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Are You Retired or Semi-Retired? Check Your Tax Withholding Now

Tax overhaul risks leaving pension recipients under withheld when it comes time to file for 2018

By Laura Saunders

June 22, 2018

Courtesy of the Wall Street Journal

Millions of Americans receiving pensions could be in for a bad tax surprise next year.

A little-noticed effect of last year’s tax overhaul is that many pension payments are now larger, reflecting the new lower tax rates in effect for 2018. But this bump-up increases the risk that recipients will be under withheld at tax time next year—and therefore owe a penalty. To avoid this, retirees should immediately check their withholding and adjust it if necessary.

One who will be checking is Ann Gardella, a retired music teacher now living in Southbury, Conn. She says most of her income is from her pension and the monthly payments rose earlier this year. Because she already has a tax balance due each April, she plans to review her withholding.

“I really don’t want to owe penalties next year,” says Ms. Gardella.

The situation with pensions is similar to what’s happening with paychecks, says Jonathan Zimmerman, a benefits attorney with Morgan, Lewis & Bockius. Earlier this year, Treasury officials adjusted withholding tables to reflect changes for 2018 made by last year’s tax overhaul, and these changes have been incorporated into many pension payments as well as employee paychecks.

But these adjustments didn’t take into account many of the overhaul’s changes. For example, the current withholding tables include tax-rate changes but not the effect of the new $10,000 cap on deductions for state and local taxes. The withholding tables have never included this information, according to an IRS spokesman.

The upshot is that some pension recipients could wind up under withheld in for 2018 because the automatic adjustments to their pension payments set them too high. In general, people must pay in at least 90% of the tax they’ll owe during the year, or by the following mid-January if they are paying quarterly estimated taxes, to avoid a penalty. The penalty is based on an annual interest rate that’s currently 5%.

Penalized

The growth in filers who owe penalties on quarterly tax payments has far outpaced the growth in individual returns in recent years.

Pension payments and filers’ circumstances vary widely, so it’s hard to predict who’s at risk here. Mr. Zimmerman says that for a typical married pension recipient with a $50,000 annual pension, the reduction in withholding comes to about $818 a year. That may not sound like a lot, but it cuts withholding by about 20%. A pension payer that follows the government’s tables isn’t responsible if the recipient is under withheld.

This new wrinkle in pension payments is yet another reason why retirees—especially those who recently retired or are working part time—should be alert for “tax shocks,” says Gil Charney, a director of H&R Block’s Tax Institute.

For many retirees, income doesn’t just drop, he explains. Often it becomes lumpy, especially if someone has part-time work, Social Security payments, or retirement-plan withdrawals. Medical expenses may become deductible for the first time, and additional “standard deductions” kick in at age 65.

Retirees must also decide what to withhold from Social Security payments and payouts from plans such as 401(k)s or individual retirement accounts at the same time that many are switching to quarterly estimated tax payments.

“The onus is on the taxpayer to make sure the withholding is correct,” says Mr. Charney, rather than on both the taxpayer and the employer.

There’s evidence of rising taxpayer problems in this area. Between 2010 and 2016, the number of filers penalized for underpaying estimated taxes rose 36%, from 7.2 million to 9.8 million.

To help with these issues, the IRS has posted a new withholding calculator. It can be used by most filers, including retirees with multiple sources of income, according to an IRS spokesman.

To use it, you’ll need a copy of last year’s tax return and estimates of this year’s sources of income and withholding so far. Based on the results, you may want to submit a revised Form W-4P, for pension and annuity withholding, to the payer.

The form for Social Security withholding is W-4V. Filers can elect to withhold at one of four flat rates—7%, 10%, 12%, or 22%. To change the withholding on the payouts from a retirement plan such as an IRA or 401(k), check with your provider.

What if a filer underpays estimated taxes? The law offers two outs. There’s often no penalty if income is less than $150,000 and the filer has paid in an amount equal to 100% of his tax for the prior year. For those earning more than $150,000, the threshold rises to 110% of the prior year’s tax.

The other is that the IRS often waives estimated tax penalties incurred in the year someone retires or becomes disabled, or sometimes the year after that. To qualify, the taxpayer submits Form 2210 with proof and an explanation that the error wasn’t willful.

But this relief often comes after a scary letter from the IRS and filling out yet another form—so avoid it if you can.

