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Winning Social Security’s Waiting Game

As more baby boomers move into their 60s, there is increased interest in Social Security retirement benefits. In particular, seniors must decide when to start. Currently, the full retirement age (FRA) for Social Security is 66. That age applies to people born from 1943 through 1954. FRA gradually increases for younger workers, reaching 67 for those born in 1960 or later.

You can start as early as age 62, but your benefits will be reduced. Alternatively, you can start as late as 70, which will entitle you to a higher benefit. If you start at 62, you’d get 75% of your FRA benefit; waiting after FRA increases your benefit by 8% a year. (Starting younger than FRA also will generate a reduction in benefits for those with substantial earned income, followed by a makeup in later years.)

Example 1: John Anderson is entitled to a Social Security benefit of $2,500 a month at age 66, his FRA. If he starts at age 62, with little or no earned income, John will receive $1,875 a month (75% of $2,500). As another option, John could wait as late as age 70 to start and receive $3,300 a month (132% of $2,500). Thus, waiting from 62 to 66 increases John’s benefit by 33.3%. Waiting still longer, from 66 to 70, increases his benefit by 32%. By the eyeball test, John will get a benefit increase of about 8% a year for waiting. That government-backed hike may sound extremely appealing, when bank accounts and money market funds pay next to nothing.

Closer look

Running the numbers through a calculator, it turns out that the higher benefit is really a compound annual increase of just over 7%. That’s still appealing, in these low-yield times.
However, the percentage increase actually fluctuates as John moves through his 60s. The periodic increases are fixed, as a percentage of FRA, but the deferred benefit increases in size as John grows older.

Example 2: At age 63, John would receive 80% of his FRA amount: $2,000 a month. That’s an increase of $125 a month, from his age 62 benefit of $1,875, so John’s boost for the year is about 6.7%. By starting at age 64, though, John would get $2,166 a month, 86²⁄₃% of his FRA amount. That’s an 8.3% increase for waiting that year, from age 63 to 64.
Crunching through the numbers, the annual percentage increase drops, rises again, and drops again until reaching a 6.5% hike from age 69 to a start at age 70.

Measuring the trade-off

Another way to make a decision on when to start Social Security is to see how much you give up by waiting, and how long the make-up period will be. If John waits from 62 to 70, he will relinquish 8 years of benefits (96 months) at $1,875 a month, or $180,000. He’d then collect $3,300 a month, an extra $1,425, so he’d catch up in 127 months. By the time John reaches age 81, he’d be ahead in total dollars collected, and the gap would grow in each succeeding month.

Example 3: For another perspective, consider Kate Bennett, who also has an FRA benefit of $2,500 a month. Kate continues to work, so starting before her FRA doesn’t make sense. As mentioned, Kate could get a Social Security benefit of $3,300 a month by waiting until age 70. However, Kate doesn’t need to wait that long. By age 69, Kate could start Social Security and receive $3,100 a month. In the first year, she’d collect $37,200 in benefits. By waiting until 70, she’d get an extra $200 a month, so it would take her 186 months ($37,200 divided by $200) to catch up: 15½ years. Kate wouldn’t be ahead in total benefits until she’s approaching age 86.

Revising your outlook

The bottom line is that the ideal time to start Social Security can be a moving target. Starting at 62 might be a good choice if you need the cash immediately, have health concerns, or just want to get something back for all the taxes you’ve paid while you’re young enough for active pursuits. If you decide not to start at 62, you might consider waiting until at least age 64 to start to get the sizable 63-64 bump in benefits.

On the other hand, if you’re in relatively good condition, physically and financially, you might decide to defer after you reach FRA to get a larger Social Security benefit. Remember that you’re not locked in to an age 70 start if you can delay; you can start any time in between 66 and 70, if waiting is no longer practical. Keep in mind that these calculations are relatively simple as they ignore taxes on benefits, cost-of-living adjustments, and any interim investment earnings. If you want to explore this topic further, HLB Gross Collins, P.C. can provide detailed projections for your specific circumstances.

Control the Costs of Weddings

If future weddings are on your mind in June, be prepared for sticker shock. The Knot website reports that the average U.S. wedding costs about $30,000, not including the honeymoon. Costs vary widely by location: The average is well over $50,000 in the New York City area, but it’s close to $16,000 in Western states such as Idaho and Utah.  Wherever the wedding might be, it’s likely to be a sizable expense. Some savvy planning can keep your outlay under control without detracting from a festive occasion.

