8 Important Retirement Money Questions for 201
As 2012 draws to a close, people in or nearing retirement face a
stunning set of uncertainties about their finances and even basic health
and retirement benefits. Congress has left Washington for the Christmas
break without passing any measures to delay or soften the effects of
the so-called fiscal cliff. Perhaps it might still act before the end of
the year, but don't count on it. Odds are that the new Congress that
takes office next year will take action to prevent the very worst
outcomes. But after years of gridlock, should we really expect things to
get better?
Here are eight pressing money and benefit issues that are barreling down on seniors. All of them are bad news. And while there aren't a lot of places to hide, it's important for anyone trying to build or conserve a retirement nest egg to develop contingency plans.
1. Tax rates. The Bush tax cuts expire December 31. All income tax brackets will shift upward--the 10 percent bracket disappears and the new lowest tax rate will be 15 percent. The 25 percent bracket becomes 28 percent; 28 percent becomes 31 percent; 33 percent moves to 36 percent, and 35 percent will be 39.6 percent. The capital gains tax rate will rise to 20 percent from 15 percent, and dividend taxes will soar, moving from being taxed as capital gains to being treated as ordinary income.
2. The Alternative Minimum Tax. The AMT was aimed at preventing wealthier taxpayers from using deductions and other tax benefits to escape their fair share of taxes. However, the qualifying income levels were not indexed for inflation. Congress has thus had to enact an AMT "patch" each year to help millions of taxpayers avoid extra taxes Congress never intended for them to pay. There is now no patch in place for 2012 income taxes. That's right: the taxes that are due on this year's income. Even if Congress does something soon, tax-filing season likely will be delayed. If Congress does not approve a patch, the number of taxpayers hit by AMT payments will rise from 4 million to 34 million.
3. Social Security COLA. Fiscal-cliff negotiations between the White House and Republicans reportedly included the Obama administration's acceptance of a new formula for setting the annual cost of living adjustment (COLA) for Social Security beneficiaries. Called the chained CPI, it may, as supporters and many economists claim, represent a more accurate cost of living measure than the index now used to set each year's COLA. But it would also cut effective Social Security benefits by more than $20 billion a year after it has been in place for several years. It would also raise income-tax bills by reducing the size of the automatic inflation adjustments the tax brackets use to determine different income tax rates.
4. Estate taxes. Estate and gift tax rules are now unusually generous. Individual estates up to $5.12 million (double that for a couple) avoid all estate taxes, and amounts above these levels are taxed at 35 percent. This is also the rate for gift taxes. Without action by Congress, the estate-tax exclusion will plunge to only $1 million in 2012, and the tax on larger estate values will be 55 percent.
5. Medicare taxes. Medicare taxes will rise on wealthier wage earners in 2013. This change is part of the Affordable Care Act and not part of the fiscal-cliff impasse. Medicare payroll taxes, now set at 1.45 percent of payrolls, will rise another 0.9 percent on wage incomes above $200,000 in 2013 ($250,000 for couples). These same income limits will be used to trigger a 3.8 percent annual tax on net investment income. The proceeds will be used to help fund health-reform changes.
6. State insurance exchanges. When health reform is fully implemented in 2014, older people not yet eligible for Medicare will have guaranteed access to health insurance regardless of any preexisting conditions, at rates that are held down by rules limiting age-based premium hikes. These benefits will be delivered in large measure through new state-based insurance exchanges. These exchanges are supposed to be set up in 2013 so they can be fully operational before the end of the year. However, most states have decided not to build their own exchanges but to let the federal government do it for them. Odds of this work being done in time, let alone being done well, are seen as very small.
7. Medicaid expansion. In 2014, health reform would provide expanded healthcare to currently uninsured, lower-income Americans through a massive expansion of Medicaid at the state level. The federal government would pay all added expenses for three years and states would never pay more than 10 percent of the expenses from the expansion. Still, many states have spurned the act's offer of expanded coverage, saying they do not like the potential for higher state expenses and the rules that come with the expanded services.
8. The doc fix. In a 1997 law, Congress tied Medicare's payments to physicians to the growth of the economy. Medicare cost increases, including physician expenses, regularly exceed overall economic growth. Under the law, Medicare payments to physicians would have to be cut each year were it not for periodic Congressional action to override the cuts. Without another fix, doctors will see a 27 percent cut in their Medicare payments next year, and an unknown number of them would stop taking Medicare patients. Like much else in Washington, the doc fix has become part of the broader fiscal-cliff debate.
