What You Need to Know About Health Care Reform

What You Need to Know About Health Care Reform
Presented by Tim Traub

As you’re no doubt aware, big changes are under way in the health care industry. In the coming months, you’ll hear a lot more about the Patient Protection and Affordable Care Act, most aspects of which are slated to take effect in 2014. Although recent negotiations in Congress could delay the law’s implementation, many Americans are still wondering how this complex legislation may affect them.

Debunking some common myths

The Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act or Obamacare, is intended to expand access to health care, remove certain limits, and protect customers. Below, we debunk some common misunderstandings so that you can better understand the upcoming changes under the new legislation.

Myth: The new law cuts Medicare’s primary benefits.

Fact: The legislation adds benefits, such as annual wellness exams and preventive screenings, incorporated at no cost into Medicare Part B.

·         As federal subsidies are reduced for Medicare Advantage plans, insurers may look to cut expenses by scaling back on extra services, such as dental coverage, vision care, or gym memberships.

·         Other insurers may increase premiums or co-pays.

·         One change that may occur in the future is that higher-income Medicare subscribers may pay higher premiums. Premiums for Parts B and D are based on income; however, according to the new legislation, income levels will not be readjusted until 2020.

o   Currently, the income level starts at $85,000 for a single person and $170,000 for married couples. If you are close to these income levels in retirement, you might want to consider diversifying a portion of your retirement income portfolio by converting to a Roth IRA because tax-free withdrawals from a Roth IRA are not added to the Medicare premium income level calculation.

Myth: Medicare will be replaced with a national medical program.

Fact: Health care reform is not a national medical program or universal health care, but those who do not currently have health care insurance should find it easier to get and keep coverage. Ultimately, the intention of reform is to give consumers the opportunity to choose their plans and plan providers.

·         Starting in 2014, it is intended that state- and federal-established insurance exchanges will provide consumers and small businesses an avenue for comparing the benefits and costs of a range of private insurance health plans. Insurance purchased through the exchanges cannot be denied due to preexisting conditions and is guaranteed renewable.

·         Open enrollment for insurance purchased under the Health Insurance Exchange (HIE) marketplace begins on October 1, 2013, for coverage starting on January 1, 2014.

Myth: Americans are required to buy health insurance.

Fact: Technically, this is not true, but by 2014 almost all U.S. citizens and legal residents (with certain exceptions) must either have health insurance coverage or be prepared to pay a tax penalty.

·         Premiums for low- and middle-income individuals who buy insurance through the new exchanges will be subsidized based on their household income. Medicaid will remain the primary health care program for the poor.

·         The amount of the insurance subsidy will vary according to income, family size, and plan type.

o   Families with incomes up to 400 percent of the federal poverty level who purchase coverage through an HIE will be eligible for a reduction in premium.

o   Families with incomes less than 250 percent of the federal poverty level will qualify for lower deductibles and co-pays.

o   People will not be required to buy health insurance if the least expensive plan available costs more than 8 percent of their income.

Myth: Small employers are required to subsidize their employees’ health insurance.

Fact: This is not the case, although small business owners are encouraged to provide access to affordable coverage.

·         Many businesses with fewer than 50 full-time employees qualify for tax credits based on their contributions to employees’ health insurance. The smaller the business and the lower the average wage, the higher the potential tax credit. In 2014, the tax credit will increase.

·         Companies with 50 or more employees will be subject to fines for not offering affordable insurance that covers minimal essential health care. (On July 1, 2013, the Obama administration announced that it was giving employers another year to comply with the new rules.) The legislation considers health insurance affordable if 60 percent of health care expenses are paid by the plan and an employee pays no more than 9.5 percent of household income toward the family’s coverage.

·         If your employer provides you with access to health insurance, very little may change. Employer-provided health insurance plans in effect prior to March 23, 2010, are grandfathered under the new law, and some new consumer protections apply to these plans. For example:

o   Starting in 2014, these plans cannot have any annual or lifetime limit on benefits nor exclude children due to preexisting conditions.

o   Insured individuals cannot lose coverage due to illness or medical conditions, and dependent coverage covers adult children up to age 26 (unless the child has coverage available through his or her own employer).

o   In addition, making a claim for a seriously ill employee cannot increase premiums for the employer’s group.