Cost sharing

Traditionally, the bride’s parents pay for the wedding. This tradition apparently goes back a long way, in many societies, dating from the time when the bride’s family provided a dowry to help enable the new husband to take care of his wife and any future children. If your daughter or son is getting married relatively young and also is in school or a recent graduate, it still may be the case that the parents pay for all or most of an engagement party, the wedding reception, flowers, music, photography. With today’s shifting societal norms, chances are you could end up contributing no matter which side of the happy couple you fall on.

Today, though, many couples are getting married (or remarried) later in life, perhaps after establishing careers and earning significant incomes. Although some of those weddings are still fully financed by one family, it’s increasingly common for costs to be split between the couple’s families as well as by the couple themselves. Thus, this advice may not only be relevant to the parents of future brides and grooms but also to unmarried individuals looking forward to their own nuptials.

In some situations, the relative resources of these parties will help determine the sharing arrangements. The division of expenses should be established early in the wedding planning process. This might be awkward at first but may help reduce future tension over who pays what.

Begin with a budget

Just as you wouldn’t shop for a new car or a second home without some price parameters, the same is true for a wedding. You should be sure that everyone’s expectations are in alignment. If you have a $25,000 wedding in mind, for example, but your daughter expects a $50,000 wedding, someone is going to be upset unless an agreement can be reached.

Brides- and grooms-to-be will differ in their financial expertise. Some may anticipate the wedding they’d like and know the total probable cost within a few thousand dollars; others may just have an idea of where they’d like to celebrate their marriage and how many people they plan to invite without any notion of the bills that will need to be paid.

Before setting a budget, research can help. Start with online fact-finding and go to on-site visits. Once the couple has seen a few possible places and learned the cost of a reception with various numbers of guests at those venues, they likely will have a better idea of the costs involved, so an overall budget can be more realistic.

If you are going to be paying a substantial portion of the wedding expenses, you should play a role in establishing a budget. One tactic is to give the to-be-weds a check for X dollars upfront, to cover the wedding expenses. They can spend more, from their own pockets or from the other parents’. Or, they can spend less and keep the balance as a wedding gift.

Once you have a working budget, try to stay with it. Cut costs where you won’t cut into the joy of the occasion. A Friday or Sunday wedding can be just as memorable as a Saturday event—and perhaps much less expensive. The same is true for out-of-season dates; a December wedding can offer more value than one in June. No matter when the wedding is scheduled, trimming the guest list to those whose presence is absolutely necessary or desirable can provide certain cost reduction.

Remember that a wedding is a major lifetime event, not a profit-making venture. Be ready to go over the budget and decide if you can manage to contribute a bit more to keep everyone smiling. Starting with a budget can help to keep supplementary requests modest and hold down the total tab.

Wedding Tax Tactics

• The costs of renting a place for a reception are not tax deductible, but you’ll be able to deduct donations to the church, synagogue, or nonprofit organization where the wedding is held. HLB Gross Collins, P.C. can help determine if a deduction is feasible.

• After a wedding reception, you might be able to take a deduction for donating flowers and leftover food to an appropriate charity. Make advance arrangements to contribute perishables.

• Similarly, other items (candles, decorations, bridesmaids’ dresses, even a bridal gown) might be donated to generate a charitable deduction.

HLB International Appoints New Member in South Sudan

HLB International, one of the leading global accountancy networks with presence in 130 countries, has recently signed a new member in South Sudan: HLB Oryem.

Established in 2007 and based in Juba, the capital and largest city of South Sudan, HLB Oryem provides audit, accounting and tax services to a variety of clients including private companies, particularly in the bank and insurance sector, family-owned businesses, and NGOs and microfinance institutions.

South Sudan became an independent state in 2011 and is the destination of growing foreign investment, especially from China, in the oil sector. This makes HLB Oryem a valuable addition to the HLB network, in addition to the fact that the firm already has referred businesss relationships with HLB members in the Middle East.

Private Health Insurance Exchanges for Business Owners

The public health insurance exchanges created under the Affordable Care Act have been well publicized. Another, not so well known option exists: private health insurance exchanges. The private entries are still relatively small; in late 2014, the Kaiser Family Foundation put total enrollment at 2.5 million people, including 700,000 retirees in Medicare plans.

Yet, some observers see the private market expanding to as many as 40 million people by 2018. While public health insurance exchanges focus largely on individual and family plans, some of the private exchanges appeal mainly to employers. Owners of small companies as well as decision makers at medium-sized and large firms may evaluate the benefits of providing employee health insurance coverage through private exchanges.

Multiple choices

Unlike public exchanges, which are offered by the federal and state governments, private exchanges are run by a variety of companies. Sponsors include consultants, brokerage firms, even retailers. The constant is that these exchanges allow those seeking health insurance to go online and compare what’s available in a virtual marketplace.

