sept 2012 newsletter

Money ConceptsLinda Wells101 Devant St. #603Fayetteville, GA 30214678-817-0210770-461-2954lwells@moneyconcepts.commoneyconcepts.com/lwells

September 2012Breaking Down the TaxpayingPopulation: Where Do You Fit In?

Should You Make Large Gifts in 2012?

Withdrawals from Traditional IRAs

Do I have the right type of life insurance?

Breaking Down the Taxpaying Population: Where Do You Fit In?

See disclaimer on final page

Every quarter, theStatistics of IncomeDivision of the InternalRevenue Service (IRS)publishes financialstatistics obtained from taxand information returnsthat have been filed withthe federal government.Recent reports reflect datagleaned from 2009individual federal incometax returns. These reports

offer a snapshot of how Americans break downas taxpayers.

Sources for data: IRS Statistics of IncomeBulletin, Spring 2012 and Winter 2012,Washington, D.C.; IRS, Data on the 400Individual Income Tax Returns Reporting theLargest Adjusted Gross Incomes, 2009 Updateto Statistics of Income Bulletin, Spring 2003,Washington, D.C.

The big pictureIndividuals filed roughly 140 million federalincome tax returns for 2009. Of those returns,just under 82 million (approximately 58%)reported federal income tax greater thanzero--representing the lowest percentage oftaxable federal income tax returns in 24 years.

Half of all the individual income tax returns filedshowed adjusted gross income of under$32,396. (Adjusted gross income, or AGI, isbasically total income less certainadjustments--e.g., deductible contributions to atraditional IRA.) As a whole, this bottom-50%group accounted for just 13.5% of the total AGIreported on all federal income tax returns. Putanother way, 86.5% of AGI was concentrated inthe top 50% of returns filed.

A look at the topWhat did it take in AGI to make the top 5% ofall individual filers? Probably not as much asyou think. If your return showed AGI of$154,643 or more, you would have been one ofthe almost 6.9 million filers comprising the top5%. This group reported about $2.5 trillion inAGI--31.7% of the total AGI reported--and wasresponsible for 58.7% of the total income tax for

the year.

The roughly 1.3 million returns showing AGI ofat least $343,927 made up the top 1% of allfilers. This group reported 16.9% of total AGI; inother words, over $1.3 trillion of the $7.8 trillionin AGI reported was reported by the top 1% offilers. This group was responsible for 36.73% ofthe total income tax for the year.

There were just under 138,000 tax returns withAGI exceeding $1.4 million. These returns,making up the top 0.1% of all filers (that's thetop one-tenth of one percent), accounted forapproximately $610 billion in AGI (about 7.8%of all AGI), and paid just over 17% of the totalincome tax.

Not all high-income returns showed taxThere were just over 3.9 million returns filedwith AGI of $200,000 or more. Of these returns,20,752 (0.529%) showed no U.S. income taxliability. Why did these returns show no incometax? The IRS report that provided the datanoted that high-income returns generally showno income tax as a result of a combination offactors, including deductions for charitablecontributions, deductions for medical and dentalexpenses, and partnership and S corporationnet losses.

Average tax ratesSimply dividing total income tax paid by totalamount of AGI results in the following averagefederal income tax rates:

• Top 0.1%--Average federal income tax rate of24.28%

• Top 1%--Average federal income tax rate of24.01%




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Should You Make Large Gifts in 2012?Currently, the exemptions for federal gift tax,estate tax, and generation-skipping transfer(GST) tax are at historic highs, and the gift,estate, and GST tax rates are at historic lows.But, in 2013, the exemptions are scheduled tosubstantially decrease, and the tax rates arescheduled to substantially increase. This raisesthe question of whether 2012 might be a goodtime to make large gifts that take advantage ofthe current exemptions while they are stillavailable.

