· In just a few short days, the comment period will close on a controversial proposal proffered by the Department of Labor (DOL) which would require virtually all financial advisors to adhere to a fiduciary standard of care when giving clients or prospective clients advice on their retirement plans, including IRAs. Ironically, most Americans believe that the advice that their financial advisor provides is already held to this high standard. In fact, the vast majority of advisors are NOT held to this standard. We are proud of the fact that ProVise has been held to this standard since the late 80's for those who contracted with us for financial planning and/or investment management.
· In case you missed the news, Federal Reserve Chair Janet Yellen all but assured a rate increase later this year in a speech to the City Club of Cleveland. Here is the direct quote: “Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Although she went on to acknowledge that the economy still has a way to go in the recovery, she gave the clearest evidence yet of the Fed’s likelihood of starting on a path of raising short term rates. Remember, the Fed only controls short term rates. Long term rates are set by the bond market. What are the implications of this move? First, as much as borrowers have come to enjoy these low rates, they have been painful for those investing for income from investments like CDs, fixed annuities, bonds, etc. Savers have been punished but can look forward to greater income. If you expect to live in your home for more than five years and have not refinanced, now may be the time to take action. For those who have a home equity loan at a low interest rate and like the low payments, especially if they are interest only, do not be seduced into ignoring refinancing. Your rate and payments may be low now, but as short term rates go up, so will your payments. Let’s take the example of the couple who borrowed $250,000 on their home 10 years ago at a 5% rate of interest over 30 years and have a home equity loan of $100,000 at 1.5% and are making interest only payments to keep the “cost” down. The monthly payment on the first mortgage is $1,342 and the payment on the home equity loan is $125 monthly for a total of $1,467. If the interest rate on the home equity loan goes to 3%, the payments will double to $250 increasing the monthly cost to $1,592 without making any principal payments on the home equity loan. However, if the couple refinances the current balance of approximately $204,000 on the first mortgage and the home equity of $100,000 at a 4% rate then the monthly payments will be $1,451 per month, slightly less than what they are paying now, and the payments will be fixed for another 30 years.
· In the spring of this year, Congress passed and the President signed a law regarding Medicare, which can increase premiums for many senior citizens. Essentially this law helped doctors by permanently ending looming reimbursement cutbacks. The only way to do that was to increase premiums. Although the premium increases do not go into effect until 2018, it will be based on one's income in 2016. Thus, rather than delaying income from 2015 to 2016, it might make sense to take the income this year.
Exactly what are the details? Part A (hospital) of Medicare is free, but there are deductibles that apply. Currently, seniors with higher incomes pay a surcharge for Medicare for Part B (doctors) and Part D (drugs) when their modified adjusted gross income (MAGI) exceeds $85,000 for singles and $170,000 for couples. MAGI equals the adjusted gross income (AGI) plus tax exempt interest, EE bond interest if used to pay for a college education, and any foreign income not included in AGI. There are multiple levels as income goes up and for this year the top level is $214,000 for singles and $428,000 for married couples. Although these numbers are used in 2015, it applies on one's income from 2013.
For all the talk from the politicians about the middle class, this law is aimed directly at the upper middle class income earner. Those below a MAGI of $133,500 (singles) and those above $214,000 are not affected. For couples, those below $267,000 and those above $428,000 also are unaffected. Medicare premiums for those in the middle will increase about $1,000 per year or about $82 per month for singles and double this amount for couples. Thus, moving income to 2015 and deductions and losses to 2016 will be helpful for those who potentially face this large increase in Medicare premiums.
· There is good and bad news on the horizon for those who have high deductible health insurance plans and a corresponding Health Savings Account (HSA). In 2016, the maximum contribution to a HSA will increase to $6,750 for those with family coverage (good news) and remain at $3,350 for singles (bad news). Those who are 50 or older can add an extra $1,000 per year (good news). However, the out-of-pocket costs will increase to $6,550 for singles and $13,100 for families (bad news). If you have not considered a high deductible plan for your health coverage, it might be well worth exploring.
· Often when a married individual dies the estate often does not file a Form 706 which is used to report any estate taxes owed since the first $5.43 million of an estate is exempt from tax. When the estate tax laws were modified several years ago, the concept of "portability" was introduced. If the first spouse to die doesn't use all of the estate tax exemption then whatever is left over can be used by the surviving spouse in most instances. However, in order to use the portability feature, a Form 706 must be filed within nine months of death. Failing to do so negates the ability to use this feature when the second spouse dies. Even in small estates, it may be worthwhile to file the 706. You never know who might one day win the lottery.
RAY, ERIC, KIM, BRUCE, LOU, NANCY, TINA, JON, STEVE, DOROTHY and PAUL
© 7/15/15 ProVise Management Group, LLC
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