your package. If youre offered this opportunity, it group insurance to an individual policy, which may be in your best interest to accept. Buying would allow you to keep your insurance life insurance through your employer can be a coverage, regardless of your age or health, but relatively inexpensive and hassle-free way to youd have to pay the entire premium get some of the life insurance coverage you out-of-pocket. need. Another disadvantage of group life insurance is With a group life insurance plan, your employer that the policy may not be tailored to your purchases a single policy that covers all individual needs. For example, the amount of employees. This policy is subject to a single coverage may be less than what you require to group premium payment. Some employers may be fully protected. If so, the group policy may pay the entire cost of the group policy (which is give you the option of purchasing more tax deductible to the employer). But if the plan coverage for an additional cost and for which requires you to pay a portion of the group you may be asked to answer medical premium, that amount will probably be lower questions. But even if you end up buying than what you would pay for the same type and supplemental insurance through a separate amount of individual insurance coverage. And company, your employer-sponsored plan gives you generally dont need to pass a medical you a head start in meeting your life insurance exam when applying for group life insurance. needs. A disadvantage of employer-sponsored life insurance is that it may not be portable. If you leave your job, your group life insurance coverage may end--potentially leaving you Page 4 of 4 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012