Keeping full and accurate homeowner records is vital for determining not only your home deductions but also the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property or other objective evidence if you acquired it by gift, inheritance, or similar means.

You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Here's some examples:

    * Putting an addition on your home
    * Replacing an entire roof
    * Paving your driveway
    * Installing central air conditioning
    * Rewiring your home
    * Assessments for local improvements
    * Amounts spent to restore damaged property

In addition, you should keep track of any decreases to the basis. Here's some examples:

    * Insurance or other reimbursement for casualty losses
    * Deductible casualty loss not covered by insurance
    * Payment received for easement or right-of-way granted
    * Value of subsidy for energy conservation measure excluded from income
    * Depreciation deduction if home is used for business or rental purposes

How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. And you must keep these records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the limited period of time after which no legal action can be brought.)

For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.

Note: Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.

Basis is still important, however, in figuring casualty loss, on conversion of the home to business or rental use, or where there's a gift of the home (in this case, important to the donee). In addition in 2010, because of the temporary suspension of the Estate tax, step up in basis is limited and may require an executor to establish a residence's basis.

Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

Tip: If you have any questions as to what items are to be considered in determining basis, please give us a call.

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If you use a car for business, as an individual, you have two choices for claiming deductions:

   1. Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.
   2. Use the standard mileage deduction and simply multiply 55.0 cents for 2009 travel. (2008's rate was 50.5 cents for first six months and 58.5 cents for the last six months of 2008) by the number of business miles traveled during the year. Your actual parking fees and tolls are separately deductible under this method.

Which method is better?

For some taxpayers, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.

Tip: The actual method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.

The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to by-pass the limits and restrictions and is simpler, but often less advantageous in dollar terms.

Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage, yet have relatively low mileage each year.

Caution: Once you choose the standard mileage rate, you cannot later use accelerated depreciation if you opt for the actual cost method in a later year. You may then use only straight line.

Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

How To Make the Most of Your Auto Deductions

Keep careful records of your travel expenses. We won't be able to determine which of the two options is better for you if you don't know the number of miles driven and the total amount you spent on the car.

Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you must keep adequate documentation.

Tip: Consider using a separate credit card for business, to simplify your record-keeping.

Tip: You can also deduct the interest you pay to finance a business-use car, if you're self-employed.

Note: Self-employeds and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, (2) are reimbursed under an employer's "non-accountable" reimbursement plan or (3) are reimbursed at less than they are entitled to deduct. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.

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During the recent recession, many have found themselves back in the job market after age 50 due to layoffs or changing demands at their employers. Yet as life expectancies lengthen, a late career change isn’t always a negative. It may be a welcome chance to renew, re-educate and restart a full life.

It’s possible that in the future, an over-50 career change might become a common event, maybe even a desired event in our society – which means it’s definitely worth planning for.

A visit to a financial planner might be a good first step in planning a move to a second career or dealing with a sudden change in your career prospects. You need to plan for any possible change in income up or down in any opportunity you entertain. You’ll also need to plan how you’ll afford any training you’ll need – college or otherwise – in making that successful transition. To make an over-50 career transition successful, it’s all about preparation. So here are some ideas:

Start with research: One of the best-detailed, up-to-the-minute career resources for the types of jobs that exist in this country and their salary and hiring forecasts is the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook. This extensive online resource not only lists major career groups, but the leading occupations in it. If you haven’t been in the job market for awhile, this kind of research is a good way to reset your knowledge of your industry and whether its hiring prospects are bright. This database also lays out the need for the necessary training required to reach certain salary and career levels.

Check industries that are friendly to older workers: Healthcare and education are just two industries that are more welcoming to older workers. U.S. News & World Report has come up with its own list of popular over-50 occupations, and it’s a good starting point for people looking for flexible scheduling and other workers their age in the field.

Network: Face-to-face contact with people in your target fields is important. If you can, check out events at professional organizations in that field or attend casual networking functions to learn more. Being someone over 50, you can get an idea of whether there’s true age diversity in a field and how all those groups work together – or if you’re simply the oldest person in the room. Obviously if you feel welcome, networking will give you a better idea of which companies with someone with your maturity and experience might fit in.

Emphasize your up-to-date experience and training, not your birthday: Career experts suggest that older workers should lead with work experience and skills and leave off all but the most essential timeframe information. You’re not there to lie about your work experience, but the reason young workers are so valuable is that they’ve gotten the most recent training and they are generally less costly to employ. That’s why older workers should lead with every strength that makes them attractive to employers and should de-emphasize descriptors that broadcast age.

March 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.

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How did we get Social Security?

The idea behind Social Security is based upon a movement from welfare assistance to social insurance. Workers contribute to the risk pool through payroll taxes, and insurance is purchased to protect income. This includes disability and living too long (and not being able to work). Social Security was first created in 1935, in the wake of the Great Depression. The traditional extended family was evolving into the smaller nuclear families which we see today in modern industrialized society. The need to protect workers from being destitute was the driving force behind Social Security, and the economic realities of the Great Depression made the program politically palatable.

Social Security was not designed to be a retirement/pension system. It was designed as insurance to protect people from an inability to work because of old age or disability. Over time, the life expectancies of Americans have increased, and the entitlement of “earning” Social Security benefits has morphed the perception of what Social Security was designed to do.

A pension system collects money annually to save for a future benefit. Those funds, in turn, are invested to grow. By the time eligibility for a pension comes around, the annual contributions and investment returns have built up a significant investment value. If no new workers enter the pension system, the investments of the pension should be sufficient to pay benefits to eligible annuitants for the rest of their lives.

