Thursday, March 28, 2013

Itemized Deductions for Medical Expenses

Did you know that, not only are our health insurance costs going up, but also, the threshold for itemizing deductions related to medical expenses is going up to 10%. It has been 7.5% in prior tax years, but for tax years beginning in 2013, the threshold moves up to 10% of adjusted gross income.

Here are some example calculations for $10,000 in medical expenses:

Adjusted                                                     Amount that       Tax
Gross Income          10% Threshold        exceeds 10%       Deduction

$  50,000                   $  5,000                     $  5,000                $ 750
$  75,000                   $  7,500                     $  2,500                $ 625
$100,000                   $10,000                     $         0                $     0

Depending on your zip code, a typical health insurance policy for a family can be around $10,000 per year or more. My first question is how can a family making $50,000 a year pay for that? Assuming they can pay the $10,000, then they would be able to add $5,000 onto Schedule A. In a 15% tax bracket, this means that they would only knock off $750 from their tax due. In this example, this makes their health insurance costs $9,250 instead of $10,000. They still cannot afford this insurance, in my opinion.

If you have $100,000 in adjusted gross income, then you will not be able to meet the 10% threshold requirement since the cost of the health insurance is $10,000. No tax reduction for anyone over $100,000 in AGI basically.

The people over age 65 will not get this 10% threshold until 2017. They get a break for now. I would say the AARP was successful in their lobbying effort in getting this loophole. Remember, the AARP came out in support of the Affordable Care Act. I suppose that it would not take a smart person to figure out that this was one of the things they lobbied for during the legislative process.

The end result is the medical costs are increasing and tax deductions are disappearing. This is why I said, be prepared for changes to the Affordable Care Act.

My advice is instead of funding your IRA or Roth IRA, fund your Health Savings Account and get as high of a deductible as you can on your health insurance policy.

Tuesday, March 19, 2013


Starting January 1st of this year, Internal Revenue Code Section 1411 went into effect. This is the Net Investment Income Tax or as I call it, the NIIT-WIT tax. As a result of Section 1411, there is a 3.8% tax on Married Couples filing jointly if their adjusted gross income is over $250,000. For single tax payers, the adjusted gross income must be under $200,000 to avoid the NIIT-WIT tax.

I believe it is more important than ever to have an investment adviser who is also a real estate agent.

Here are some examples as to why.

Let's look at some planning situations whereby you might inadvertently fall into the NIIT-WIT trap.

1) Suppose you are single and go to your stockbroker and he tells you that the income limits for converting your IRA account to a Roth IRA are no longer in place. As a result, your stockbroker advises you to convert your IRA to a Roth IRA. In addition, your stockbroker tells you to use your Home Equity Line of Credit to pay the taxes. Once the Roth grows for about 5 years, then you take a cost basis withdrawal from your Roth IRA to pay off the Home Equity Line of Credit. In past tax years, this was a good strategy, but one that now needs to be well thought out.

Assume that you have $400,000 in your IRA account. Your adjusted gross income before the Roth Conversion is $100,000. Therefore, your total AGI is now $500,000. You are now $300,000 over the NIIT-WIT threshold.

But, wait, your real estate agent has found a buyer for your real estate investment property and the buyer is willing to pay your sell price. The cost basis on your investment property was only $120,000 and the sell price is $320,000. Another $200,000 is now added to your gross income for a total of $500,000 over the NIIT-WIT threshold. The total NIIT-WIT tax due is $19,000.

Odds are that your stockbroker and your real estate agent do not even know each other and neither knew what the other one was doing.

2) Suppose you are married and file jointly with the IRS. Your insurance agent has sold you a Non-Qualified Variable Annuity several years ago with 10% free withdrawals. Your Non-Qualified Variable Annuity has grown to $700,000 and you are starting to take the 10% free withdrawals from it, or $70,000 for this tax year. Your total adjusted gross income from other sources is $300,000, plus the $70,000 free withdrawal. At $370,000 AGI, this puts you in the 33% tax bracket. The 3.8% tax applies to the amount over $250,000, so in this example that would equate to $120,000. This puts an extra $4,560 NIIT-WIT tax burden upon you.

If you sell your real estate investment property in the same year with another $100,000 net profit, then that profit is added on top of the $120,000 amount making it $220,000 over the NIIT-WIT threshold. So, you could end up paying an extra $8,360 in NIIT-WIT taxes.

Odds are that your insurance agent and your real estate agent do not know each other either and they do not have any idea what the other is recommending.

3) Suppose you use an investment adviser who is also a licensed real estate agent. In example one above, the investment adviser knows your investments and knows your real estate properties. Because he knows that you have real estate for sale, he would never advise you to also convert your IRA to a Roth IRA in the same year.

