Archive for February, 2014:

protect your assets

Written on February 28th, 2014 by Jamesno shouts

The local NAPFA chapter hosted a quarterly workshop on Property and Casualty Insurance recently with Ashley Healy of Yates Insurance.  Now before you roll your eyes and stop reading, the info below may help you big time one day.  Ashley shared with us some common things to look for in a policy and some basic rules for what a policy will and won’t cover.

P&C Insurance is one of those areas that you don’t typically think about that often.  Us planners jump up and down telling clients to make sure their liability limits are sufficient, but honestly no one really thinks much about it.  That is until you or someone you know is in an accident, has a major claim at their house or is sued.

Understanding your homeowners policy, auto policy and umbrella coverage can help you and your insurance agent figure out the right coverage for your situation:

  • Ever notice the codes beside your Home Owners insurance?  HO3 stands for Named Peril and HO5 stands for All Risk.  HO5 is typically the type of coverage you want.
  • Guaranteed vs. Replacement  Cost on a homeowners policy:  The guaranteed coverage will cover the cost to rebuild no matter what, the replacement cost has a fixed amount and usually a rider up to 20% additional.
  • What does standard Home owners insurance not cover:   Floods, Earthquakes, Maintenance Damage, Sewer Backup, termites or squirrel damage.
  • Mold:  many policies that cover have a very low dollar amount for mold.  It is typically buried low on the list of coverage, so be aware how much your policy covers if anything.
  • As for liability limits on your homeowners policy:  strive for the highest you can get which is typically $500k.
  • When to claim:  be cognizant that the insurance company keeps track of your claim history.  You should not file a claim for every little item that comes up.  For the insurance company it isn’t the size of the claim but frequency.  After the 3rd claim they may cancel you.


This was an eye opener for me.  The state minimum coverage in Georgia is $25k.  That means that if someone hits you and has only the state minimum coverage they are only required to pay out $25k, if your $35k car is totaled then your insurance company has to cover the rest through your uninsured motorist coverage.  So how many of you have taken a look at your Uninsured Motorist Coverage limits lately?  If someone hits you and you end up in the hospital, your bills could be very high.  Better make sure your Uninsured Motorist limits are maxed:  $250k each person / $500k each accident / $100k medical payments.

Lastly the Personal Umbrella coverage:

This is excess liability insurance that sits on top of your home/auto policy  Should you be sued this will kick in once those policy limits are met.  One interesting thing we learned is that some Umbrella policies will actually include Excess Uninsured Motorist Coverage to protect “you” above and beyond the limits mentioned above.

As for deductibles on both Home and Auto, the takeaway was to raise them high enough that it makes a substantial difference in your premium payments, but really take a look at how much savings you get.  There are points that raising your deductible on your homeowners from $2500 to $10,000 would not make sense as the premium savings doesn’t offset the exposure.  The idea is to talk with your agent and find the best level to suit your needs.


How to get Audited!

Written on February 16th, 2014 by Jamesno shouts

In the spirit of tax season, what better topic to address than how to get audited?  I think most people cringe at the thought of any letter bearing the IRS logo in their mailbox, especially one that requests more information or a big amount of tax due!

Most IRS inquiries are correspondence audits that are done via mail and can usually be handled by just furnishing additional information.  Case in point, if you sold some stock and forgot to include that transaction on your Schedule D you might get a letter indicating that you owe income tax on the entire amount.  This was common in the past when custodians were not required to include the cost basis in the 1099′s.  (the custodian would report the sell amount only to the IRS via the 1099) The matter was usually cleared up easily by submitting proper documentation to the IRS showing your cost basis vs. sell proceeds and adjusting your return to reflect the tax due.

So what are the big items that might warrant a closer look or even a face to face meeting with an examiner?

1.  All returns are run through a computerized scoring system at the IRS called the Discriminant Inventory Function System (DIF for short) which assigns a numeric score to your return.  If you fall sufficiently outside the national average then your return gets pulled for an exam.  Items that can affect your score include:  very high charitable deductions, large casualty losses, home office deductions and travel/entertainment deductions for self employed.  There is nothing wrong with donating a large amount to charity or with any of these items, however if common sense tells you it might jump out or get flagged, consider attaching supporting or substantiating documentation.  This is so when the examiner takes a look at it they already have the additional info needed and can avoid calling you in for an audit.