Myth: All taxpayers will feel the tax bite from health care reform.

Fact: The brunt of the taxes associated with reform will impact the highest income taxpayers. Workers with annual adjusted gross income (AGI) above $200,000 ($250,000 if married) will see their payroll tax increase 0.90 percent and may see some investment income taxed an additional 3.8 percent. Some taxpayers will also pay the cost of the new health care reform through the revised threshold for claiming medical expense deductions.

·         Starting in 2013, only qualified expenses that exceed 10 percent of AGI are eligible for deduction, up from the previous 7.5-percent threshold.

·         In 2018, a new 40-percent tax will take effect for insurers that offer “Cadillac” health insurance plans. For the purposes of the health care bill, Cadillac health care plans are defined as those with premiums of at least $10,200 for single coverage and $27,500 for family plans.

o   Although this new tax will be imposed on the insurance companies, the costs will likely be passed along to the insured. Commentators predict that high-deductible plans will become more popular in order to keep certain insurance plans from being categorized as Cadillac options.

o   Deductible contributions to health savings accounts (HSAs) may become more popular as a way to bring down taxpayers’ AGI. (Deductible contributions to HSAs are only available to taxpayers who maintain a high-deductible health insurance plan.)

·         Tax-exempt bonds, tax-deferred annuities, cash-value life insurance, charitable remainder trusts and Roth conversions may become more attractive to investors in the highest tax brackets to help lower taxable income.

All in all, the health care reform law is intended to expand access, remove certain limits, and protect consumers. Feel free to contact us if you would like to discuss your current health care plans or how the new legislation may affect your financial situation.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10-percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees. Cash-value life insurance is a type of life insurance policy that both accumulates value during the policyholder’s lifetime and pays out upon the policyholder’s death. The interest and earnings on the policy are typically not taxable, and while some accrue a cash value that can be borrowed against, certain types may not allow you to withdraw from your cash value at all. Whole life, variable life, and universal life are all types of cash-value life insurance.

IRS CIRCULAR 230 DISCLOSURE:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Help Your Child Reap the Benefits of a Summer Job
Though they may only have three months off from school, a summer job can teach kids a lot about financial responsibility. Summertime presents a great opportunity for students to earn income, get work experience, and save for the future. Here are some tips for helping your child make the most of a summer job.

Keep an eye on earnings
Since a summer job typically lasts just a few months, it's important to consider ways to help your child keep as much of his or her paycheck as possible. Evaluate the tax situation. In 2013, a dependent doesn't have to pay federal income tax on earnings up to $6,100. Assuming your child has no other income and won't earn more than $6,100, he or she can claim exemption from withholding on Form W-4. This means your child won't have to file a tax return to get withheld taxes back.
Here are some other tax considerations to keep in mind:

• Tips are included in taxable earnings. If your child receives $20 or more in cash tips in any one month, he or she must report those tips to the employer, who will include them in the amount of earnings subject to withholding. The requirement to report tips applies whether total earnings are over or under $6,100, since tips are subject to social security and Medicare tax.
• Self-employment income is taxable. If your child has self-employment income, such as from babysitting or lawn mowing, he or she may owe self-employment tax. The tax applies to net self-employment income of $400 or more.

Minimize effects on financial aid. Earnings from a summer job may affect students' financial aid, depending on how much they earn. In order to protect your child's financial aid eligibility, be sure to take the following areas into account:

• Income protection allowance. For 2013–2014, dependent students have an income protection allowance of $6,130. Earnings above $6,130 will be counted toward the expected family contribution (EFC) at a rate of 50 percent. (Earnings through the Federal Work-Study program do not count.)
• Retirement accounts. Money saved in a retirement plan, such as a Roth IRA, is not considered an asset for financial aid purposes. Distributions, however, are considered as income in the financial aid calculation.
• Non-retirement accounts. Money saved in a non-retirement account or in cash by the student will count toward the EFC at a rate of 20 percent.

