Lehigh Valley Woman – Finance Section – February/March 2012

by Laurie A. Siebert, CPA, CFP®, AEP® Vice President, Valley National Financial Advisors

Now is a good time of year to evaluate life changes, how they may affect you, and how to plan for them. People are gathering the documentation necessary to prepare their tax returns. We typically just do the same thing year after year. Take advantage of this time and try to understand not only your income tax, but also how “life changes” may impact your financial life.

Understanding your tax return helps you plan for your financial future. What does your tax return tell you about life and, then, what might be changing?

• Marriage

• Children

• Single parenting

• Contemplation of retirement

• Retirement • Divorce • Death of a spouse

Filing status says so much about you

The filing status on your tax return impacts the rules that may apply to you. There are different tax rates and deductions for single filers, married filers, separated filers, single parents with dependent children, and widows with dependent children. Confirm that you are using the correct filing status now. If you have children, know who is entitled to claim them as a dependent and what other related tax benefits might apply. Also look on page one of the return for other life changes that affect income such as retirement benefits.

Contemplating retirement? Wait…

If you and/or your spouse are contemplating retirement, pause before applying for Social Security benefits. You may want to maximize benefits by delaying Social Security by choosing various payment options. There are earned benefits, spousal benefits and survivor benefits. You may not have options

if you collect before Full Retirement Age. In addition, some of your Social Security benefits may be taxable if you have too much other income. Or, some of your benefits may have to be returned if you collect early AND continue to work before full retirement age. Think before you act, and consider all factors as they relate to your personal situation.

Pension elections

If your employer provides a pension benefit, ask for an il- lustration of the various pay- ment options that are avail- able to you during your life and then to your survivors. You need to understand your options prior to formalizing because you cannot change your mind once made.

Typically, there are options for your single life where the benefit stops when you die. Then there are various survivor benefits depending on the plan. You should know the options for cash flow and income tax planning for you and your survivors.

Getting divorced or are divorced?

When working with your divorce attorney, work through the after-tax value of what both parties are receiving, not just the “split” of assets. If they get the house and you get the IRA, what’s the income tax consequence on each? Consider what the cost to you will be to get to that asset if you need it. If you are the divorced spouse entitled to share in your spouse’s 401k retirement benefits, your lawyer will discuss a Qualified Domestic Rela- tions Order (QDRO) with you. There are advantages to this that do not apply to IRAs whereby a distribution from a QDRO pre-age 59 1?2 does not have the 10 percent early withdrawal penalty. This can make a big difference to the divorced spouse needing to use those funds for living expenses. CAUTION: The distribution will still be subject to income tax reporting.

Death of a spouse

No one wants to face this one but understanding what happens to your financial life can make the difference in how you manage.  A tax filing status change from Married to Single will change your tax rate schedule and may increase the taxes due. In addition, Social Security benefits will be reduced from two recipients to one if both were collecting. Any pension may be cut or suspended. You might have to adjust down your spending earlier rather than later.

In summary

Be proactive, not reactive. Anticipate life changes and make the best of your financial choices.