In Social Security, “insurance premiums” are withheld from payrolls and then most of that money goes right back out to retirees. The small surplus which currently exists is held in a trust fund that has basically loaned its full value to the Federal Government with the promise of paying those Social Security benefits in the future. The downside to this is that additional tax revenue (above FICA taxes) will be needed to pay the trust fund back. In addition, the trust fund value only covers a fraction of the future liabilities of Social Security.

Over time, life expectancies have increased and so has the cost of paying Social Security benefits. When first enacted, the total payroll tax of the Social Security system was only 1% of payroll. In 1990, the combined employer/employee OASDI tax rate reached the current level of 12.4%.   Under current projections, the Social Security system will run annual deficits in 2016, and the trust fund will be exhausted in 2037.

Regardless of the reasons for starting Social Security over 70 years ago, the current system has evolved into an expected benefit which workers rely upon for their retirement plans. It would be very dangerous for any politician to cut Social Security benefits for current retirees and yet still very difficult to lower benefits for future retirees.   In this series, we will explore how Social Security retirement benefits are calculated and possible ways to maximize those benefits available, based on the current rules.

How Social Security is Calculated

Once vested, Social Security benefits are paid to workers and their families when they reach retirement age or sooner if the worker becomes disabled. There is no account balance reported to participants. The earnings history for each worker which Social Security taxes were paid is shown on Social Security Statements.  This earnings record is the basis for all Social Security benefits and it is important that the earnings record is accurate.

To be vested for Social Security retirement benefits, a worker must have 40 quarters (10 years) of Social Security covered employment. Once vested, Social Security inflates the past income numbers into current equivalent salaries. This is done for each year of Social Security covered employment. Social Security then averages the top 35 years of inflation adjusted earnings and comes up with an Average Indexed Monthly Earnings (AIME). The AIME roughly equals your lifetime average gross monthly income.

Social Security then uses the AIME to calculate the Primary Insurance Amount (PIA). To do this, the AIME is applied to a regressive formula which calculates a lower percentage of AIME earnings as AIME rises. The AIME is segmented into three different levels (sometimes called “bend points”). The first level is $761 (2010). The PIA multiplies this first level by 90%. So, the PIA amount for the first $761 of AIME is $684. The next level is multiplied by 32% and the anything above that is calculated by 15%. You can see the 2010 PIA formula below.

2010 PIA Formula Using AIME
     90% of the first $761 or $684
     32% on the next $3,825 or $1224
     15% on the next $4,134 or $647

Max PIA in 2010 = $2,556

Early, Normal or Late Retirement?

The PIA represents the monthly Social Security retirement benefits for a worker at their Normal (or Full) Retirement Age (NRA). The NRA is between 65 and 67, depending on the year of birth. Most baby boomers have an NRA 66, and gen X/Y have an NRA of 67. There is a discounting from the PIA amount for early retirement and an increasing multiplier for later retirement benefits.

Again, like the NRA, the size of the multiplier for early and late retirement is dependent on the worker’s year of birth. Baby boomers and younger get an eight percent increase for each year of delayed retirement beyond NRA. At age 70, that increase reaches the maximum of 132 percent of the NRA benefit. The maximum reduction for early retirement is for workers born after 1960. That reduction is a 30% discount of the PIA amount (or NRA benefit). The maximum monthly benefit for a worker retiring at 62 in 2010 is $1,917. The maximum possible monthly benefit for a worker retiring at 70 in 2010 is $3,361.

There are many factors to consider when deciding when to take Social Security benefits. For instance, the taxation of benefits can vary depending on when benefits are taken, and benefits each worker may be eligible to receive based on their spouses record can be affected by when they begin to receive benefits.

Spousal & Widow Benefits

For married couples (and some divorced spouses), it is possible to receive spousal retirement or widow(er) benefits. Each married worker has eligibility for spousal retirement benefits based upon their partner’s work record. The spousal benefit is one half of the worker’s benefit at NRA. So if a spouse has a PIA of $2,000 at NRA, their spouse would be eligible for a spousal retirement benefit of $1,000 at the spouse’s NRA. Like a worker who can file for benefits early or late, it is possible to collect spousal benefits prior to NRA and also delay receiving benefits until age 70. Like worker retirement benefits, taking spousal benefits early or delaying them can increase and decrease the monthly benefit amount.

Many spouses work themselves and have earned a retirement benefits from their own work record. If this is the case, they will in effect collect the greater of the two. So, going back to the example above, the husband earned a PIA of $2,000 and the wife earned a PIA of $900. The husband qualifies for a monthly benefit at NRA of $2,000 or a spousal benefit of $450. Because the husband’s own work record entitles him to a higher benefit than his spousal benefit, he will only receive his own benefit. The wife qualifies for a retirement benefit at her NRA of $900 and spousal benefit of $1,000. In her case, she would receive $900 monthly at her NRA for her own record and $100 for spousal benefits. Her gross benefit is the same as her spousal benefit, but it is mostly “funded” by her own record.

When one spouse dies, the surviving spouse is entitled to the greater of their own benefit or their spouses. So in the example above, the surviving spouse would get $2,000 a month assuming the husband filed at his NRA. If he retires early or delay’s filing, his higher or lower benefit is passed to the surviving spouse.

The rules and calculations behind spousal and widow(er) benefits are a major area for financial planning. The question of whether and how to take Social Security benefits will be the major topic of conversation in the next segment of this series. Read more about when to file for Social Security benefits in the part 2 of this series, “When to File - Understanding and Maximizing Social Security Benefits”.

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This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.

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