Save, save, save!
Encourage your child to maximize the value of his or her paycheck by saving early. Setting aside even a small amount from each check can add up to significant savings for the future. Plus, developing a saving habit now will only benefit your child when he or she starts working full time.
Harness the power of compounding. By saving early, your child can take advantage of compounding interest. Though the rate of return may change year after year, compounding makes it possible to generate earnings from previous earnings. For example, if your child saves $5,000 per year over 3 years starting at age 18, his or her $15,000 may grow to more than $250,000 by age 60, assuming a 7-percent rate of return.
Consider a Roth IRA. Though it may be hard for a teenager to think ahead 50 years, saving early can go a long way toward securing a comfortable retirement lifestyle. If your child has earned income, he or she can contribute to a Roth IRA—an attractive savings vehicle for low-income earners, such as students. With a Roth IRA, your child may not have to pay any taxes today but would be able to take tax-free distributions in the future.
Keep in mind:

• If your child is a minor, he or she may need you to sign on the account.
• The contribution limit in 2013 is the lesser of $5,500 or the amount of earned income.
• If your child needs to take distributions from the Roth IRA before retirement, contributions can come out first, tax- and penalty-free. If your child has held the Roth IRA for five years or more, he or she can withdraw up to $10,000 in earnings, tax- and penalty-free, for the purchase of a first-time home.

A profitable summer
Besides offering life experience, a summer job can teach kids valuable lessons in financial responsibility. By keeping these tips in mind, you can help your child pave the way toward a bright financial future.

Avoiding Inheritance Conflict in Your Family

Presented by Tim Traub

You may have a will in place, but have you taken steps to ensure that your children won’t be left bickering over inheritances once you’ve passed away? In even the most close-knit clan, grief over a family member’s passing can bring tensions to the surface, especially when money is involved.

A typical scenario

Throughout their marriage, John and Jane Smith had kept a close eye on their finances. Working with their financial advisor, they’d saved and invested carefully over the years, and they planned to leave a sizable inheritance to their three children, Jack, Olivia, and Harry. Unfortunately, though they had prepared a will, John and Jane failed to outline exactly who would get what. They named Jack, the eldest child, as the beneficiary on their life insurance policy and other accounts, assuming he would divide up the funds equally. They left meaningful family jewelry to Olivia, because she was their lone daughter, and gave Harry all of their artwork, since he loved to paint.

Because the children had always been so close and gotten along so well, John and Jane figured they would split everything three ways and, if someone wanted a specific item, they’d work out an equitable arrangement. But things didn’t turn out as the Smiths had planned. Upon discovering that he was the sole legal beneficiary of his parents’ accounts, Jack decided to keep the money for himself, using it to pay for the vacation house he and his wife had long dreamed of buying. In his view, Olivia and Harry had received their fair share of the family estate and there was no need to split the money three ways. A family inheritance feud ensued, with Olivia and Harry vowing never to speak to Jack again.

Tips for keeping the peace

You may be thinking, “That would never happen to my family!” But situations like this are all too common. To help prevent inheritance conflict among your children, consider these suggestions:

·         Be realistic and communicate openly. Your children may be expecting a significant inheritance, one that could help them purchase a home, pay for their children’s education, or simply make them rich. To avoid disappointment, it’s important to give them a sense of where you stand financially and to emphasize that your finances may change, depending on medical expenses or other unexpected costs.

·         Keep your documents up to date. Be sure to update your will and beneficiary designations to reflect life events such as marriages, divorces, new grandchildren, and so on. Keeping your documents current will help ensure that you don’t unintentionally include someone who’s no longer part of your family or exclude someone you wish to benefit.

·         Address personal property specifically and separately. In addition to your will, leave a separate list of personal property with instructions detailing who should inherit each item. The list should describe each piece of property you wish to gift, leaving no room for interpretation.

