Michele Clark in the News: CNBC about Downsizing Housing in Retirement

I was happy to be a resource for Sara O’Brien of CNBC for the article “Older Americans planning to downsize should brace for sticker shock” that highlights the surprises that retirees can face when downsizing.  We had a great discussion about the types of expenses people often forget, the types of housing I see clients gravitate toward, and if the cost of the square footage downsized home is dollar downsized as much as people originally had envisioned.

Why retirees might not get as much equity out downsizing as they thought

When thinking of “downsizing” people often assume that if they reduce the size of their home, the purchase price will also be lower.  That isn’t always the case.  Often times people are looking for newer homes that will require less maintenance, and may even be attracted to villa homes that include (for a fee) exterior upkeep such as snow shoveling, yard work etc.  Those types of homes cost more.  You may end up downsizing the square footage but upsize the amenities.

People often forget that they will pay a 6% sales commission to the realtor to sell their home that translates into a smaller check at the closing table than they originally thought.  For a $450,000 house, it is $27,000 less for their retirement than they were thinking. Especially considering they are also using the proceeds to buy another house.

Due to years of watching HGTV reveals people swing open a front door and expect to be wowed. Knowing this a Realtor’s marketing plan will include a list of staging ideas and home repairs designed to maximize the sales price and reduce the number of days on the market. These expenses are often overlooked because they cover more items than they used to, Pre-HGTV.

Moving expenses and the cost of setting up the new home add up as well.

Why it pays to plan in advance when thinking of downsizing

One benefit to downsizing, even if the reduction is not significant, is if you currently have a mortgage, and you move to a less expensive home, you can improve your monthly cash flow by doing away with the monthly principal and interest mortgage payments (you will still pay taxes and insurance each year.)  Or of course, if your current home is paid off, you will walk away from the closing table with equity out of the house, which is what people traditionally think of when they think of downsizing.

Another benefit is in the form of improved monthly cash flows, due to a reduction in housing costs, such as utilities, home owner’s insurance, and potentially real estate taxes.

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Overlooked expenses in retirement: Gifts and travel related to gift giving occasions

Many people who come to me for assistance with retirement income planning are on the cusp of retirement and have never tracked their expenses.  If that is the case, no problem, we have methods to estimate spending to get a baseline estimate of your spending needs in retirement.

For those that are trying to get a clearer picture of retirement spending, I often see them list their regular monthly expenses such as utilities, insurance, food, and gasoline.  But overlook the irregular expenses such as home and car maintenance, personal property taxes, gifts, etc.; expenses that happen on an irregular basis.

Gift giving in Retirement

To help you think through what you might spend on gifts in a year consider these items:

Consider your:
Immediate family
Extended family
Friends
Your children’s friends, teachers, coaches, etc.

Consider occasions:
Christmas
Hanukkah
Birthdays
Weddings
Graduations
Baby showers
Hostess gifts
Funeral flowers
Get well flowers

Consider travel related to gift giving:
Christmas
Destination or out of town weddings
Baby showers
Funerals

What does this average you annually, divided by twelve; this gives you an estimated amount that you spend per month.

Retirement planning is setting your self up to be able to afford the lifestyle and activities that are important to you.  Part of that is determining what is important to you and how much it costs.

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Coffee with Michele, Jan and Diana November 2017

Come to the Community Room at Kaldi’s in Chesterfield with your financial planning, tax, and Medicare questions and enjoy a cup of coffee with CERTIFIED FINANCIAL PLANNER™ professional Michele Clark, Jan Roberg, Enrolled Agent, and Diana Wilson, Health Insurance Professional.

There is no prepared presentation, just a casual conversation in a small group environment; your opportunity to pick our brains. Feel free to invite family or friends who could benefit from an hour with us. Open to registered attendees only, due to the size of the room.

It will be Medicare season, bring your questions.

Coffee with Michele, Jan, and Diana
Kaldi’s Coffee Chesterfield
Wednesday, November 8th
10:30 am to 11:30 am

RSVP online Clark Hourly Financial Planning and Investment Management RSVP or call 636-264-0732. Space is limited. Coffee and pastries are complimentary.

Kaldi’s Coffee Chesterfield Missouri address and map. The Community Room is an enclosed room in the back of the coffee shop.

We hope you can join us!

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Garrett Planning Network Retreat 2017

I was recently out of the St. Louis area for a bit while I attended The Garrett Planning Network 17th Annual Retreat which was held in Denver, Colorado.   I am a member of the Garrett Planning Network which is an international group of financial planners / investment advisors.  Each member of the network owns their own firm. I have written about the Garrett Planning Network before.  This was the ninth year I have gone.