4) Suppose you use an investment adviser who is also a licensed real estate agent. In example two above, the investment adviser knows that you bought the Variable Annuity from an insurance agent and that your income is already above the NIIT-WIT threshold. He would advise you NOT to take any withdrawals from the Variable Annuity when you are selling real estate in the same year, because all that is going to do is increase the NIIT-WIT tax. In addition, he would make you aware that by selling the real estate, then you are going to be increasing your exposure to the NIIT-WIT tax.

An investment adviser has a fiduciary duty to work in your best interests, even if they are also a real estate agent. Stockbrokers, insurance agents and real estate agents by themselves, do not have to offer their services in your best interests. The fact is that most of them are just looking to close a sale without regard to taxes. I doubt most of them even know about Section 1411 and its impact on the advice transactions that they recommend. This is why I call it the NIIT-WIT tax.

Personally, I believe in the team approach. At the very least, all of your financial professionals need to be involved in any and all of your major financial decisions that can potential increase your adjusted gross income.

Perhaps, an investment adviser who is also a real estate is a good place to go for advice.


I agree with the protesters in the streets of Nicosia, Cyprus. "No. Don't do it!"

It sets an awful precedence if banks are allowed to make bad decisions that make them insolvent, then get bailed out by the EU, IMF or their own government by confiscating their depositor's money.

Imagine if a big global bank made some horrible decisions that for all practical purposes made them insolvent. However, they knew that they could simple petition the EU, IMF or their government to bail them out for their poor decisions. What would stop them from continuing the activity? You are in effect letting them get away with the poor decisions without any real repercussions.

Think about this. The people who make the horrible decisions are still running the bank after they get bailed out! History tends to repeat itself. The likelihood of these same bankers making more mistakes in the future is very high. Why on earth would you bail out these executives at the banks when they have proven their ineptness?

Socialists believe they are entitled to everyone else's money in order to facilitate the greater good of society in general. If these socialists get this done, then "Katy bar the door". Others may follow suit. I suspect that we will see a run on banks in the EU if this happens. These people better think long and hard about what they are doing, because the repercussions can be global.

There is apparently about 30% of the Cyprus bank depositors who are Russians. Vladamir Putin is a little upset that he was not consulted about this idea. I can assure you that these smaller countries will see deposits dry up completely if they pass this idea. Those people who are affected will yank their money out and those banks will have less money on deposit in the end. In addition, they will be in worse shape, not better shape after it is done. I believe that they are going to yank their money out at the very first opportunity anyway. Watch as it happens.

It blows my mind how these people can even think of doing something like this, in order to pay for the mistakes of some inept banking executives. Bankruptcy is a better option. Let some other global bank buy the deposits. Write off the loan losses and move on. It is not that complicated. They have made things worse already. I doubt that they can put the genie back in the bottle now.

Let's hope they come to their senses.

Wednesday, March 13, 2013

Were you touched today?

As I watched and waited for the new Pope to appear to the Vatican City crowd below, I could not help but shed a few tears. After all, this is the Church of Jesus Christ who installed the very first Pope, St. Peter, who is well known as Simon Peter in the New Testament's Book of St. Matthew.

As the camera panned across the faces of the faithful people who were there to watch, my thoughts turned to the words of Our Lord Jesus Christ. In the Catholic Douay-Rheims Bible, Matthew 16:18, Jesus says "Thou art Peter; and upon this rock I will build my church, and gates of hell will not prevail against it." It is a remarkable site to witness the work of Christ continue on and in my view stronger than ever.

Jesus is the founder of the Catholic Church. The Pope is the one chosen to continue the legacy of Our Lord. Even when it is a historic fact and there are records of every Pope that ever lived, there are still those who doubt. It is no different today than it was during the time of Christ. There were plenty of non-believers back then, just as there is today. However, here we are some two thousand plus years later and Christ's Catholic Church is still standing. This is not a surprise to the believers and followers.

As much as the naysayers like to criticize the Catholic Church for it's recent scandals, they should first stop and think that they are criticizing the Church of Our Lord. They should have more reverence and respect.

God Bless Pope Francis.

Wednesday, March 6, 2013

Did I call that correctly, or what?

With my last blog post on February 19th, I said "Once people realize that nothing really happened by the Sequester cuts, the stock market will continue its path of slow growth." Well, I hate to pat myself on the back, but I was correct.

Now for my next prediction.

Investment returns are off to a great start this year, but we are liable to see a little dip between the 3rd week of March through April 15th. Why? People have to pay their taxes! In order to do so, they generally will sell some investment positions to free up cash. Historically, this is what we have seen during this time period for several prior years. Once we get past April 15th, I believe that we will continue our slow growth forward. So, do not be overly concerned during this time period if the stock market pulls back.

Stay diversified and stay invested.