·         Don’t task the oldest beneficiary with distributing your assets. It’s not wise to leave one child to handle the distribution of your assets, trusting he or she will do the right thing. If you want all of your children to inherit equally, put them all down as beneficiaries.

·         Give everyone a role. Dividing assets equally can help reduce conflict among heirs, but it’s important to think about the division of responsibilities as well. When you assign responsibility for handling your estate, you’re making a statement about whom you think is capable and trustworthy. Consider how your children will react and, if possible, assign everyone a role, even a small one, to play in the decision-making.

·         Explain yourself. What happens if you don’t want to split your assets equally among your children? Many parents consider this option if one child is financially successful while another is struggling. If you plan to distribute your assets unequally, write a personal note to accompany the will, explaining your reasoning. This may help reduce any resentment your heirs may feel.

·         Eliminate uncertainty with a trust. A common estate planning tool, a trust can help you manage and control the distribution of your assets in the event of your death. Through a trust, you can elect to distribute your assets in increments if you pass away before your children are mature enough to manage money wisely—for instance, one-third at age 25, another third at 30, and the final installment at age 35. You might also consider using a trust to hold a distribution until a later date if your child has financial problems or creditor concerns.

Protecting your legacy

Though the estate planning process involves many legal responsibilities, it’s important not to lose sight of the personal aspects. If you plan to leave an inheritance to your children, be sure to consider ways to reduce conflict once you’re gone. By carefully planning and setting expectations ahead of time, you’ll help protect the most valuable part of your legacy—your family.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or lawyer.

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Tim Traub is a financial consultant located at Tim Traub, LLC 167 Cranberry Highway in Orleans, MA. He offers securities as a Registered Representative of Commonwealth Financial Network^®, Member FINRA/SIPC. He can be reached at (508) 240-0848 or at timtraub@timtraubllc.com.

© 2013 Commonwealth Financial Network^®

If you lived as a child in the 40's, 50's, 60's or 70's.

Looking back, it's hard to believe that we have lived as long as we have...

As children, we would ride in cars with no seat belts or air bags. Riding in the back of a pickup truck on a warm day was always a special treat.

Our baby cribs were covered with bright colored lead-based paint. We had no childproof lids on medicine bottles, doors, or cabinets, and when we rode our bikes, we had no helmets. (Not to mention hitchhiking to town as a young kid!)

We drank water from the garden hose and not from a bottle. Horrors.

We would spend hours building our go-carts out of scraps and then rode down the hill, only to find out we forgot the brakes. After running into the bushes a few times we learned to solve the problem.

We would leave home in the morning and play all day, as long as we were back when the street lights came on. No one was able to reach us all day.

No cell phones. Unthinkable. We played dodgeball and sometimes the ball would really hurt. We got cut and broke bones and broke teeth, and there were no law suits from these accidents. They were accidents. No one was to blame, but us. Remember accidents?

We had fights and punched each other and got black and blue and learned to get over it.

We ate cupcakes, bread and butter, and drank sugar soda but we were never overweight...we were always outside playing. We shared one grape soda with four friends, from one bottle and no one died from this.

We did not have Play stations, Nintendo 64, X-Boxes, video games at all, 199 channels on cable, video tape movies, surround sound, personal cell phones, Personal Computers, Internet chat rooms ... we had friends. We went outside and found them. We rode bikes or walked to a friend's home and knocked on the door, or rung the bell or just walked in and talked to them. Imagine such a thing. Without asking a parent! By ourselves! Out there in the cold cruel world! Without a guardian. How did we do it?

We made up games with sticks and tennis balls and ate worms and although

we were told it would happen, we did not put out very many eyes, nor did the

worms live inside us forever.

Little League had tryouts and not everyone made the team. Those who didn't, had to learn to deal with disappointment..... Some students weren't as smart as others so they failed a grade and were held back to repeat the same grade.....Horrors. Tests were not adjusted for any reason.

