JustCare

Tag: IRS

  • A bear market is jeopardizing people’s retirement security

    A bear market is jeopardizing people’s retirement security

    The stock market is in a downward plunge, and there’s no sign that it will be heading in the opposite direction any time soon. As bad as it is for working people fortunate enough to have savings, it is jeopardizing the retirement security of millions of retirees. Martha C. White writes for the New York Times about the risk some retirees take when they must rely on their retirement savings in a bear market.

    According to IRS rules, everyone must take money out of their retirement accounts beginning April 1 of the year after they turn 72. And, that’s not easy to do in a down market. Less money in retirement accounts means less income and a need to rethink spending.

    Many retirees don’t have adequate income and savings to cover their costs in retirement, even in a bear market. Today, some experts believe people need $150,000 in savings just to pay healthcare costs in retirement. For many people, Social Security income alone does not even cover basic necessities. We need Congress to increase Social Security benefits.

    The bear market, combined with inflation, is taking a toll on people’s retirement security. At the same time that the market has fallen, prices for consumer goods are climbing fast, which makes retirement living all the more difficult. It goes without saying that retirement insecurity is rising.

    Today, people with investments fully in the stock market already could have seen losses as great as 40 percent, especially if they had invested heavily in tech stocks. But, they still must withdraw money from their retirement accounts if they’re over 72.

    The value of investing retirement savings in bonds. Bonds are a much safer bet with retirement savings. But, the return on the investment is much smaller. Many retirees took a gamble on stocks with the hope of building a bigger nest egg. While the stock market was going up, it was a smart risk, now they have to deal with the consequences.

    The value of holding cash in a retirement account. Some financial planners say it’s wise for people to hold some of their savings in cash, so that they are best able to make it through a plunge in the stock market. Of course, that option is easier said than done.

    Unretirement and lines of credit. Some retirees are now forced to return to work to manage–what some are calling “unretirement.” Others were forced back to work before the bear market took hold because of high out-of-pocket health care costs. Some people are getting lines of credit and borrowing money based on the value of their homes, as a means of making it through this market downturn.

    How much must you withdraw from your retirement account? How much you are required to withdraw depends on how much savings you have in your retirement account and your age. You must pay income tax on this money.

    What if you don’t withdraw the money when required? You pay a steep penalty. The IRS imposes a 50 percent tax.

    Congress is looking to delay the time that people are required to take money from their retirement accounts to 75. But, whether and when a law is passed to that effect is an open question.

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  • Beginning at age 72, you must withdraw money from your retirement accounts

    Beginning at age 72, you must withdraw money from your retirement accounts

    If you have money in an individual retirement account, once you turn 72, the Internal Revenue Service requires that you withdraw money from this account every year, even if you still work. (Note: The Secure Act of 2019 made changes to this rule. “If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first Required Minimum Distribution by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first Required Minimum Distribution by April 1 of the year after you reach 72.”)

    In effect, once you turn 72, the IRS requires you to stop saving all your money in your individual retirement account “IRA” or most other employer-based retirement accounts, such as 401(k), 403(b) and 457(b) plans. You must withdraw it over time. Unfortunately, when you withdraw the money, the government gets to tax it. Remember that any money that you put into these accounts went in tax-free, before taxes. And, any money in an IRA can appreciate without any taxes on the appreciation until you withdraw the money.

    • How much must you withdraw from your retirement account? The amount you are required to withdraw before the end of each year depends upon the amount in your IRA and your life expectancy. It is called the RMD or required minimum distribution. The total distribution can come out of one or more of your IRA accounts, if you have more than one. It does not have to come out of each one of them. But, the 401(k) and 457(b) distributions must come out of those accounts.
    • Can you withdraw more than the required minimum distribution amount? Yes. You will be taxed on whatever amount you withdraw that was deposited pre-tax; it will be counted as part of your taxable income and taxed at your income tax rate. It will not count towards your RMD for the following year.
    • Are there any retirement accounts not subject to the RMD? Any retirement accounts you have with after-tax contributions are not subject to the RMD and you are not required to withdraw money from them. This would include a Roth IRA, unless you inherited it.
    • When must you take your first distribution? You are permitted to take your first distribution in the April of the calendar year following the year you turn 72.  Put differently, you do not need to take a distribution in the calendar year you turn 72. But, you must then take another distribution by the end of that calendar year.
    • What if you forget to take a distribution? If for any reason you forget to take a distribution when you are required to, do so as soon as possible and complete an IRS form explaining why you forgot. Unless the IRS accepts your explanation, you may have to pay a big penalty if you do not take a distribution when you are required to. That penalty can be as much as half of the amount you should have withdrawn.
    • Must you spend the money you withdraw from your retirement account? You are not required to spend the money from your IRA after you withdraw it. You can reinvest it in a different taxable account if you do not need it, but not into a tax-deferred account. And, if you want to give the money in the IRA to a charity, you may distribute up to $100,000 from the IRA to the charity without paying any taxes on it.

