The 2012 Income Tax Season Observations
I haven’t come across many new issues this tax season, but, as usual, a few surprises have popped up.
Make Work Pay Credit Gone
Many are disappointed with the amount of refund or amount owed compared to last year, primarily due to the elimination of the Make Work Pay credit that could be as great as $800 for a couple. A credit is almost always better than a deduction because it is subtracted directly from the tax, whereas a deduction is subtracted from taxable income prior to the tax calculation.
Residential Energy Credits
As usual, many are confused about the Residential Energy Credit. Homeowners have new windows, insulation, furnaces, etc. installed by suppliers and contractors with the expectation that their taxes will be greatly decreased, a convenient sales tool. Actually, not all of the labor and materials qualify for the credit, and then the credit is only a small percentage of the cost, usually 10%, with dollar limits on specific items and with a maximum accumulative limit of $500 over the past five years. I had a salesman tell me about the credit while presenting his replacement windows for my seasonal lake property. What he didn’t say, or probably know, was that the credit is only for a primary residence. When challenged on this aspect, he moved on to the next selling point.
New York State Changes
NY State has added a new e-file requirement for individual taxpayers. Individual taxpayers who file their own returns using tax software are generally required to file electronically. A taxpayer who is required to e-file and fails to do so will be subject to a penalty and will not be eligible to receive interest on any overpayment until the return is filed electronically. They say that if your software supports the e-filing of your return, you must e-file, and if you are required to e-file but you file on paper instead, you may be subject to a $25 penalty. Looks like NY State is serious about automation and reducing paperwork. Why then have they discontinued the Form IT-150 short form (two pages), and now require the four-page Form IT-201 for full-year residents? Why not just reform the tax system and reduce the amount of paperwork that way?
Cost Basis Reporting – Valuable, But Not Entirely Accurate
We are hearing lots of talk about the new cost basis reporting by custodians, and confusion for taxpayers. The Form 1099Bs that are used for reporting security sales now include the original cost of the security or cost basis for the security sold (stock, bond, mutual fund, etc.). New legislation that took effect January 1, 2011, now requires the custodian to report this information to the IRS. This cost basis information is quite valuable for the taxpayer preparing income taxes because it eliminates the need to go back over months and years of statements showing when and for how much the security was purchased and reinvested capital gains and dividends, all of which go into the cost basis.
My first experience was enlightening. The cost basis for several mutual funds sold was accurate. They were purchased four years ago and reinvested all dividends and capital gain distributions. The US Treasury note that matured in 2011 at $18,000 was purchased in 2008 at a premium of about $19,300 because it carried an annual interest rate of almost 5%. The custodian showed a cost basis of $18,000.
Although the custodian included a notice that cost basis is furnished to the IRS, these securities I mentioned actually were not furnished to the IRS. Cost basis reporting is only for “taxable” (non-retirement) accounts. Cost basis is required for:
- Stocks acquired on or after January 1, 2011 and
- Mutual funds and some other less common security types acquired on or after January 1, 2012.
The cost basis information is valuable for the taxpayer, but not entirely reliable. The custodian has no knowledge of the cost basis of securities purchased through one custodian and transferred to another custodian. The responsibility for cost basis lies with the owner of the securities. Rockbridge Investment Management has historic cost information available for our clients upon request.
This year the filing deadline is April 17, 2012. Be sure to file by that date, or file a request for extension if your actual return is not ready. Be sure to estimate any amount owed and include it with the extension request. At least you will still have another six months to get your act together and get the proper return filed.
Medicare: How do I evaluate additional coverage?
Medicare Advantage, Medicare Supplement, Medigap. Let’s get specific about which coverage to choose.
Medical insurance is not like any other insurance you have. Some common insurances, like home owners and auto, may be required by lenders and or state authorities, but you hope you never have to use it. You really have little choice on how much coverage or how much to pay. Medical, however, is much more personal in that most of us have a pretty good idea of what medical services we will need from year to year. Of course there will be unexpected illnesses or accidents from time to time. But overall, we can estimate our medical needs and how much they may cost.
So, we base our coverage on what premium we can afford, how many doctor visits we expect, what drugs we need, and how much risk we are willing to take with major medical expenses. High costs of health care pretty much dictate that we must have at least some protection against doctor and hospital visits that could lead to financial ruin. For example, my heart cath last year was expensed at $16,000. How would I have paid for that without insurance coverage? What if I had been diagnosed with a blockage that needed surgery? My out-of-pocket amount was $150. I can handle that, but not $16,000.
There are many, many questions you need to ask yourself and the insurer when deciding on what coverage type and coverage plan is right for you. Here are a few to get you started.
How much insurance do I need?
You may know the number of primary care and specialist visits, what prescriptions, and what lab tests you will have in a year’s time, and what they may cost. If you don’t know, you better find out so you can decide if extra insurance is worth the premium. Why pay a monthly premium of up to $200 per person, in addition to standard Medicare, if you don’t expect that there will be claims?