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The Rise of the Older, Single Female Home Buyer

The Rise of the Older, Single Female Home Buyer

Unmarried women over 55 is one of the largest, and fastest-growing, demographics of home buyers. With longer lifespans and careers, many look for homes with ‘no bad memories’

Ms. Hoffman said her new home is giving her a chance to ‘start from scratch.’ Photo by THE WALL STREET JOURNAL

By Katy McLaughlin

Leah Hoffman was looking for a house to start the next phase of her life. She doesn’t need a lot of space, and being single, she only needs to please herself. She says she found exactly what she was looking for in a $1.7 million home in Paradise Valley, Ariz., which she moved into in January.

The life phase Ms. Hoffman is starting? She is 60 and divorced, with grown children. She sold a wealth-management firm she founded in 2007 and is now ready for something new. “I’m totally starting from scratch,” she says. “I like change.”

Since 1981, single women over 55 have been the fastest-growing demographic of home buyers when compared with a multitude of other categories, according to an analysis of U.S. Census Bureau data by Ralph McLaughlin, founder and chief economist at Veritas Urbis Economics in Alameda, Calif. Married couples are by far the largest group of home buyers, and single women the next largest group. But last year, single, older women made up 8.2% of all home buyers, roughly double the percentage of 20 years ago, Mr. McLaughlin says. These women also buy homes at nearly twice the rate as their male counterparts.

Three Single Women, Three New Homes

There have long been many more older single women than men, reflecting the fact that men remarry at a higher rate after a divorce, as well as the fact that men generally die at younger ages. But the dramatic increase in home purchasing by older women speaks to something else. Many women in this place in life want to own a home of their own, says Jessica Lautz, director of demographics and behavioral insight for the National Association of Realtors. Ms. Lautz also notes that longer average lifespans—and people working until later in life—are giving older buyers the confidence to take on a 15- or 30-year mortgage.

Ms. Hoffman, echoing the sentiments of others, views her purchase as more than a financial transaction. “There are no bad memories in this house, and I’m going to try hard not to create any,” she says.

In the late 1990s, Ms. Hoffman and her then-husband built a family home in Paradise Valley. Raising two sons, the couple designed a 6,000-square-foot house with a wing of bedrooms and a play area for the boys. Because she spent about 60-hours-a-week running her own company, a location near school, a grocery store and a dry cleaner was paramount. After divorcing in 2005, Ms. Hoffman moved into a 5,000-square-foot Paradise Valley house so her children could remain in the same school district. That house is now on the market for $1.475 million.

She then decided to downsize to a house that was easier to take care of. Finding her new place wasn’t easy, says her agent Joan Levinson of an eponymous brokerage in the area, as most Paradise Valley homes are larger. Eventually, Ms. Hoffman found a 3,200-square-foot, two bedroom with a separate, one-bedroom casita. Near restaurants and shopping, it has a landscaped garden and views of Camelback and Mummy mountains. Ms. Hoffman says she left behind all her old furniture and commissioned custom pieces, aiming to “start from scratch.”

Mary Jo Valentine Blythe and her then-husband raised three children in a 7,000-square-foot home in the upscale Chicago suburb of Hinsdale, Ill. They divorced in 2005, and seven years later Ms. Blythe bought an 8,000-square-foot home in Vail, Colo. that she and her now-grown sons, avid skiers, consider their “family home,” she says. She waited until her youngest son graduated from high school to put the Hinsdale home on the market, she says, selling it in 2016. That same year she also sold the corporate event company she built over 25 years.

Next, Ms. Blythe moved to an $8,000-a-month, two-bedroom rental in Trump International Hotel & Tower in downtown Chicago. The rental introduced her to a “completely different life,” she says, putting her close to restaurants, upscale shopping and bike rides alongside Lake Michigan. Her only qualm was the monthly outlay for a home she didn’t own, she says.

So in June, Ms. Blythe, now 56, put down a deposit on a $3.2 million, four-bedroom condominium in Renelle on the River, an 18-story building currently under construction near the Trump Tower. Her new apartment keeps her in the heart of the city, “where I can walk everywhere,” she says.

A year ago, Ms. Blythe met a man with whom she is in a relationship, she says. As it happens, he lives back in Hinsdale, the suburb she left, where he is raising two teenagers. Ms. Blythe says she has no plans to return to the suburbs. “I’m done with that chapter,” she says. “I want to be part of something that’s more energized.”

