Beginning January 1, 2013,  a new Medicare surtax of 3.8% will be assessed if you have income over a “threshold amount”.  The new surtax will be assessed on the lesser of:

1. “Net Investment Income” OR
2. Any “Modified Adjusted Gross Income” over the “threshold amount”

Investment Income

OK, so what the heck does that mean?  First, investment income comes from a lot of sources.  Here’s what’s included in “investment income” for purposes of the 3.8% surtax:

• Interest
• Dividends
• Capital Gains
• Annuities
• Rents
• Royalties
• Passive activity income

“Investment income” does not include:

• Active trade and/or business income
• Distributions from IRAs or other qualified retirement plans
• Any income taken into account for self-employment tax purposes

Threshold Amount

The “threshold amount” is as follows:

1. Married taxpayers filing jointly – $250,000
2. Married taxpayers filing separately – $125,000
3. All other individual taxpayers – $200,000
4. Trusts and estates – $11,200

So if your MAGI is over the “threshold amount”, you will pay the 3.8% surtax on the lesser of all your investment income or on your income that in excess of the “threshold amount”.

Here’s what your new tax rates will most likely look like for Married Taxpayers Filing Jointly:

I know, clear as mud.  If this still does not make sense, and you think that you are pretty sure that your income is going to be close to or over the “threshold amounts” mentioned above, then you probably need to talk to a good Certified Financial Planner certificant, and also a good CPA.

There are a number of strategies you can use in your presonal financial planning to reduce or eliminate this excess surtax if you are someone who will be exposed to it.  If you are one of these people, you need to contact us as soon as possible to start planning ahead.  As I like to say, these are “high class” problems to have.

Currently the tax brackets are 10%, 15%, 25%, 28%, 33%, and 35%.  The new tax rates in 2011 will be 15%, 28%, 31%, 36%, and 39.6%.  So basically everyone will be paying more in taxes, no matter what your income will be.  We don’t know yet exactly where the income tax brackets will cut off, but if we use the 2010 rates and adjust for inflation, it will likely look like something this:

Capital gains taxes

Income tax rates are not the only thing that will be going up. Currently we pay 15% taxes on long term capital gains (held more than a year) or 0% if your income tax bracket is 15% or less.  Starting in 2011, the long term capital gains tax rate will be 20% instead of 15%, and those in the lowest tax bracket will pay 10%.

Stock dividends

Currently we are paying a 15% tax rates on qualified stock dividends.  Starting in 2011, stock dividends will be taxed at whatever your income tax rate is.  This will be a drastically higher rate for many people who rely on stock dividends for income.

What should you do?

There are a number of things you can do this year to help reduce your tax bill in 2011.  For starters, if you have the ability to take additional income in 2010 that you would normally take in 2011, you should do so.  This could be in the form of a bonus or deferred compensation.  Or, if you own your own business, you could pay yourself extra at the end of 2010 to cover some of your expenses in 2011.  This way you will pay much less in taxes on that income.

Second, if you are thinking about selling any stock, mutual fund, or bond positions, you should do it before the end of the year.  This will allow you to pay capital gains taxes at rates that are at least 33% less than they will be next year.

Third, if you would normally make a charitable donation at the end of 2010, and you can wait until January 1, 2011, it may benefit you to do so. 

And last, this would be the ideal year to consider making some tax efficient shifts to your investment portfolio.  This could include doing a Roth conversion of part of your IRA (at much lower tax rates this year), and/or shifting more of your money to tax deferred vehicles like annuities.

Talk to your personal financial planning advisor about things that you can do to prepare for these higher tax rates.  Doing so will help you pay less to Uncle Sam and put more in your pocket.  Of course you can call us for a free consultation about how to reduce your income tax exposure at 1-866-983-4222.

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.

Volunteer with high school students in Tanzania

So you’re at a point in your life where you’re ready to quit the daily grind and start following your true passion.  For many people today, this means doing some kind of humanitarian work, missionary work or other volunteer activities.  It’s the time in your life when your days are just as busy as ever, buy your only pay is the heart-warming satisfaction that comes from giving back.  It’s a time when most people find that in serving others, they grow more than they ever thought they could.