What is my basic health status?
A person with a history of heart problems, diabetes, back pain, eye problems, or any other regularly occurring health issues requiring hospitalization or specialist care can expect the possibility of them recurring during the year.
Which type of additional insurance should I get?
Medicare is standard and (somewhat) understandable. The Medicare Advantage and Medigap plans require lots more analysis to understand their options and coverages. They all are unique as to costs, restrictions, claims processing, etc. Learn as much as you can about how each would work for you. Don’t assume that the highest premium plan would be best for you.
What is a Medicare Advantage Plan (MA Plan)? Is it Medicare?
MA Plans are a form of Medicare administrated by private companies approved by Medicare. They must cover all of the services of Medicare (except Hospice) but can charge different out-of-pocket costs and have different rules for referrals, doctors, facilities or suppliers. For instance, a recent visit to an urgent care facility cost me $35 under my MA Plan, where original Medicare would have been $0. All MA Plans are not the same as to premiums and coverage, so they must be examined to determine how they work for your individual situation. You must still carry and pay the premium for Medicare Parts A & B. MA Plans are not Supplemental Plans.
What is a Supplemental Plan? (Also called Medigap)
This is insurance that can help pay some of the health care costs not covered by Medicare, like copayments, coinsurance, and deductibles. They are standardized policies, but different insurance companies may charge different premiums for the same exact policy.
Do my doctors participate with this plan? Some plans provide “in network” and out of network coverage, with a different co-pay for each. Using the latter usually means you pay more and have more paperwork to complete a claim. Ask your doctors if they “participate” with any plan you choose.
How much will I pay for prescription drugs? Are they covered under this plan?
Medicare A & B does not include coverage for prescription drugs. One recent mailing from a private insurer showed a monthly Rx premium of either $40.30 or $89.70 for the same coverage I now get for $0 premium. One friend of mine has the same plan as I and doesn’t even think he has drug coverage. He does, but hasn’t needed to use it.
Additional Questions:
What if I travel, go south for the winter?
What kind of plan should I get just to make sure I would not suffer financially if I had a serious illness or operation?
What would Medicare have paid if I didn’t have Medicare Advantage or a Medigap plan?
How do I access details on line?
What if I have other company retiree coverage? Should I keep it or change?
The questions and personal issues go on and on. By now it should be obvious that this is a very complex area and the best way to address it is to go to the seminars put on by most, if not all, of the insurance companies. Bring your “Medicare & You” booklet. Be an informed consumer!
Planning for Medicare – Part Deux
The new 2012 Medicare & You booklets have been mailed and Medicare eligibles are receiving mailings from insurers daily about their products. This booklet contains over 150 pages of details about Medicare and the related Medigap and Medicare Advantage plans.
Here are some of the key things to consider when choosing coverage for 2012:
- Medicare Parts A & B provide basic adequate hospital and medical coverage. There is no requirement for additional insurance. Many people are satisfied with only Medicare A & B and no additional coverages.
- If you are newly eligible for Medicare, make sure you contact Social Security and discuss your options to enroll. Medicare coverage is too important financially to pass up.
- Everyone’s health situation is unique, so no one plan or option “fits all”. Choosing or rejecting additional coverage beyond Medicare depends on each person’s age, health, physicians, prescriptions, budget, etc. A married couple might have two very different health plans because their needs dictate it.
- The Medigap and Medicare Advantage plans are sold by insurers. By this I mean that an individual can’t just buy one on the internet without discussing it with a representative. This is valuable for the consumer, because there are so many important factors to consider.
- Insurers are holding seminars to discuss what their products cover and what they cost. If you have any doubts about what you need, attend one or more of these seminars and get the benefit of a large group discussion with others who may have the same questions as you.
- Take a friend or relative with you, someone who is familiar with your financial and/or health situations. Two heads are better than one.
Don’t procrastinate or just assume that your current coverage is best for you. The older we get, the less likely we are to risk a change, even though it might be a substantial financial saving. Inertia is the easy way out, though not necessarily the best.
A few years ago, when I no longer had coverage through my employer, a friend suggested a Medicare Advantage Plan, something I had never heard of. They said they were paying no premiums and had very good coverage. I didn’t believe them, assuming they weren’t giving me the whole story. My wife and I and several good friends met with their plan representative and I became convinced that this type of plan was best for me. For various personal and health reasons it was not best for some of the others, but I switched to a Medicare Advantage Plan and still am covered with the same company, under a similar plan, pay $0.00 premiums, and am saving hundreds of dollars every year. My wife has a slightly different plan with the same company because her health needs are different. But her premiums, like mine, are $0.00. There are also plans that include premiums and offer a higher level of coverage on certain items.