“Multigenerational homes,” or places where aging parents, adult children not ready to leave the nest, and children under the age of 18 can co-habitate are in high demand among “buyers in their early 50s,” says Ms. Lautz of the NAR. That is roughly what Laura Ackerman was looking for. After ending a 33-year marriage, she was planning to move out of her Bay Area home of 20 years.
“Over the holidays, my kids sat me down and told me they wanted me to move to the East Coast,” says Ms. Ackerman, 57. At first, she laughed it off, but later started to dwell on it. Two of her children live on the East Coast and a third lives in Spain, she says.

Influencing her decision was the fact that eight years ago, her youngest son fell out of a tree and nearly died of a traumatic brain injury, Ms. Ackerman says. He recovered and is a healthy young man finishing college, she says. But the experience taught her to “never take another day for granted,” she says.

In April, Ms. Ackerman closed on a $1.75 million Colonial on 5 acres in Mendham, N.J., where she had gone to high school. The 7,000-square-foot house has six bedroom and seven bathrooms—ideal for when her three children and her mother come to visit. Someday, when there are spouses and grandchildren, everyone will be able to gather, she says.
Still in the process of unpacking, Ms. Ackerman says she is looking forward to joining a church and book club, strengthening relationships with old friends and taking advantage of proximity to her children.

“I definitely feel that the fresh start has given me a new lease on life.”

Write to Katy McLaughlin at katy.mclaughlin@wsj.com

Appeared in the June 29, 2018, print edition as ‘A New Life, a New House.’

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Do You Know Who Your Beneficiaries Are?

Why you should periodically review beneficiary designations.

Your beneficiary choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions. In fact, you might want to review them annually.

Beneficiary designations commonly override bequests made in a will or living trust. Many people do not realize this. When assets have designated beneficiaries, they can usually avoid probate and transfer directly to that person.1,2

You may have chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets?

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. If you’re not certain you understand all the possible ramifications of your selections, you may want to reach out to a qualified financial professional for guidance.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thebalance.com/why-beneficiary-designations-override-your-will-2388824 [8/28/17]
2 – wealthmanagement.com/estate-planning/designating-beneficiary-not-easy-it-looks [4/23/18]

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How Much Do You Really Know About Long-Term Care?

Separating some eldercare facts from some eldercare myths.

How much does eldercare cost, and how do you arrange it when it is needed? The average person might have difficulty answering those two questions, for the answers are not widely known. For clarification, here are some facts to dispel some myths.

True or false: Medicare will pay for your mom or dad’s nursing home care.

FALSE, because Medicare is not long-term care insurance.1

Part A of Medicare will pay the bill for up to 20 days of skilled nursing facility care – but after that, you or your parents may have to pay some costs out-of-pocket. After 100 days, Medicare will not pay a penny of nursing home costs – it will all have to be paid out-of-pocket, unless the patient can somehow go without skilled nursing care for 60 days or 30 days including a 3-day hospital stay. In those instances, Medicare’s “clock” resets.2

True or false: a semi-private room in a nursing home costs about $35,000 a year.

FALSE. According to Genworth Financial’s most recent Cost of Care Survey, the median cost is now $85,775. A semi-private room in an assisted living facility has a median annual cost of $45,000 annually. A home health aide? $49,192 yearly. Even if you just need someone to help mom or dad with eating, bathing, or getting dressed, the median hourly expense is not cheap: non-medical home aides, according to Genworth, run about $21 per hour, which at 10 hours a week means nearly $11,000 a year.3,4

True or false: about 40% of today’s 65-year-olds will eventually need long-term care.

FALSE. The Department of Health and Human Services estimates that close to 70% will. About a third of 65-year-olds may never need such care, but one-fifth are projected to require it for more than five years.5

True or false: the earlier you buy long-term care insurance, the less expensive it is.

TRUE. As with life insurance, younger policyholders pay lower premiums. Premiums climb notably for those who wait until their mid-sixties to buy coverage. The American Association for Long-Term Care Insurance’s 2018 price index notes that a 60-year-old couple will pay an average of $3,490 a year for a policy with an initial daily benefit of $150 for up to three years and a 90-day elimination period. A 65-year-old couple pays an average of $4,675 annually for the same coverage. This is a 34% difference.6

True or false: Medicaid can pay nursing home costs.