Here are eight pressing money and benefit issues that are barreling down on seniors. All of them are bad news. And while there aren't a lot of places to hide, it's important for anyone trying to build or conserve a retirement nest egg to develop contingency plans.
1. Tax rates. The Bush tax cuts expire December 31. All income tax brackets will shift upward--the 10 percent bracket disappears and the new lowest tax rate will be 15 percent. The 25 percent bracket becomes 28 percent; 28 percent becomes 31 percent; 33 percent moves to 36 percent, and 35 percent will be 39.6 percent. The capital gains tax rate will rise to 20 percent from 15 percent, and dividend taxes will soar, moving from being taxed as capital gains to being treated as ordinary income.
2. The Alternative Minimum Tax. The AMT was aimed at preventing wealthier taxpayers from using deductions and other tax benefits to escape their fair share of taxes. However, the qualifying income levels were not indexed for inflation. Congress has thus had to enact an AMT "patch" each year to help millions of taxpayers avoid extra taxes Congress never intended for them to pay. There is now no patch in place for 2012 income taxes. That's right: the taxes that are due on this year's income. Even if Congress does something soon, tax-filing season likely will be delayed. If Congress does not approve a patch, the number of taxpayers hit by AMT payments will rise from 4 million to 34 million.
3. Social Security COLA. Fiscal-cliff negotiations between the White House and Republicans reportedly included the Obama administration's acceptance of a new formula for setting the annual cost of living adjustment (COLA) for Social Security beneficiaries. Called the chained CPI, it may, as supporters and many economists claim, represent a more accurate cost of living measure than the index now used to set each year's COLA. But it would also cut effective Social Security benefits by more than $20 billion a year after it has been in place for several years. It would also raise income-tax bills by reducing the size of the automatic inflation adjustments the tax brackets use to determine different income tax rates.
4. Estate taxes. Estate and gift tax rules are now unusually generous. Individual estates up to $5.12 million (double that for a couple) avoid all estate taxes, and amounts above these levels are taxed at 35 percent. This is also the rate for gift taxes. Without action by Congress, the estate-tax exclusion will plunge to only $1 million in 2012, and the tax on larger estate values will be 55 percent.
5. Medicare taxes. Medicare taxes will rise on wealthier wage earners in 2013. This change is part of the Affordable Care Act and not part of the fiscal-cliff impasse. Medicare payroll taxes, now set at 1.45 percent of payrolls, will rise another 0.9 percent on wage incomes above $200,000 in 2013 ($250,000 for couples). These same income limits will be used to trigger a 3.8 percent annual tax on net investment income. The proceeds will be used to help fund health-reform changes.
6. State insurance exchanges. When health reform is fully implemented in 2014, older people not yet eligible for Medicare will have guaranteed access to health insurance regardless of any preexisting conditions, at rates that are held down by rules limiting age-based premium hikes. These benefits will be delivered in large measure through new state-based insurance exchanges. These exchanges are supposed to be set up in 2013 so they can be fully operational before the end of the year. However, most states have decided not to build their own exchanges but to let the federal government do it for them. Odds of this work being done in time, let alone being done well, are seen as very small.
7. Medicaid expansion. In 2014, health reform would provide expanded healthcare to currently uninsured, lower-income Americans through a massive expansion of Medicaid at the state level. The federal government would pay all added expenses for three years and states would never pay more than 10 percent of the expenses from the expansion. Still, many states have spurned the act's offer of expanded coverage, saying they do not like the potential for higher state expenses and the rules that come with the expanded services.
8. The doc fix. In a 1997 law, Congress tied Medicare's payments to physicians to the growth of the economy. Medicare cost increases, including physician expenses, regularly exceed overall economic growth. Under the law, Medicare payments to physicians would have to be cut each year were it not for periodic Congressional action to override the cuts. Without another fix, doctors will see a 27 percent cut in their Medicare payments next year, and an unknown number of them would stop taking Medicare patients. Like much else in Washington, the doc fix has become part of the broader fiscal-cliff debate.
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