Financial lives in flux as DOMA decision awaited

Liz Skinner for Investment News writes:  Supreme Court decision on same-sex marriage, expected any day now, could improve the financial outlook significantly for couples living in certain states, but many gay partners still will have to work around a system that affords financial benefits mostly to recognized spouses.

If the Defense of Marriage Act is declared unconstitutional, as many legal experts expect, same-sex couples living in the dozen states and District of Columbia that allow them to be married will no longer have to worry about gifting issues that arise when one spouse contributes more to common ex-penses. They also won't have to file separate federal taxes and may save money by filing jointly, said J.T. Hatfield Charles, an adviser with Raymond James Financial Services Inc.

They'll also have access to each other's Social Security benefits and pensions after death, qualify for military spousal benefits and will not have to contemplate buying life insurance to cover the cost of estate taxes when one partner dies, he said.

A Supreme Court decision on same-sex marriage, expected any day now, could improve the financial outlook significantly for couples living in certain states, but many gay partners still will have to work around a system that affords financial benefits mostly to recognized spouses.

If the Defense of Marriage Act is declared unconstitutional, as many legal experts expect, same-sex couples living in the dozen states and District of Columbia that allow them to be married will no longer have to worry about gifting issues that arise when one spouse contributes more to common ex-penses. They also won't have to file separate federal taxes and may save money by filing jointly, said J.T. Hatfield Charles, an adviser with Raymond James Financial Services Inc.

They'll also have access to each other's Social Security benefits and pensions after death, qualify for military spousal benefits and will not have to contemplate buying life insurance to cover the cost of estate taxes when one partner dies, he said.

1,100 FEDERAL BENEFITS

“Couples in the 12 states with same-sex marriage gain access to 1,100 federal benefits, so it would do a tremendous amount for those couples,” said Kyle Young, an adviser with Wells Fargo Advisors. “For those in states that don't recognize gay couples, access to those federal benefits still will not be on the table.”

It's unclear what would happen to a couple's federal rights if they were to move out of a state that recognized gay marriage to one that didn't. Mr. Young has clients for whom this issue has cut into their life plans.

Two of Mr. Young's clients have been together for about 40 years but were married in New York last year after the state made same-sex marriages legal. If the Supreme Court decides to overturn DOMA, their financial picture will immediately brighten by at least $20,000 a year, and whichever partner lives the longest faces more financial security.

However, it makes the retired couple's dream of moving permanently to their Pennsylvania vacation house less appealing, for several reasons.

Pennsylvania requires that marriage be between a man and a woman, so it's unclear whether the two would still qualify for the federal benefits gained from a repeal of DOMA, including inheritance of pension and deferred-compensation plans. The surviving partner also would owe the state 15% of the deceased partner's estate — the same amount he or she would if the two were strangers, Mr. Young said.

TAX COMPLICATIONS

This couple, as well as all same-sex couples who would gain federal benefits, would have to consider certain new tax complications. For example, couples could be hit with the “marriage penalty,” the bane of heterosexual couples. Couples where spouses had similar incomes are the most likely to face higher tax bills filing jointly than they would filing as two single people, accounting experts said.

But more importantly, a reversal of DOMA “would radically change the way that employee benefits are taxed and the way same-sex couples file and think about their planning,” said Todd Solomon, a partner at law firm McDermott Will & Emery LLP, who focuses on employee benefits.

If same-sex spouses were eligible for federal benefits, those benefits provided through a spouse's employer no longer would be taxable, Mr. Solomon said. He added that couples with a state-recognized marriage could consider asking the Internal Revenue Servicefor these and other taxes to be returned to them as far back as 2010.

“I think there will be very dramatic changes, and people are waiting anxiously for the court's decision,” he said.