There is a medical plan out there that is best for every situation. You just have to find it. I am not recommending any specific plan type or insurance company, just advising each person to do what is best for them. In my next post I will try to be specific about what questions to ask and how to find the plan that is right for you.
Planning for Medicare
Why would an investment advisor’s website contain a blog about Medicare?
The cost of health care is an increasingly important piece of retirement planning, and it is a shock to many who have been covered under an employer plan that is often subsidized by the employer, sometimes at 100%. Most employers either reduce the subsidy or discontinue health coverage completely for retirees because it is too costly to continue. This trend is sure to continue. Costs are a combination of premiums, co-pays, and deductibles.
Those age 65 and over who are eligible for Medicare are beginning to receive mailings about Medicare Supplemental Plans and Medicare Advantage Plans because the enrollment period begins October 15 and extends to December 7 for 2012. As usual, these mailings tend to create more confusion than clarity with their various plan costs and coverages.
There are three basic parts to Medicare: Part A (Hospital Insurance), Part B (Medical Insurance), and Part D (Prescription Drug Coverage).
Most pay no premium for Part A Medicare (Hospital Insurance) because they paid Medicare taxes while working so, essentially, one could have some coverage and pay no premium. This is called ”self insuring,” assuming that any health care expenses not covered under Part A would be paid from personal funds. I don’t recommend this approach because the cost of care from a serious illness could be astronomical and devastating.
The monthly Part B premium can be anywhere from $95 to about $460 depending on income. Lower income retirees generally pay $95 or $115. At income levels of $85,000 ($170,000 for joint tax filers) the premium increases accordingly. The monthly cost for a couple reaching age 65 today would be at least $230 for Parts A & B. This would be basic coverage with co-pays, deductibles and no drug plan.
From this point it really depends on how much additional coverage is desired and the expectation of individual health care needs, i.e., how many doctor visits, how many and what kind of drugs, and overall health status. Doctor and specialist visits can cost $100 or more. Drugs are very expensive – mine, for example, would cost over $300 per month without drug insurance coverage.
For planning purposes, a person on Medicare can expect monthly costs (premiums, co-pays, and deductibles) of from $0 (unlikely) to over $1,000. Without Medicare, one person could spend over $1,500 per month just on basic premiums and coverages.
My next post will discuss the Medicare Supplement and Medicare Advantage options.
Tales from the Tax Prep Front Lines
Tax preparation gives interesting insight about personal financial situations. Here are some examples.
Last year an elderly lady brought her tax documents to the AARP Volunteer Tax Service for preparation. Her 1099s, etc. were not well organized, but appeared to be adequate. She, herself, was a little disorganized, and not entirely comfortable with what she needed. For example, she didn’t have her prior year return, one item that we specifically request.
One item was a 1099 for an IRA distribution of about $150,000, from which there was federal withholding of 10%, no NY withholding. I immediately thought that she would be grossly underwithheld unless there were huge deductions or unless some of it had been rolled over to another IRA. I asked about it and she told me she took it all out and bought gold. Alarm bells automatically went off in my head. I asked who her advisor was, or what firm had done this transaction for her: her response was that she did it herself and bought the gold from the guy on the late-night talk radio program, Coast-to-Coast. I finished the tax return and explained that she would owe over $20,000 to the IRS and over $6,000 to New York State.
She told me she would sell the gold to get the cash to pay IRS. When asked how that would work, she told me that she had not yet received the gold, and that she had bought it back in the fall of the previous year. I fear that she will never see the gold, or proof that she owns it. With any luck, she has the gold or certificate of ownership, but she did just about everything wrong to get it. This transaction may work out for her but is full of questions that should have been addressed by an advisor with fiduciary responsibility prior to the initial IRA distribution.
Another return this year points out just how important it is to plan for your retirement. A few years ago I met with a couple who planned to retire early at age 62. They had company 401k plans and would begin to collect Social Security at age 62. Presently they were covered by a subsidized company health plan at a total monthly cost to them of $400. Fast forward to a return I just did for a single individual age 60 who paid $1,300 monthly for health insurance, and another $2,000 for co-pays and deductibles in 2010.
Imagine the shock for this couple when they factor this kind of expense into their retirement cash flow budget. Their monthly medical costs will have gone from$400 to $2,800. They would need another $100,000 in assets just to pay for health care costs to get them to age 65, at which time they would be eligible for Medicare coverage at a lower cost (assuming it still exists at today’s premiums and coverages). They had budgeted and saved for years for this early retirement goal, but the single most critical factor in their decision to retire early is this important, necessary expense. Of course, they could self-insure and take the risk of not needing health insurance for three years, but I don’t recommend it for anyone with today’s costs of health care.
A realistic plan for retirement is important, as well as a regular periodic review of your financial status once retired. Lots of things change, some of which we as retirees can’t control. Your investment advisor can help develop and monitor a retirement plan for you.
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