Our actions were our own. Consequences were expected. No one to hide behind. The idea of a parent bailing us out if we broke a law was unheard of. They actually sided with the law, imagine that!

This generation has produced some of the best risk-takers and problem solvers and inventors, ever. The past 50 years has been an explosion of innovation and new ideas. We had freedom, failure, success and responsibility, and we learned how to deal with it all.

And you're one of them. Congratulations!

Tips for Saving Money on Your Cell Phone

Presented by Tim Traub 

These days, pretty much everyone has a cell phone—some people even have two! As cell phones get faster and smarter, new product launches can rival the fan frenzy of Beatlemania, and it’s easy to get caught up in the excitement.

Because the initial cost and ongoing monthly expenses can be substantial, make sure you don’t get so carried away that you overpay for your phone. Whether you’re looking for the hottest new toy or just want to cut back on your monthly costs, there are plenty of ways to trim the overall cost of your cell phone. Follow these simple tips to save money and stay connected:

Evaluate your needs

·         Look closely at your monthly usage. If you only use 200 minutes of voice per month and are paying for more, you should downgrade your voice plan. Conversely, if you regularly use more than your allotted texts, it may be cheaper to upgrade your texting plan and avoid the overage charges.

·         Review rollover packages. If you use more voice minutes during certain times of the year, the right rollover plan can save you money. You can pay for the average month, not the high-usage month, by rolling unused minutes from the slow months to the busier ones.

·         Do you really need an Internet plan or a data plan? Be honest with yourself. If you don’t travel much and spend your days at a computer, how much do you need a phone to check your e-mail? Or if you have a phone with a small screen, how much will you actually use it to browse the Internet?

·         Is a smartphone right for you? Do you need a phone that surfs the Internet or checks your e-mail throughout the day, or do you just need one that makes it easy to text? Don’t buy a phone just because it’s popular. If you’re looking to save money, there are lots of cool phones that can meet your needs without emptying your pockets.

Avoid costly calls

·         Toll-free 800 calls are not free on cell phones. You will be charged for calls to 800 numbers made from your cell phone.

·         Calling 411 will cost you money. You can be charged up to $1 per call for using 411 directory assistance and being connected to the number you requested.

·         Use free online directory services. If you have a data plan—or access to a computer—use an online directory service like www.411.com or www.whitepages.com to find a number.

Avoid extras

·         How necessary are ringtones, software, video streaming, games, and other downloads? Although these items can add to your experience, they aren’t necessary for the phone’s functionality, so think twice before purchasing them.

·         Only buy the accessories you really need. Add-ons like phone cases, car chargers, and other accessories can tack on unnecessary costs.

Stay up to date on new offers

·         Shop around. Carriers buy phones in bulk from manufacturers like Apple and Nokia and then offer them at reduced costs in exchange for customer contracts. The carriers may price their offers very differently, so be sure you know what you want in advance and shop around till you find the best deal.

·         Check out different contract terms. Contract prices change according to length of commitment, so signing a longer contract may save you money in the long run.

·         Timing can be everything! When a new model is first released, it can be much more expensive than it will be a few months later; coincidentally, the old model will likely become cheaper, and it may have everything you really need.

·         Make sure the plan you’ve always had is still the plan you need. Although many cell phone users keep the same plan for more than five years, the prices of these plans change frequently. Your carrier will not retroactively change the price you pay, so be sure to check the contract price before you renew.

Consider pay-as-you-go plans

·         Pay separately for minutes and texting. With a pay-as-you-go phone, you purchase a phone and pay separately for only as many minutes or texts as you think you’ll use. Keep in mind that these phones become expensive with heavy usage because the per-minute price is higher than it would be with a more traditional contractual plan.

·         Budget control. Pay-as-you-go phones help you control how much money you spend and are a great option for light users or people who only want a phone for emergencies.

The customer is always right

·         Don’t be afraid to ask for a better deal. If you feel like you are paying too much, call your carrier. Many cell phone companies offer special customer-retention deals if they think you might leave the company.