7 Facts About the Retirement Crisis You Can’t Ignore

 Dan Ritter for Wall St. Cheat Sheet writes:  If you ask around, most people will say that there’s a retirement problem in the United States. In fact, surveys suggest that 92 percent of people believe there is a retirement crisis in America. Last July, Senator Tom Harkin, Chairman of the U.S. Senate Committee on Health, Education, Labor & Pensions, issued a report called “The Retirement Crisis and a Plan to Solve It.”

Here are seven things that everybody should know about the crisis, pulled from the report and elsewhere.

1) Americans are running a huge deficit

Harkin’s report suggests that the retirement crisis is “directly attributable to the breakdown of the traditional ‘three-legged stool’ of retirement security – pensions, savings, and Social Security.” All three of these legs have been eroded in some way by the financial crisis and global economic downturn. Institutions with defined benefit pension plans such as large corporations or municipal governments are having an increasingly difficult time meeting their obligations. Meanwhile, stagnant wages and a rising cost of living have made it more difficult for people to contribute to a 401K or an IRA.

Harkin’s report points out that, in aggregate, Americans currently hold a $6.6 trillion retirement deficit. Only one of five people in the private sector workforce have a defined benefit pension plan, and half of Americans have less than $10,000 in savings.

2) Social Security is in danger

The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds recently delivered its 2013 annual report to Congress. The report was intended to inform Congress about the current state of the Old-Age, Survivors, and Disability Insurance (“OASDI”) and the Disability Insurance (“DI”) programs and projects forward to the best of its abilities the health of these programs in the future. These programs fall under the umbrella of Social Security.

“Beginning in 2021,” reads the report, “annual cost exceeds total income, and therefore reserves begin to decline… The dollar level of the combined trust fund reserves declines beginning in 2021 until reserves are depleted in 2033.”

The report explained why: “The projected OASDI annual cost rate increases from 13.95 percent of taxable payroll for 2013 to 16.98 percent for 2035 and to 18.01 percent for 2087, a level that is 4.77 percent of taxable payroll more than the projected income rate for 2087.” In short, unless taxes are increased or spending is cut, the OASDI program will not be able to satisfy its obligations.

3) Social Security alone is not enough

Social Security is intended to complement, not replace, individual retirement planning. Unfortunately, reports indicate that 53 percent of married couples and 74 percent of unmarried retirees receive at least 50 percent of their income from Social Security while nearly 25 percent of married couples and nearly 50 percent of unmarried retirees rely on Social Security for 90 percent of income.

Part of the reason Social Security has become such an essential part of retirement for so many people is that in aggregate Americans have failed to save enough. Even for those who have though, record low interest rates and uncertain market conditions have created an environment where a problematically high number of retirees risk draining their portfolio.

4) .. but Social Security may be the best fixed income you’ll ever get

John Bogle is no doubt one of the best investment managers on the planet. He founded The Vanguard Group, which manages approximately $2 trillion in assets, and is credited with the creation of the first index fund available to individual investors. In many ways, Bogle has defined what long-term investing looks like for the average person.

Despite the fact that Social Security may not be around for much longer, Bogle has suggested that “Social Security’s the greatest fixed income you’ll ever get… We’re all so transfixed with the movements of the stock market, but that has nothing to do with your retirement. It doesn’t matter what the stock market is worth as long as the income keeps coming from dividends. In the long run, focus on the dividend stream, and focus on the fact that Social Security will keep coming.”

Bogle may assume that Washington will get its act together and figure out how to fix the system before it breaks.

5) Crashes hurt, but stocks are still your friend

The 2008 financial crisis forced a small minority of people saving for retirement out of equities and into safer but slower-growing investments like bonds. Unfortunately, those who left the markets in the wake of the crisis have lost out on what can only be considered a historic run.

“There is a valuable lesson to be learned from the minority of pre-retirees who abandoned equities altogether and experienced significantly less progress,” James M. MacDonald, president of Workplace Investing at Fidelity Investments, told the AARP. “It’s important to continually remind employees that sticking to [their] savings philosophy may not always reward in the short-term but may over the long-term.”

