Tax Tips-Accounting 4 U!

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THE CLIENT NEWSLETTER

Issue: Summer 2003

Prepared by Crair & Company, CPA

In this issue, we are going to update you on the many tax changes in the "Jobs and Growth Tax Relief Reconciliation Act of 2003".

Tax brackets, previously from 10% to 37.5% now run from 10% to 35%.
>BR> The child tax credit has been increased from $600 to $1,000 for each qualifying child. A qualifying child is one under the age of 17, who resides with the taxpayer, and be claimed as a dependent.

Capital gains and dividend income now will be taxed at 5% to 15%, depending upon your other taxable income.

The marriage penalty ( for joint filers who don't itemize deductions ) is being eased.

Alternative minimum tax is being eased a little.

Businesses are getting a little relief under this bill, also. First year bonus depreciation and the amount allowed to be written off for new equipment purchases are both being increased.

In this issue of THE CLIENT NEWSLETTER we will help you chart a course for your retirement by offering some suggestions for evaluating your income sources and managing your assets. If you are close to getting that gold watch, it's essential that you figure out just how much you'll need during retirement and whether your investments and other assets can provide the income to cover the expenses. One rule of thumb is that you will need 70% to 80% of your pre-retirement income during retirement - but this is not a hard and fast rule. Your situation could be radically different from the "average" taxpayer. That's why you will need to put together a realistic budget based on your goals and finances.

Let's start with a series of assumptions that most of us can agree on. In order to reach a general agreement, we will avoid entering into the debate on the future of Social Security. We will assume that some form of Social Security will be there and that our government will keep its commitment to us.

Here are some suggested "safe" assumptions:

Assumption 1: Turning your retirement dreams into reality takes careful planning.
Assumption 2: It is never too early or too late to get started
Assumption 3: Americans are living longer.
Assumption 4: Company-sponsored benefits may need replacing after retirement.
Assumption 5: Inflation doesn't retire.
Assumption 6: No one retirement plan fits all taxpayers.
Assumption 7: Your tax professional is in a position to answer your individual questions and make suggestions regarding your individual needs.

Now, let's get started. Yes, we are living longer. Men and women 65 years old today can expect to live to nearly 81 and 84, respectfully. Remember that these are averages only and you should count on living longer. More American workers are planning and saving for retirement but their efforts may fall short because they often underestimate how long they will live.

Many taxpayers are covered by company-sponsored benefit plans. But, these individuals (and others) may need to purchase "Medigap" insurance or a Medicare managed care plan to cover the numerous routine expenses not covered by Medicare. Many taxpayers today are investing in long-term care insurance to cover the potential expense of nursing home care. So, the future cost of health and life insurance needs to be considered.

As you begin to evaluate your expected income flow, consider when you will start drawing on Social Security. If you begin receiving Social Security at age 62, your monthly benefits will be about a quarter less than if you had waited until "normal retirement age". One of the recent changes to Social Security has been to raise the retirement eligibility age for younger workers. Conversely, the longer you wait past the "normal retirement age" the higher the monthly benefits. For each year you delay, up to age 70, your monthly benefits can increase by up to 8%. On the other hand, if you start withdrawing early, your extra years of receiving Social Security may outweigh the lower monthly benefits.

Today, by law, the Social Security Administration must send you an annual report concerning your "anticipated" benefits. The statement is sent to you in advance of your birthday (6 months ahead). It is critical to review and keep these statements for current and future reference. If you need to get a replacement statement, you can call the agency at 800-772-1213.

HOW DOES SOCIAL SECURITY WORK?

Call me naive, but I believe that social security will be around for a long, long time. I don't think that people will (or should) be able to rely on their monthly social security check as their only source of retirement income, but I do think that even the youngest of workers can count on receiving at least a small monthly check upon reaching retirement age.

That being said, the basic rules for social security, as they currently stand, are as follows:

To be eligible to collect social security, you need to pay into the system for at least ten years. You pay into the system if you are an employee and have the 6.2% social security tax withheld from your salary each pay period, or if you are self-employed and pay the 15.3% self-employment tax as part of your federal income tax return.
When the Social Security Administration calculates your benefit when you retire, your benefit will be based on your 35 years of highest earnings. If you work less than 35 years, each non-working year will still be factored in, thus reducing the benefit that you will be entitled to receive.
If you were born after 1959, your full retirement age will be 67. Full-retirement age has been 65 for many years. However, beginning with people born in 1938 or later, that age will be gradually increased until it reaches 67 for people born after 1959.
Even though the full retirement age is increasing to age 67, you can still begin to collect your social security retirement benefits upon turning age 62. A person born after 1959 who starts taking benefits at age 62 will forfeit 30% of his annual retirement benefit for life. If you start collecting social security before reaching full retirement age, you will forfeit approximately 0.5% of your benefit for every month you retire early.
Once you reach full retirement age (age 67 if you were born after 1959), you can earn any amount of income without giving up any of your social security benefit. Prior to reaching full retirement age, a person collecting social security will forfeit $1 of benefit for ever $2 of earned income over a certain threshold ($11,300 in 2002).
If you delay collecting from social security until after reaching full retirement age, your annual benefit will actually increase by as much as 8% per year until you reach age 70. Once you reach 70, your benefit will no longer increase, even if you continue to delay collecting.
If you are married, you will receive the greater of your earned benefit, or 50% of your spouses full retirement benefit, subject to certain restrictions.

A great place to get more information about your projected social security benefit is from the Social Security Administration's web site. In addition to containing plenty of easy to understand information, their site contains a calculator which enables you to calculate your projected benefit based on whatever criteria you enter.

If you need additional
information or would like a copy of one
of our informative brochures on a variety of issues,
please give us a call at (305) 270-8200
or e-mail us at: accountant@mindspring.com.