    (Note: This article was updated to reflect the new withdrawal age of 72. It used to be 70.5)

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  • IRS finds Bristol Myers skirts its tax obligations

    IRS finds Bristol Myers skirts its tax obligations

    It’s not enough that Bristol Myers Squibb profits handsomely from the U.S. failure to rein in drug prices. Jesse Drucker reports for the New York Times that, with help from its lawyers at White & Case and its auditors at PwC, the IRS found that it skirted its federal tax obligations as well.

    Bristol Myers created an offshore subsidiary which the Internal Revenue Service called an “abusive” tax shelter when it learned of it. It was an inappropriate excuse to pay $1.4 billion less in taxes. Needless to say, Bristol Myers does not admit to having done anything wrong and did not tell its shareholders that the US was demanding these unpaid taxes back.

    Bristol Myers behaves like many pharmaceutical companies. It keeps its taxes down by using foreign subsidiaries to hold patent rights to its most profitable drugs. It chooses countries with low tax rates.

    President Joe Biden’s infrastructure plan would make sure that companies could not play these games. It would raise the amount companies must pay in taxes on foreign subsidiaries. Between 2009 and 2011, Bristol Myers was paying 24 percent when the corporate tax rate was 35 percent.

    Then, with the help of the accounting firm, PwC, and the law firm, White & Case, Bristol Myers set up a subsidiary in Ireland. And, Bristol Myers paid negative 7 percent in taxes in 2012. PwC and White & Case provided cover for Bristol Myers’ tax avoidance strategy. In lengthy letters, they claimed it was legal. But, they knew that the IRS would not look favorably on what they had done as it had gone after Merck and Dow Chemical for undertaking similar efforts.

    In 2020, the IRS  found Bristol Myers to have violated an anti-abuse provisions that precludes this profit-shifting arrangement. Neither White & Case nor PwC considered this provision in their analyses of the tax strategy, which many believe was intentional, a way to give Bristol Myers the ability to say that it did not know it had acted illegally.

    The IRS mistakenly posted its 20-page determination with Bristol Myers’ name on it when it should have been redacted.

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  • Coronavirus: What’s in the $2 trillion stimulus for older adults?

    Coronavirus: What’s in the $2 trillion stimulus for older adults?

    The Coronavirus Aid, Relief and Economic Security (CARES) Act, the $2 trillion stimulus package just passed by Congress and signed into law by President Trump, offers some financial and medical relief to older adults. The legislation includes cash payments and expanded Medicare benefits, along with emergency supports for skilled nursing facilities and caregivers.

    If you get Social Security benefits, you will receive an extra check for $1,200, so long as your adjusted gross income (AGI) in 2019 was $75,000 or less. If you’re married, you’ll both get $1,200, so long as your combined income was $150,000 or less. 

    If your individual annual income is less than $99,000, you will receive a stimulus check for an amount less than $1,200. If your individual income is $99,000 or higher or your combined income with your spouse is $198,000 or higher, you are not eligible to receive a stimulus check.

    The government will determine your income based on your 2019 tax filing if you made one. If not, it will base it on your 2018 tax filing.

    If you did not file a tax return in 2018 or 2019, the CARES Act explicitly allows the Treasury Department to use your Social Security statement to establish your income so that people get money quickly. Click here for more information.

    And, on April 1, the Treasury Department announced that it would be sending stimulus payments automatically into the bank accounts of people getting Social Security, or by check, however they receive their Social Security benefits. [In so doing it reversed its position on March 30, which required older adults and people with disabilities to file a tax return in order to receive their checks.]

