Don't Ignore These Retirement Expenses (Blackrock)

Top 10 Forgotten Retirement Expenses

Are you considering all of your retirement expenses in your planning?

You've no doubt got a sense of how much retirement income your 401(k), IRA, Social Security benefit and other investments will be able to generate for you in retirement. But have you taken a careful and detailed look at your expected monthly outgo in retirement?

Understanding your retirement expenses is an equally important step in successful retirement planning.

As you work your way through this interactive retirement expense worksheet, take the time to carefully consider some of the most overlooked retirement expenses:

1. Health care
   Yes, you are eligible for Medicare beginning at age 65, but Medicare comes with monthly premiums. "If you're transitioning from an employer defraying the cost of health insurance to covering all your costs on your own, you need to understand what that means," advises Chad Terry, BlackRock's Director of Retirement and Investment Education. For 2014, the standard monthly premium for Medicare Part B was $104.50, but high-income households paid as much as $230.80 a month. Prescription drug coverage (Medicare Part D) is an additional cost, and you need to prepare for expenses that Medicare does not cover.
2. Income tax on traditional 401(k) and IRA withdrawals
   Even if you don't need the cash, Uncle Sam requires you to take required minimum distributions (RMD) from traditional individual retirement accounts by April 1 of the year after you turn 70 ½ years old. And such withdrawals generally are taxed as ordinary income. Depending on the size of your RMDs, you might even find yourself bumped into a higher tax bracket.

   Note: Roth IRAs don't have withdrawal requirements, and you may not have to make 401(k) withdrawals if you are still working.
3. Income tax on Social Security benefits
   Yep, there are more potential taxes on retirement income out there. Individuals with income of more than $34,000, and married couples filing joint federal tax returns with more than $44,000 in income generally owe federal income tax on up to 85% of their Social Security benefit.
4. Housing
   Okay, what you spend on housing isn't exactly forgotten, but have you carefully tallied all the various expenses? It can be an eye opener. According to the Survey of Consumer Expenditures, basic housing costs account for more than one-third of spending by Americans over age 65. Utilities eat up another 9% of retirement spending. Downsizing can be one way to reduce your housing expenses—especially if it means being able to pay off a mortgage. About one in four Americans who are at least 65 years old, who own a home, are still making mortgage payments.
5. Adding a vacation spot
   If you buy or rent a vacation property, you are adding a whole new round of housing costs to your retirement expenses.

   Note: You could also encounter different tax rates or treatment for property in another state.
6. Helping elderly parents
   One in five middle-aged Americans provide some financial support for a parent who is at least 65 years old, according to the Pew Research Center. "Helping your family is an important unforeseen expense to think about," Terry says. According to a recentnational survey conducted by caring.com, almost half of the families who provide care spend more than $5,000 a year.
7. Helping adult children
   Forty-eight percent of parents with adult children (at least 18 years old) provided some support to their kids in 2012, according to Pew. That's up from 42% in 2005.
8. Helping grandchildren
   Do you intend to contribute to a 529 college savings plan, or help pay other education costs, such as preschool bills? Those are expenses you should take into account.
9. Insurance premiums
   Don't forget this ongoing expense. Especially if you have long-term care insurance, for which annual premiums can often run more than $2,000.
10. Inflation
    You may be on a fixed income, but there's nothing fixed about many expenses you'll be paying through what can be a very long retirement. In fact, the inflation typically experienced by older Americans is slightly higher than the general inflation rate that generally hovers around 3% or so a year*. (Later life medical expenses are often to blame for that.) What costs $1 today will cost more than $2 in 25 years, assuming an annualized inflation rate of 3%.

TAX RETURN RED FLAGS (kiplingers)

15 Reasons You Might Get Audited

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual tax returns in 2014. And the 2015 audit rate will definitely fall even lower as the agency’s resources continue to shrink. For example, funding for enforcement in the IRS’s current budget is 5% less than last year. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

That said, your chances of being audited or otherwise hearing from the IRS escalate depending upon various factors, including your income level, the types of deductions or losses claimed, the business in which you're engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, these 15 red flags could increase your chances of unwanted attention from the IRS.

Making a Lot of Money

Although the overall individual audit rate is only about one in 116, the odds increase dramatically as your income goes up. IRS statistics for 2014 show that people with incomes of $200,000 or higher had an audit rate of 2.71%, or one out of every 37 returns. Report $1 million or more of income? There's a one-in-13 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.78% of such returns were audited during 2014, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money—everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

Failing to Report All Taxable Income

The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

Taking Higher-than-Average Deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review.But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

Running a Small Business

Schedule C is a treasure trove of tax deductions for self-employeds. But it's also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions and don’t report all of their income. IRS looks at both higher-grossing sole proprietorships and smaller ones.

Special scrutiny is also given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) as well as to small business owners who report a substantial net loss on Schedule C.

Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations and small partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

Taking Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

Claiming Rental Losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS is actively scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It’s pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business. The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit.

Taking an Alimony Deduction

Alimony paid by cash or check is deductible to the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The instrument can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.

Alimony doesn’t include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t always satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

 

Writing off a Loss for a Hobby Activity

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.

 

Deducting Business Meals, Travel and Entertainment

Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees.

A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

Failing to Report a Foreign Bank Account

The IRS is intensely interested in people with money stashed outside the U.S., especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information. The IRS has also used voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean—in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Form 114 by June 30 to report foreign accounts that total more than $10,000 at any time during the previous year. And those with a lot more financial assets abroad may also have to attachIRS Form 8938 to their timely filed tax returns.

Claiming 100% Business Use of a Vehicle

When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business.Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction.

As a reminder, if you use the IRS's standard mileage rate, you can't also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.

Claiming 100% Business Use of a Vehicle

Claiming Day-Trading Losses on Schedule C

Those who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and are reported on Schedule C (investors report their expenses as a miscellaneous itemized deduction on Schedule A, subject to an offset of 2% of adjusted gross income), and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and are treated as ordinary losses that aren’t subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. So it’s pulling returns and checking to see that the taxpayer meets all of the rules to qualify as a bona fide trader.

Gambling: Failing to Report Winnings or Claiming Big Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw unwanted IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). But the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. The IRS is looking at returns of filers who report large miscellaneous deductions on Schedule A, Line 28 from recreational gambling, but aren’t including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure that these folks really are gaming for a living.

Claiming the Home Office Deduction

The IRS is drawn to returns that claim home office write-offs because it has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages. If you qualify for this savings, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

Engaging in Currency Transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 in cash one day and an additional $9,500 in cash two days later).