Looking into the futureWhen you transfer your property during yourlifetime or at your death, your transfers may besubject to federal gift, estate, and GST tax.(Your transfers may also be subject to statetaxes.) Currently, there is a basic exclusionamount (sometimes referred to as anexemption) that protects up to $5,120,000 fromgift tax and estate tax, a $5,120,000 GST taxexemption, and a top tax rate of 35%. Unlessnew legislation is enacted, in 2013 the gift taxand estate tax exemption will decrease to$1,000,000, the GST tax exemption willdecrease to $1,000,000 (as indexed), and thetop tax rate will increase to 55%.

No one knows what the future holds for thesetaxes, but there is a lot of speculation aboutwhat Congress might do. Among the possiblescenarios, tax rates could increase andexemptions decrease, tax rates could decreaseand exemptions increase, or current tax ratesand exemptions could be extended. Thequestion then arises: "Should large gifts bemade in 2012 to take advantage of the large$5,120,000 exemption while it is still available?"

To answer that question, you should generallyconsider the following: the size of your estateand the rate at which it can be expected togrow (or decrease), whether you can afford tomake large gifts, what the future of the transfertaxes might be, and whether "claw back" wouldapply in future years.

Claw backClaw back refers to a situation where thebenefit of certain tax provisions is essentiallyrecaptured at a later time due to changes in taxlaw. There is some split in opinion as towhether claw back applies to the estate tax. Acouple of examples will illustrate the difference.

Example(s): Assume the gift and estate taxchange as currently scheduled in 2013 andclaw back applies. Assume you make a taxablegift of $5 million in 2012 that is fully protectedby your gift tax exemption and you have ataxable estate of $5 million when you die in2013. Estate tax, after reduction by the unified

credit but not the state death tax credit, is$4,795,000. The result is essentially the sameas if you had not made the taxable gift in 2012and your taxable estate is $10 million in 2013.

Example(s): Assume the same facts as above,but with no claw back. Estate tax, afterreduction by the unified credit but not the statedeath tax credit, would be $2,750,000. So, thefederal estate tax is $2,045,000 lower if there isno claw back.

Guidelines for large gifts in 2012If you expect that you can keep your estatedown to around $1 million ($2 million total forboth spouses if you are married) using annualexclusion gifts (generally, up to $13,000 perrecipient per year; effectively, $26,000 for giftsby married couples) and qualified transfersexclusion gifts for medical and educationalexpenses, there may be no advantage tomaking taxable gifts in 2012. If you have alarger estate, you may wish to consider makingtaxable gifts sheltered by exemptions in 2012,depending on your evaluation of how theguidelines here apply to your particularcircumstances.

If you make taxable gifts sheltered by the giftand estate tax exemption in 2012, and the giftand estate tax rates later increase, theexemptions decrease, and there is no clawback, you may save gift and estate taxes bymaking the gifts in 2012. Even if there is clawback, your gift and estate taxes will probably beno worse than if you hadn't made the gifts. And,if the gift and estate tax rates later decrease orstay the same and the exemptions increase orstay the same, your gift and estate taxes willprobably be no worse than if you hadn't madethe gifts.

If you make generation-skipping transferssheltered by the GST tax exemption in 2012,and the GST tax rate later increases and theexemption decreases, you may save GST taxby making the GST in 2012. Even if the GSTtax rate later decreases or stays the same andthe exemption increases or stays the same,your GST tax will probably be no worse than ifyou hadn't made the GST in 2012.

In each of these scenarios, it has beenassumed that values do not appreciate. If theproperty transferred by gift increases in valueafter the gift, there may also be transfer taxsavings from removing the appreciation fromthe transfer tax system.

You'll want to consider how these guidelines forlarge gifts in 2012 might apply to your specificcircumstances. An estate planning professionalcan help you evaluate them.

Other gift considerations

• While it might seem obvious,gifts should only be made ifyou can afford to part withthe property.

• In general, it is usuallypreferable to make as manygifts as possible using theannual exclusion and thequalified transfers exclusionfor medical and educationalexpenses before makingtaxable gifts that use up thegift and estate taxexemption. Annual exclusionand qualified transferexclusion gifts do not use upthe gift and estate taxexemption.