TRUE. The question is, do you really want that to happen? While Medicaid rules vary per state, in most instances a person may only qualify for Medicaid if they have no more than $2,000 in “countable” assets ($3,000 for a couple). Countable assets include bank accounts, equity investments, certificates of deposit, rental or vacation homes, investment real estate, and even second cars owned by a household (assets held within certain trusts may be exempt). A homeowner can even be disqualified from Medicaid for having too much home equity. A primary residence, a primary motor vehicle, personal property and household items, burial funds of less than $1,500, and tiny life insurance policies with face value of less than $1,500 are not countable. So yes, at the brink of poverty, Medicaid may end up paying long-term care expenses.4,7

Sadly, many Americans seem to think that the government will ride to the rescue when they or their loved ones need nursing home care or assisted living. Two-thirds of people polled in another Genworth Financial survey about eldercare held this expectation.4

In reality, government programs do not help the average household pay for any sustained eldercare expenses. The financial responsibility largely falls on you.

A little planning now could make a big difference in the years to come. Call or email an insurance professional today to learn more about ways to pay for long-term care and to discuss your options. You may want to find a way to address this concern, as it could seriously threaten your net worth and your retirement savings.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – medicare.gov/coverage/long-term-care.html [6/5/18]
2 – medicare.gov/coverage/long-term-care.html [6/5/18]
3 – fool.com/retirement/2018/05/24/the-1-retirement-expense-were-still-not-preparing.aspx [5/24/18]
4 – forbes.com/sites/nextavenue/2017/09/26/the-staggering-prices-of-long-term-care-2017/ [9/26/17]
5 – longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html [10/10/17]
6 – fool.com/retirement/2018/02/02/your-2018-guide-to-long-term-care-insurance.aspx [2/2/18]
7 – longtermcare.acl.gov/medicare-medicaid-more/medicaid/medicaid-eligibility/financial-requirements-assets.html [10/10/17]

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Choosing a Financial Professional

There’s nothing like doing your homework and being selective.

When we buy a car or a house, consider a school for our children, or plan our next vacation, what kind of approach do we take? For one thing, we take our time. We shop around and consider our choices.

Yet when it comes to selecting a financial consultant, not everyone takes such care. Chuck Jaffe, for many years a MarketWatch columnist, often spoke to audiences on this topic, and when doing so, he liked to conduct an informal poll. He started by asking people to raise their hand if they had ever worked with a financial advisor. Typically, many hands went up. Next, he asked them to keep their hands in the air if they hired the first financial advisor they met with in their search. Seldom did a hand lower. Then he asked them to keep their hands up if they did a background check on that person before agreeing to work together. Jaffe noted that when that third question was asked, “[I] never had a single hand stay in the air.”1

Credibility and compatibility both matter. When it comes to the “alphabet soup” of financial industry designations, some of them carry more clout than others. Some of the most respected professional designations are Certified Financial Planner™ (CFP®), Chartered Financial Consultant® (ChFC), and Chartered Financial Analyst® (CFA). These designations are earned only after thorough examinations and a required curriculum of college-level studies in financial planning applications, retirement, insurance and estate planning fundamentals, and other topics. Real-world experience complements this course of study.2

Beyond a financial professional’s credentials and designations, you have the matter of compatibility. You don’t want to work with someone who insists that you fit into a preconceived box, for you are not simply Investor A, Investor B, or Investor C who deserves this or that generic strategy. Better financial professionals really get to know you – and they will not be offended if you make the effort to get to know them.

This is a relationship-based business, and when a financial consultant offers a thoughtfully considered, personalized strategy to a client resulting from one or more discovery meetings, they have taken a step to earn the respect and trust of that client. Finer financial professionals abide by a client’s preferences and risk tolerance and take the client’s values, needs, and priorities into account.

How do you “check out” a financial professional? You can visit www.finra.org (the Financial Industry Regulatory Authority) and use FINRA BrokerCheck to see if anything questionable has occurred in their career. If that financial professional is an investment advisor, you can go to the Securities and Exchange Commission website and look at that advisor’s Form ADV at advisorinfo.sec.gov. Part 1 will tell you about any issues with clients or regulatory agencies; Part 2 will tell you about the advisor’s services, fees, and investment strategies.3,4

In addition, AARP offers you a Financial Adviser Questionnaire, and websites like ussearch.com and paladinregistry.com can provide you with further information.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – marketwatch.com/story/7-mistakes-investors-make-in-hiring-advisers-2010-05-20 [5/20/10]
2 – csmonitor.com/Business/Saving-Money/2017/0205/A-simple-guide-to-the-many-financial-advisor-designations [2/5/18]
3 – brokercheck.finra.org/ [6/13/18]
4 – adviserinfo.sec.gov/ [6/13/18]