Being aware of how much you spend on anything is a good idea. And with cell phones, it’s easy to check your bill every month to ensure that the charges are correct and that you need all the services you’re paying for. Be realistic. We can get so caught up in the excitement surrounding the latest gadget that we forget to look at what we really need our phone to do. Even if you just make a few seemingly small changes to your monthly cell phone usage, you can save yourself a good deal over time.

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Tim Traub is a financial consultant located at Tim Traub, LLC 167 Cranberry Highway in Orleans, MA. He offers securities as a Registered Representative of Commonwealth Financial Network^®, Member FINRA/SIPC. He can be reached at (508) 240-0848 or at timtraub@timtraubllc.com.

 

© 2012 Commonwealth Financial Network^®

American Taxpayer Relief Act of 2012 Creates Planning Opportunities

Presented by Tim Traub

The American Taxpayer Relief Act of 2012 was passed by Congress on January 1, 2013. The act provides a mixed bag for taxpayers, extending or modifying many of the tax provisions that were set to expire on December 31, 2012¹, while letting others terminate. Where do we stand now? Let’s take a closer look at some of the changes that have occurred and how you may take advantage of them.

Individual income tax rates

For taxpayers with annual income less than $400,000 (individual) and $450,000 (married filing jointly), the act made permanent the current marginal income tax rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. For taxpayers with taxable income over these thresholds, the act restores the 39.6-percent tax bracket.

Planning tip: Business owners may wish to examine their current entity structure to determine whether or not it remains beneficial under this new legislation. S corporations and LLCs historically have been favored over C corporations due to the ability for the business owner to report business profits on his or her own personal return. Now, however, the C corporation’s highest tax bracket is lower than the highest personal tax bracket. The spread may provide opportunities to defer compensation.

Capital gains and qualified dividends

Taxpayers with income above the $400,000 (individual) and $450,000 (married filing jointly) thresholds will see an increase in the long-term capital gain and qualified dividend tax rate from 15 percent to 20 percent. The 15-percent rate will remain in place for taxpayers below these income thresholds. (For taxpayers in the 15-percent or lower tax bracket, the 0-percent capital gain rate will remain in place.)

Important note: The new Medicare surtax resulting from the 2010 Patient Protection and Affordable Care Act will also play an important role for higher-income taxpayers in 2013. Starting January 1, certain taxpayers will be subject to a 3.8-percent surtax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 (individual) and $250,000 (married filing jointly). This is on top of regular capital gain taxes. The following types of investment income will be affected: taxable interest, capital gains, dividends, nonqualified annuity distributions, royalties, and rental income. Exceptions include distributions from retirement accounts, pensions, 401(k), IRAs, and municipal bonds, although these distributions will impact the MAGI calculation.

As a result, the effective top rate for net long-term capital gains for many higher-income taxpayers is now 23.8 percent.

Federal estate, gift, and generation-skipping transfer (GST) tax

The act retains the annual inflation-adjusted $5 million estate tax exclusion but increases the maximum estate tax rate to 40 percent. The lifetime gift tax exemption remains unified with the $5 million exemption. Portability between spouses also becomes permanent, and the act extends the GST tax-related provisions, including the inflation-adjusted $5 million exemption.

Portability allows the surviving spouse to apply any unused exclusion of the deceased spouse to his or her own transfers during life and at death (if the proper elections are made). Portability should bring with it flexible planning strategies for high-net-worth estates.

Planning tip: The $5 million exemption amounts offer greater flexibility for high-net-worth individuals to transfer assets during life or at death—potentially gift and estate tax-free. With the “permanency” of these provisions, taxpayers are encouraged to take time to execute well-thought-out estate plans, instead of trying to implement changes at the last minute, before legislation expires.

Qualified charitable tax-free IRA distributions

Congress restored the Qualified Charitable Distribution (QCD) provision for 2012 and 2013. The QCD allows taxpayers age 70½ and older to transfer up to $100,000 from an IRA directly to a qualified charity to avoid recognition of the income and to partially or fully satisfy the required minimum distribution (RMD) requirement. For 2013, the QCD must be made prior to December 31, 2013.