• When you make a gift ofproperty, your income taxbasis in the property(generally, what you paid forthe property, with some upand down adjustments) isgenerally carried over to theperson who receives the gift.When you transfer propertyat your death, the basis ofthe property is usually"stepped up" (or "steppeddown") to fair market value atthe time of your death.

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Withdrawals from Traditional IRAsIn these challenging economic times, you maybe considering taking a withdrawal from yourtraditional IRA. While you're allowed towithdraw funds from your IRAs at any time, forany reason, the question is, should you?

Why you should think twiceFinancial professionals generally recommendusing your retirement funds for one purposeonly--retirement. Why? Because frequent dipsinto your retirement funds will reduce yourultimate nest egg. Plus, there will be lessmoney available to take advantage of the twinbenefits of tax deferral and any compoundearnings. Depleting your retirement funds toosoon can create a dire situation in your lateryears.

And then there are taxes. If you've made onlydeductible contributions to your traditional IRA,then all the funds in your account are subject tofederal income tax when you withdraw them.They may also be subject to state income tax. Ifyou've made any nondeductible (after-tax)contributions to your IRA, then each withdrawalyou make will consist of a pro-rata mix oftaxable (your deductible contributions and anyearnings in your account) and nontaxable (yournondeductible contributions) dollars.

All your traditional IRAs (including SEPs andSIMPLE IRAs) are treated as a single IRAwhen you calculate the taxable portion of awithdrawal. So you can't just transfer all yournondeductible contributions into a separateIRA, and then withdraw those funds tax free.And, if you're not yet age 59½, the taxableportion of your withdrawal may be subject to a10% federal early distribution tax (your statemay also apply a penalty tax).

10% early distribution penaltyTo discourage early withdrawals from IRAs,federal law imposes a 10% tax on taxabledistributions from IRAs prior to age 59½. Not alldistributions before age 59½ are subject to thispenalty, however. Here are the most importantexceptions:

• Distributions due to a qualifying disability• Distributions to your beneficiary after your

death• Distributions up to the amount of your

tax-deductible medical expenses• Qualified reservist distributions• Distributions to pay first-time homebuyer

expenses (up to $10,000 lifetime)• Distributions to pay qualified higher education

expenses

• Certain distributions while you'reunemployed, up to the amount you paid forhealth insurance premiums

• Amounts levied by the IRS• Distributions that qualify as a series of

substantially equal periodic payments(SEPPs)

The SEPP exception to the earlydistribution penaltyThe SEPP exception allows you to withdrawfunds from your IRA for any reason, whileavoiding the 10% penalty tax. But the rules arecomplex, and this option is not for everyone.SEPPs are amounts you withdraw from yourIRA over your lifetime (or life expectancy) or thejoint lives (or joint life expectancy) of you andyour beneficiary. You can take advantage of theSEPP exception at any age.

To avoid the 10% penalty, you must calculateyour lifetime payments using one of threeIRS-approved distribution methods and take atleast one distribution annually. If you have morethan one IRA, you can take SEPPs from justone of your IRAs or you can aggregate two ormore of your IRAs and calculate the SEPPsfrom the total balance. You can also usetax-free rollovers to ensure that the IRA(s) thatwill be the source of your periodic paymentscontain the exact amount necessary togenerate the payment amount you want basedon the IRS formulas.

Even though SEPPs are initially determinedbased on lifetime payments, you canchange--or even stop--the payments after fiveyears, or after you reach age 59½, whichever islater. For example, you could start takingSEPPs from your IRA at age 50, withoutpenalty, and then, if you no longer need thefunds, reduce the payments (or stop themaltogether) once you reach age 59½.

Short-term loanIf you only need funds for a short period of timeyou may be able to give yourself a short-termloan by withdrawing funds from your IRA, andthen rolling those dollars back into the same ora different IRA within 60 days. However, watchthe deadline carefully, because if you miss it,your short-term loan will instead be treated as ataxable distribution. And keep in mind that youcan only make one rollover from a particularIRA to any other IRA in any 12-month period. Aviolation of this rule can also have seriousadverse tax consequences.