I attended the conference and earned continuing education credits by going to various educational programs, which I need so that I can keep my designations and licenses such as:

  • CERTIFIED FINANCIAL PLANNER™
  • NAPFA Registered Financial Advisor
  • CHARTERED RETIREMENT PLANNING COUNSELOR℠

For example, I have to have 60 hours of continuing education every two years as a NAPFA Registered Financial Advisor.

During the four day conference, I attended various educational programs such as:

  • What Goes into a Plan for the Later Years of Life?
  • Retirement Income Showdown: Risk Premium vs. Risk Pooling
  • How You Can Help Your Clients Cut Their College Costs
  • Why All the Buzz about Reverse Mortgages
  • The State of Fiduciary Rules for Fee-Only Investment Advisors
  • Big Insurance Theories
  • How to Use Reverse Mortgages to Secure Yur Retirement
  • Long Term Care Planning: Leveraging Your Client’s Risks
  • And others

You can see some of the live tweeting that I did at the conference under my Twitter handle @HourlyPlanner.  You do not need a Twitter account.

The Garrett Planning Network has several educational conference calls each month, and the members interact on an internal forum to help each other with more complex planning cases on a daily basis.  One of the most beneficial outcomes of my annual trip to this retreat is getting together with this group, sharing ideas, and getting updates from these amazing colleagues in person.  It is something I look forward to all year!

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Tax Planning Ideas for Year End 2016

December 31, the window of opportunity for many tax-saving moves closes.  So it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2016 tax year.

Timing is everything

Consider any opportunities you have to defer income to 2017. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2016. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2016 and postponing deductible expenses to 2017. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2017; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes won’t help your 2016 tax situation, but could hurt your 2017 bottom line.

Special concerns for higher-income individuals

The top marginal tax rate (39.6%) applies if your taxable income exceeds $415,050 in 2016 ($466,950 if married filing jointly, $233,475 if married filing separately, $441,000 if head of household). And if your taxable income places you in the top 39.6% tax bracket, a maximum 20% tax rate on long-term capital gains and qualifying dividends also generally applies (individuals with lower taxable incomes are generally subject to a top rate of 15%).

If your adjusted gross income (AGI) is more than $259,400 ($311,300 if married filing jointly, $155,650 if married filing separately, $285,350 if head of household), your personal and dependency exemptions may be phased out for 2016 and your itemized deductions may be limited. If your AGI is above this threshold, be sure you understand the impact before accelerating or deferring deductible expenses.

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and retirement plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2016 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2016, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2016, you can contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2016 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2016 IRA contributions.

Roth conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions). If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. (Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.)

If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (things don’t go the way you planned and you realize that you would have been better off waiting to convert), you can recharacterize (i.e., “undo”) the conversion. You’ll generally have until October 16, 2017, to recharacterize a 2016 Roth IRA conversion — effectively treating the conversion as if it never happened for federal income tax purposes. You can’t undo an in-plan Roth 401(k) conversion, however.

Changes to note

If you didn’t have qualifying health insurance coverage in 2016, you are generally responsible for the “individual shared responsibility payment” (unless you qualified for an exemption). The maximum individual shared responsibility payment for 2016 increased to 2.5% of household income with a family maximum of $2,085 for 2016, up from 2% of household income for 2015. After 2016, the individual shared responsibility payment will be based on the 2016 dollar amounts, adjusted for inflation.

Since 2013, individuals who itemize deductions on Schedule A of IRS Form 1040 have been able to deduct unreimbursed medical expenses to the extent that the total expenses exceed 10% of AGI. However, a lower 7.5% AGI threshold has applied to those age 65 or older (the lower threshold applied if either you or your spouse turned age 65 before the end of the taxable year). Starting in 2017, the 10% threshold will apply to all individuals, regardless of age. This is something that you may want to factor in if you’re considering accelerating (or delaying) deductible medical expenses.

Expiring provisions

Legislation signed into law in December 2015 retroactively extended a host of popular tax provisions — frequently referred to as “tax extenders” — that had already expired. Many of the tax extender provisions were made permanent, but others were only temporarily extended. The following provisions are among those scheduled to expire at the end of 2016.

  • Above-the-line deduction for qualified higher-education expenses
  • Ability to deduct qualified mortgage insurance premiums as deductible interest on Schedule A of IRS Form 1040
  • Ability to exclude from income amounts resulting from the forgiveness of debt on a qualified principal residence
  • Nonbusiness energy property credit, which allowed individuals to offset some of the cost of energy-efficient qualified home improvements (subject to a $500 lifetime cap)

Talk to a professional

When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.

Article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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