According to the AARP, the average balance of a 401K plan for those older than 55 has doubled since 2009 to $255,000. The analysis, conducted by Fidelity Investments, included 12 million participants and found that the majority of the gains can be attributed to increases in the value of stocks. This compares to an increase of just 25.9 percent in the 401K plans for those who got out of equities in 2008 and 2009 and have not rebalanced since.

6) Bonds may not be the safe haven they once were

An analysis done by Alliance Bertstein for the New York Times showed that thanks to record low interest rates, even retirees with a portfolio of $1 million — something only 1 in 10 have access to — invested in bonds have a 72 percent chance of running out of money before they die. This, of course, turns the traditional advice of investing more heavily in bonds as you near retirement on its head.

7) There are options

One increasingly popular option is to continue working. There are a number of serious proposals that suggest the retirement age should be increased anyways, and surveys show that more and more Americans see themselves working during retirement either out of necessity or out of a desire to stay active. There are a few clear financial and social advantages to this option. Not only will whatever income you are earning from your portfolio and Social Security be augmented, but you remain a participant in the economy.

Underwhelmed by the survey of options listed above, a growing number of retirees have taken the idea of working through retirement one step further. They’ve decided to take their savings and use it to buy a business.

Owning and operating a business after a long career may not be some people’s idea of an ideal retirement, but for others there are only so many cocktails to be had on so many beaches. As Meg Schmitz, an independent franchise consultant, would ask people considering what to do with their golden years: “Does the word ‘retirement’ even resonate with you anymore?” 

Congressional Bill : The Autofill Act of 2013 would create a voluntary tax filing program that would allow individuals to log in to a IRS website and download a tax form that is automatically populated with information the IRS already collects from employers, the Social Security Administration and financial institutions.

 H.R. 1532 — The Autofill Act of 2013 would create a voluntary tax filing program that would allow individuals to log in to a secure IRS website and download a tax form that is automatically populated with information the IRS already collects from employers, the Social Security Administration and financial institutions. Filed April 12, 2013, by U.S. Reps. Bill Foster and Mike Quigley (D-Ill.). A related bill, S. 722, would implement pre-prepared returns by tax year 2018.

LIBRARY OF CONGRESS SUMMARY

The summary below was written by the Congressional Research Service, which is a nonpartisan division of the Library of Congress.

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4/12/2013--Introduced.

Autofill Act of 2013 - Amends the Internal Revenue Code to require the Secretary of the Treasury to:

(1) establish a program to allow taxpayers to download income tax forms that are populated with tax return information (e.g., wages, withholding, and self-employment income) previously reported to the Secretary for the taxable year;

(2) establish standards for data download to tax preparation software; and

(3) provide on the website of the Department of the Treasury a secure function that allows a taxpayer to download, as both a printable document file and in a form suitable for input to automatic tax preparation software, the 1040, 1040A, and 1040EZ forms that are populated with tax return information previously reported to the Secretary. Establishes deadlines for reporting tax return information to the Secretary and for making such information available for populating tax returns.

(The Actual Bill Below)

HR 1532 IH

113th CONGRESS

1st Session

H. R. 1532

To amend the Internal Revenue Code of 1986 to establish a program to populate downloadable tax forms with taxpayer return information.

IN THE HOUSE OF REPRESENTATIVES

April 12, 2013

Mr. FOSTER (for himself and Mr. QUIGLEY) introduced the following bill; which was referred to the Committee on Ways and Means

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A BILL

To amend the Internal Revenue Code of 1986 to establish a program to populate downloadable tax forms with taxpayer return information.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Autofill Act of 2013’.

SEC. 2. AUTOMATED PARTIALLY PRE-POPULATED TAX RETURNS.

(a) In General- Chapter 77 of the Internal Revenue Code of 1986 (relating to miscellaneous provisions) is amended by adding at the end the following new section:

‘SEC. 7529. AUTOMATED PARTIALLY PRE-POPULATED TAX RETURNS.