In these challengingeconomic times, you may beconsidering taking awithdrawal from yourtraditional IRA. While you'reallowed to withdraw fundsfrom your IRAs at any time,for any reason, the questionis, should you?

of 4, see disclaimer on final page

Money ConceptsLinda Wells101 Devant St. #603Fayetteville, GA 30214678-817-0210770-461-2954lwells@moneyconcepts.commoneyconcepts.com/lwells

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012

All Securities Through MoneyConcepts Capital Corp., MemberFINRA / SIPC11440 North Jog Road, PalmBeach Gardens, FL 33418 Phone:561.472.2000Copyright 2010 Money ConceptsInternational Inc.

Investments are not FDIC or NCUAInsuredMay Lose Value - No Bank orCredit Union Guarantee

Should I buy my life insurance through my employer oron my own?Many companies offer theirworkers employer-sponsoredlife insurance coverage as partof their employee benefits

package. If you're offered this opportunity, itmay be in your best interest to accept. Buyinglife insurance through your employer can be arelatively inexpensive and hassle-free way toget some of the life insurance coverage youneed.

With a group life insurance plan, your employerpurchases a single policy that covers allemployees. This policy is subject to a singlegroup premium payment. Some employers maypay the entire cost of the group policy (which istax deductible to the employer). But if the planrequires you to pay a portion of the grouppremium, that amount will probably be lowerthan what you would pay for the same type andamount of individual insurance coverage. Andyou generally don't need to pass a medicalexam when applying for group life insurance.

A disadvantage of employer-sponsored lifeinsurance is that it may not be portable. If youleave your job, your group life insurancecoverage may end--potentially leaving you

underprotected, especially if you can't purchasean individual policy at a reasonable costbecause of your age or changes in your health.However, you may be allowed to convert yourgroup insurance to an individual policy, whichwould allow you to keep your insurancecoverage, regardless of your age or health, butyou'd have to pay the entire premiumout-of-pocket.

Another disadvantage of group life insurance isthat the policy may not be tailored to yourindividual needs. For example, the amount ofcoverage may be less than what you require tobe fully protected. If so, the group policy maygive you the option of purchasing morecoverage for an additional cost and for whichyou may be asked to answer medicalquestions. But even if you end up buyingsupplemental insurance through a separatecompany, your employer-sponsored plan givesyou a head start in meeting your life insuranceneeds.

Do I have the right type of life insurance?Your need for life insurancechanges as your life changes.You may need less lifeinsurance when you'reyounger, but as you take on

more responsibilities and as your family grows,the amount and type of life insurance that fitsyour circumstances changes.

There are many different types of life insurance.But generally, life insurance policies fall intoone of two categories, temporary or terminsurance, and permanent or cash valueinsurance.

Term insurance

Term insurance provides coverage for aspecified period ranging from 1 to 30 years.Premiums are typically lower compared topermanent life insurance. If you die during thecoverage period, your beneficiary receives aspecified death benefit. If you live to the end ofthe specified period, coverage ends and thepolicy has no cash value.

Permanent insurance

Unlike term insurance, permanent insurancecontinues throughout your life as long as youpay the premiums. As with term insurance,

permanent insurance pays a death benefit toyour beneficiary at your death, but it alsocontains a cash value account funded by yourpremium dollars. The cash value portion of thepolicy grows, tax deferred, as long as thecoverage remains in force. With permanentinsurance, you can tap the dollars in the policyeven while you're alive. You can borrow againstthe policy, and in some cases, withdraw part ofthe cash value. Keep in mind, though, thatunpaid loans and withdrawals will decrease thedeath benefit available to your beneficiaries,and reduce the cash value, which may causethe policy to lapse.

What's right for you?

Think about what protection you need and whatyou can afford before you purchase any type oflife insurance. If you really need insurance butdon't have the discretionary income, terminsurance may be your best choice. On theother hand, if you want lifetime coverage andyou're interested in accumulating cash value,then permanent insurance may make moresense.

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