Preparation For Service

Whether you’re planning to serve in another state, or in a foreign country, there are a lot of things you need to prepare for prior to leaving.  In addition to making arrangements for your house, car, & utility payments, there are a lot of financial things to think about.

Power of Attorney

A power of attorney gives someone else the power or authority to act in your behalf in legal or business matters.  This obviously needs to be someone you trust very much, like a family member or trusted advisor.  This person can sign binding documents in your behalf and do pretty much anything you could do for yourself (with the exception of changing a will).  If you are serving somewhere in Africa you will not very easily be able to sign a tax return, or endorse a check that needs to be cashed.

Online Account Access

These days you have to be pretty darn remote to not have online access to your financial accounts.  But there are STILL a lot of places you could go where your only source of power would be from a currant bush.  Just in case you do have an opportunity to get on the web at some point during your mission trip, you’ll most likely want to check in on your bank & brokerage account balances.  Here, you can usually also get copies of tax forms too which can be very helpful.  Make sure that wherever possible, you are set up for online account activity.

Insurance Coverage

You may be going to a place where you’ll have healthcare provided to you as part of the project.  But in the event that you’re on your own for health care, you need to make sure that you have adequate health insurance.  You can buy foreign travel health insurance if you need to, but you’ll want to do your homework on it.  If you’re serving stateside and you don’t yet qualify for Medicare, you’ll want to make sure you have a good health insurance plan with a nationwide network of doctors.  If you need to get some health insurance quotes, go to www.TurningPointBenefits.com.

Investment Management

Your investments are one thing you definitely want to have someone keeping an eye on for you while you’re gone.  This could help you avoid a terrible financial disaster, and help you to relax and focus on what you’re there for.  Choosing a good money manager who will put your best interests first is a critical to making this work.  Hiring a Certified Financial Planner will help ensure that your advisor is looking out for only you.  See my previous post called Why Work With A CFP? for more information as well.  Asking a family member to take care of this might save you a little money in the short run, but could cost you royally in the long run.  An experienced & trustworthy financial planner will be worth their weight in gold.  You will always be able to communicate by email and get your statements and trade confirmations online as long if you have internet access.  Also, most banks and financial firms can forward your paper account statements to overseas addresses as well.

Now Go To Work!

Once you’ve taken care of these critical financial issues, you can focus on your volunteer service whole heartedly.  Now it’s time to get your VISA and get to work!  Good luck!

If you would like to talk with us about helping you with any of the financial matters listed above, CLICK HERE.

First, even though your Medicare part B premiums won’t go up in that year, the cost of everything else you buy will.  The cost of healthcare, food, utilities, gasoline & everything else you buy will increase in costs every year no matter what you do.  So while not paying more for your Medicare part B premiums will be nice, it’s hardly as nice as a cost-of-living increase in your social security check would be.

Secondly, what they don’t come out and say is that if you are an individual with a modified adjusted gross income of over $85,000, the “hold harmless” provision does not apply to you.  So if you’re in that boat, your Medicare part B premiums will continue to increase each year.  And these incrases are likely to be higher than normal because Medicare part B still needs to take in the same amount of revenue to cover it’s costs and pay benefits.

So isn’t this really a tax increase in disguise?  Maybe it’s technically not called a “tax”, but it’s still a “revenue generator” for our government, which is the same as a tax.  And this will apply to a whole lot of individuals who’s income is far less than $250K.  How many more “revenue generators” will be disguised this way in the years to come?  Costs continue to rise, and so do our taxes.

With a little bit of planning you can reduce your taxable income to bring it under this $85,000 level so that you’re not exposed to this kind of “taxation”.  Contact us now if you would like to discuss how we can help you do this and save yourself unnecessary taxation.

Also, if you would like to see if you can save tons of money on your Medicare Supplement insurance to cover the things that Medicare doesn’t cover, go to www.Great-Financial-Planning.com/best-medicare-supplement.html.