    As of now, if you receive SSI benefits or Veterans Pension benefits but do not receive Social Security benefits and do not file a tax return because your income is low, you will need to file a 2019 tax return in order to get a stimulus check. You are likely able to file your 2019 tax return for free online through the IRS Free File program. This IRS requirement is a terrific burden and will keep many people from receiving stimulus money. Advocates are fighting hard to have it lifted.

    The stimulus money will go out as soon as possible. The Treasury Department is now saying that people for whom it has direct deposit information, should see the money in their bank accounts by April 14. If the IRS does not have your direct deposit information and you would like the money deposited directly in your bank account, you will be able to enter the necessary information on an IRS web site in the coming weeks. If not, the IRS will mail you a check; but, then, you might not see the money until September.

    Here are other provisions of the law specifically applicable to older adults and people with disabilities:

    • Medicare Part D prescription drug plans are authorized to provide a three-month supply of medications.
    • Medicare and Medicaid will cover a wide range of telehealth services if you are unable to visit a doctor. 
    • The Center for Medicare and Medicaid Services will have greater resources to help ensure nursing homes are able to control the spread of infection and so that states are better prepared to contain the spread of COVID-19 in nursing homes. 
    • Older Americans Act and disability services programs, such as nutrition; home and community-based supportive services, family caregivers, and the Low Income Home Energy Assistance Program (LIHEAP) will receive an additional $955 million.  

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  • How to be smart about money you inherit

    How to be smart about money you inherit

    Susan Garland advises people on how to be smart about money they inherit, in The New York Times. No matter how much you inherit, she strongly recommends not doing anything with it for some period of time. Here’s what she says you need to think about:

    Between paying for housing, health care and education, most Americans are struggling to make ends meet and are not able to save much if any money. If you’re lucky enough to inherit some money, you likely have many ways you could spend it. But, you might not have a good sense of how to prioritize your needs. So, it generally is not wise to go out right away and spend some or all of your inheritance.

    Unless you have saved all you need for retirement, it’s probably smart to think about saving and investing most if not all of your inheritance. Today, people who inherit money appear to save only about half of it. And, one in five baby boomers who inherited $100,000 or more spend all of it.

    Find out whether you might need to pay taxes on the inheritance. People who inherit money often make the big mistake of not realizing that they may have taxes to pay on their inheritance. In fact, if you’re not careful and you inherit a 401(k) plan or Roth IRA, you could end up with a big tax bill.

    One financial advisor recommends that you should take many months, at a minimum, to consider what you should do with an inheritance. During that time, talk to people you trust about your options. If possible, you should hold off making loans to family and friends. Explain to them that you want to take a meaningful period of time to think through your options.

    What’s the typical amount people inherit? Fifty percent of inheritances are under $50,000. Thirty percent or so more inheritances are between $50,000 and $250,000. Even if you inherit a lot, you could easily end up frittering the money away if you’re not careful, as many people do.

    Of course, everyone needs to decide for themselves how to spend the money they inherit. Still, you might want to consider putting aside the equivalent of six months of expenses in case of emergency.

    If you’re nearing retirement or recently retired, you might also use the money to pay for your living expenses so that you can delay taking Social Security benefits. Every year you delay taking Social Security benefits up to age 70, you increase your benefits by about eight percent.

    You might also use your inheritance to pay off debt with high-interest rates. Instead of continuing to pay the high interest, you might put that money aside as savings. Than again, if you are paying low interest on your debt, you might not want to pay off your debt.

    If you’ve inherited someone’s IRA account, you need to follow the legal rules in order to avoid paying huge taxes on your inheritance. If you follow the rules, you can keep the money and allow it to grow tax free. You pay taxes only on the annual distribution you are required to take.

    However, keep in mind that if you move the IRA money you inherit into another bank account–even if it’s your own IRA account–all of it becomes taxable right away. You want to establish a special bank account for your inherited IRA and have the bank transfer the funds you are inheriting directly into that account.

    If you inherit a Roth IRA, you must take an annual distribution. Your yearly Roth IRA distribution is tax free. But, if you don’t take the distribution, you must pay a 50 percent penalty to the IRS on the amount you should have taken as a distribution.

    Don’t let your love and respect for the person who gifted you the money get in the way of investing it in ways that best suit your needs. You should not assume that the money you inherited is invested in the best possible investment vehicle for you. Explore different investment vehicles for your inheritance. Consider putting the money in a few different stocks or bonds to protect yourself. If the money’s in one company and it goes belly up, you could lose it all.

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