Planning tip: A QCD may still be made for the 2012 tax year under the following conditions:

1.       An individual may make a direct transfer from the IRA to charity prior to February 1, 2013, and characterize it as made on December 31, 2012.

2.       If an individual took an RMD after November 1, 2012, and before January 1, 2013, the individual may treat the distribution as a QCD if the amount (up to $100,000) is transferred to charity prior to February 1, 2013. Please note: RMDs taken prior to November 1, 2012, are not eligible.

Education Incentives
The American Opportunity Tax Credit is extended through 2017. This provides for a 100-percent tax credit of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a maximum credit of $2,500 per eligible student. The credit applies to the first four years of a student’s post-secondary education.

The Qualified Tuition and Related Expenses “above the line” deduction (meaning you don’t need to itemize to claim it) is extended until December 31, 2013, and was retroactively extended for 2012.

The Student Loan Interest Deduction is a $2,500 “above the line” deduction. The act makes permanent the suspension of the 60-month time limit.

Coverdell Education Savings Accounts received a permanent maximum contribution limit of $2,000. Distributions must be used for qualified higher education expenses while attending elementary, secondary, or post-secondary educational institutions.

Planning tip: A taxpayer cannot claim the Qualified Tuition deduction in the same year as he or she claims the American Opportunity Tax Credit or the Lifetime Learning Credit. Nor can the tuition deduction be claimed for a student in the same tax year if anyone else claims the American Opportunity Tax Credit or Lifetime Learning Credit for the same student in the same year.

Alternative minimum tax (AMT)

The last AMT “patch” expired at the end of 2011. The 2012 act permanently extends AMT amounts to $50,600 for individuals and $78,750 for married filing jointly. These amounts are retroactive for the 2012 tax year. The exemption will be adjusted for inflation in 2013.

Planning tip: In previous years, the AMT patch was not released until the year after the previous tax year, making it difficult to plan without knowing the exemption amounts. Now that the AMT has been given a more permanent fix, planning should be easier.

Itemized deductions and personal exemptions

For tax years 2010–2012, itemized deductions and personal exemptions were not subject to phase-out. The new legislation revives phase-out rules for 2013 at these applicable thresholds:

• $300,000 for married filing jointly
• $275,000 for heads of household
• $250,000 for single filers
• $150,000 for married filing separately

The itemized deduction rules reduce the allowable itemized deductions by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds the applicable threshold. The itemized deduction cannot be reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, casualty, wagering, and theft losses, are excluded.

The total amount of personal exemptions that may be claimed by a taxpayer is reduced by 2 percent for each $2,500 or portion thereof (2 percent for each $1,250 for married filing separately) by which the taxpayer’s adjusted gross income exceeds the applicable thresholds listed above.

Planning tip: For taxpayers with a higher income and larger deductions, the itemized deduction and personal exemption limitations may create a “stealth” tax on tax liability, effectively increasing the marginal rate. Taxpayers may wish to recognize income or deductions in certain tax years to help minimize the impact.

Payroll tax cut

The act did not extend the 2-percent payroll tax cut, which temporarily reduced the social security tax withholding rate from 6.2 percent to 4.2 percent for tax years 2011 and 2012. The tax withholding rate will return to 6.2 percent for wage bases under $113,700, which will have an immediate impact on take-home pay.

On the whole, although Congress did act to stop the sweeping tax increases that were set to take effect as a result of the fiscal cliff, taxes may go up for some taxpayers. We will continue to work with you—as well as with your legal and tax advisors—to help you pursue your financial and legacy goals in this new tax environment.

¹Bush-era Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Act of 2003 (JGTRRA), both of which were extended under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Commonwealth Financial Network^® does not provide legal or tax advice.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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Tim Traub is a financial advisor located at Tim Traub, LLC. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (508) 240-0848 or timtraub@timtraubllc.com.

© 2013 Commonwealth Financial Network^®