Private health insurance exchanges can take many forms, but one likely structure is the defined contribution plan. Just as traditional defined benefit retirement plans have lost ground to defined contribution retirement plans, such as 401(k)s, so traditional employer health plans may be supplanted by defined contribution arrangements.

Here, the “defined contribution” could be the amount an employer gives its employees to shop for coverage on a private exchange.

Example: Melanie Wilson owns a small business with 25 employees. She enters into an agreement with a health insurance exchange managed by an employee benefits firm. Melanie’s employees will be able to go online and examine the offerings from three specified health insurers; each health insurer will make four different plans available. Employees can choose among the offerings as they’d choose among the investment options of a 401(k) plan.

Melanie decides to allow each employee to spend up to $300 a month on health insurance. If Bob Smith picks a plan that costs $400 a month, Bob will have to contribute the extra $100 each month; if Claire Jones picks a plan that costs only $250 a month, Claire might use the extra $50 for some other type of coverage, such as disability insurance. If handled properly, Melanie’s outlays will be treated as tax-deductible business expenses for the company, while her employees will not have to include the $300 monthly allowance as taxable income. That’s how today’s standard health insurance plans are taxed.

Cost control

Advocates of private health insurance exchanges say that they can help employers control expenses and reduce paperwork responsibilities. Employees not only get to choose a plan that fits their needs and finances, they’ll also gain an appreciation of how much of the health care costs employers are bearing.

Nevertheless, there can be drawbacks to private exchanges. Coverage won’t qualify for the subsidies that public exchanges may deliver. The area is still new, so there’s not much of a track record to examine. If your company is interested in exploring the idea of a private health insurance exchange for its employees, our office can help you compare the costs and benefits with those of your present health plan.

Are Tax Refunds Good or Bad?

Few people pay exactly the correct amount of income tax during the year. When you file your return for 2014, you probably will find that you paid too little (and owe more tax) or paid too much (and can request a refund). Typically, refunds are due to employees who have too much tax withheld from their paychecks.

Example 1: Arlene King is paid twice a month. From each paycheck, her employer withholds $1,000 for federal income tax, so Arlene’s tax payments for 2014 were $24,000. When Arlene files her 2014 tax return, she sees that her tax obligation for last year was $21,000. Thus, Arlene can request a $3,000 tax refund.

Does over-withholding and getting a refund in this manner make sense financially? That depends on a taxpayer’s situation.

Positive features:  The advantage of getting a tax refund is, well, who wouldn’t want to receive a large check from the federal government? Moreover, federal income tax refunds aren’t taxable. (A state or local tax refund may increase the tax you’ll owe.)

Thus, Arlene may decide to use her $3,000 refund check to invest or to pay down debt or to make a special purchase. In effect, her $3,000 of excess tax withholding becomes a form of forced saving, which she can utilize every year when the check comes in.

Now for the negatives:   On the other hand, having too much money withheld for income tax has been likened to making an interest-free loan to the IRS. It’s your money—you earned it—so why wait for months to get your hands on it? This strategy can be especially unappealing if your over-withholding results from a major change in your life.

Example 2: In early 2014, Bianca and Craig Carter bought a house, using a large mortgage for the purchase. Bianca left her job to stay home with their young child. Thus, the Carters had lower income and higher deductions than in 2013, resulting in a smaller tax bill.  However, Craig did not adjust his tax withholding at work. Thus, he paid more tax than necessary throughout the year. It’s true that the Carters will get back the overpayment with a 2015 tax refund, but they went through 2014 with less cash flow than required, forcing them to struggle to cover the costs of a new home and a growing family.

Winning the numbers game

If you feel that you need the disciplined forced savings of over-withholding, then relying on an annual tax refund may make sense. Conversely, if you prefer to get your money as you earn it, you can reduce the amount withheld by filling out IRS Form W-4, Employee’s Withholding Allowance Certificate, and submitting it to your employer. Our office can help you fill out Form W-4 so you get the right amount withheld, avoiding either a large refund or a large tax obligation with next year’s tax return.
Trusted advice: Adapting allowances

  • On IRS Form W-4, employees can claim a number of personal allowances.
  • The more allowances you claim, the lower your withholding and the more income you’ll receive with each paycheck.
  • Two income couples can calculate the total number of allowances to which they’re entitled.
  • For such couples, withholding usually will be most accurate when all allowances are claimed on the Form W-4 for the higher earning spouse.
  • The lower earning spouse then can claim zero allowances on his or her Form W-4.
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