‘(a) Establishment of Program- The Secretary shall establish a program under which taxpayers may download forms relating to the individual income tax returns that are populated with return information reported to the Secretary under chapter 61 and reported to the Secretary pursuant to section 232 of the Social Security Act.
‘(b) Requirements Relating to Information-
‘(1) DEADLINE FOR MAKING INFORMATION AVAILABLE- The Secretary shall make such return information available under the program established under subsection (a) not later than 15 days after the Secretary receives such information.
‘(2) FORMAT OF INFORMATION MADE AVAILABLE- Return information shall be made available under the program established under subsection (a) in both a printable document file suitable for manual completion and filing and in a computer-readable form suitable for use by automated tax preparation software.
‘(c) Autofill Service Deadlines-
‘(1) STANDARDS- Not later than October 31, 2013, the Secretary shall--
‘(A) establish standards for data download to tax preparation software, and
‘(B) provide a demonstration server for downloading the partially populated printable document file.
‘(2) TAX FORMS- Not later than February 15, 2014, and annually thereafter, the Secretary shall provide on the Secretary’s Web site a secure function that allows a taxpayer to download, as both a printable document file and in a form suitable for input to automatic tax preparation software, the 1040, 1040A, and 1040EZ forms that are populated with information with respect to the taxpayer that is reported under chapter 61 or any other provision of this title under which reporting of information is required.
‘(d) Taxpayer Responsibility- Nothing in this section shall be construed to absolve the taxpayer from full responsibility for the accuracy or completeness of his return of tax.
‘(e) Disclaimer- Before any form can be downloaded under the program established under subsection (a), taxpayer must acknowledge that--
‘(1) the taxpayer is responsible for the accuracy of his return, and
‘(2) all information provided in the downloadable form under such program needs to be verified.
‘(f) Information Provided for Wage and Self-employment Income- For purposes of subsection (a)--
‘(1) INFORMATION RELATED TO CALENDAR YEAR 2013- In the case of information relating to wages paid, and amounts of self-employment income, for calendar year 2013 required to be provided to the Commissioner of Social Security under section 205(c)(2)(A) of the Social Security Act (42 U.S.C. 405(c)(2)(A)), the Commissioner shall, using best efforts, make such information available to the Secretary not later than January 31, 2014.
‘(2) INFORMATION RELATED TO CALENDAR YEAR 2014 AND THEREAFTER- In the case of information relating to wages paid, and amounts of self-employment income, for any calendar year after 2013 required to be provided to the Commissioner of Social Security under section 205(c)(2)(A) of the Social Security Act (42 U.S.C. 405(c)(2)(A)), the Commissioner shall make such information available to the Secretary not later than the January 31 of the calendar year following the calendar year to which such wages and self-employment income relate.’.
(b) Filing Deadline for Information Returns- Subsection (b) of section 6071 of such Code is amended to read as follows:
‘(b) Information Returns- Returns made under part III of this subchapter shall be filed on or before January 31 of the year following the calendar year to which such returns relate. Section 6081 shall not apply to returns under such part III.’.
(c) Conforming Amendment to Social Security Act- Subparagraph (A) of section 205(c)(2) of the Social Security Act (42 U.S.C. 405(c)(2)) is amended by adding at the end the following new sentence: ‘For purposes of the preceding sentence, the Commissioner shall require that information relating to wages paid, and amounts of self-employment income, be provided to the Commissioner not later than January 31 of the year following the calendar year to which such wages and self-employment income relate.’.
(d) Clerical Amendment- The table of sections for chapter 77 of such Code is amended by adding at the end the following new item:
‘Sec. 7529. Automated partially pre-populated tax returns.’.
(e) Effective Date- The amendments made by this section shall apply to returns for taxable years beginning after December 31, 2012.