2.  Tax Shelters / Tax Avoidance transactions:  first let’s clear this up, it’s okay to use all legal methods to hang onto your hard earned money.  There is nothing wrong with trying to avoid taxes.  Take your 401k for instance, that is a legal way to avoid income tax on $17,000 of income each year.  What the IRS looks for though are those items on the fringe of being legal.  Don’t kid yourself when you see a pitch for “tax shelter” strategies, the IRS has seen them all and will flag your return for closer scrutiny.  If you like that extra scrutiny and feel confident that you would prevail in an audit then great, however if the thought causes you to break out in a cold sweat then maybe you should think twice.

Certain items that may draw scrutiny are direct ownership oil/gas partnerships to get the intangible drilling cost deductions and or accelerated depreciation write-offs, depreciable real estate transactions designed strictly as tax shelters, trusts that are designed to hide personal expenses as business write-offs, etc.  Some of these are completely legal and sold as investment / tax strategies, the important thing is just make sure you are completely comfortable with the legitimacy of the strategy.  The IRS really wants to understand your “at-risk” investment amount to see if your write-off is proportional.

3.  Excessive rounding on expenses:  this one is more for the self-employed folks, but if all your numbers are rounded to whole numbers that may get some extra scrutiny.

4.   Excessive credits:  Credits are a dollar for dollar reduction in tax owed and some are even paid if you don’t owe any tax (called a refundable credit)  the Earned Income Credit is a biggie.

5.  Information not matching:  if your reported W2 & 1099 don’t line up with what you enter on your tax return, it will be examined.

What if you are Audited?

The important thing to remember is that if you have supporting documentation then the matter should be cleared up with little issue.  If you can’t substantiate then the audit will find that you may owe additional tax and/or penalties.   After an audit you will receive what is called the “30-day letter” explaining the results of the audit and the proposed assessment.  Along with that you will be given instructions for appealing the decision.  You have the right to appeal to the IRS Appeals Office, US Tax Court, US Court of Federal Claims and finally the US District Court.  If you feel strongly that you are correct then by all means use your right to an appeal.

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Social Security part 4: GPO surprise

Written on February 13th, 2014 by Jamesno shouts

Last week we dove into the Windfall Elimination Provision which affects workers that have both “uncovered” pension benefits from work where their pay wasn’t subject to social security withholdings and also had accrued SS benefits by working for enough years at a “covered” job that did withhold social security taxes.

For those folks that want to get a more accurate estimate of their true SS benefit here is a calculator in the Social Security website:

The other nasty surprise for these folks is something called Government Pension Offset (or GPO).  GPO affects potential spousal and survivor benefits.  For sake of this example let’s say Betty was a teacher with a “non covered” pension from a school district that opted out of social security.  Let’s say her husband Bob worked in separate industry and has accrued full social security benefits.  Typically, a spouse (Betty) would be eligible for 1/2 Bob’s full retirement benefit at her full retirement age.  However, because she has a non-covered pension that spousal benefit will be further reduced by subtracting 2/3′rds of her pension amount from it.  What that means is that Betty’s spousal SS benefit will be very small if anything.

And it get’s worse:  if Bob passed away, normally Betty would be eligible for survivors benefit = Bob’s full retirement benefit (if she was full retirement age and he waited until full retirement age to claim his benefit).  However, once again because she has a non-covered pension that survivor benefit is reduced by 2/3rds of her pension amount.  This is a nasty surprise for a surviving spouse.

What can you do in this case?  It makes sense to plan for when to take benefits.  If Bob had waited until age 70 to claim, then his benefit would be larger and although it would still be reduced when Betty gets survivor benefits, it would still be much larger than if he had started benefits at age 66.    This strategy may not work in all cases, but running a full benefits estimate on all claiming strategies can at least let a couple know ahead of time what to expect.

Social Security part 3: the teacher trap

Written on February 6th, 2014 by Jamesno shouts

When you used to receive those annual social security statements, did you ever glance down at the paragraph at the bottom that discussed the “Windfall Elimination Provision”?  Chances are that you didn’t, as not many of us read it very thoroughly.  The name is a bit misleading as most of us have not come into a “windfall” and figured it did not pertain.  In actuality this only affects a certain group of folks, but it is extremely important.

Who does it affect?

Teachers, public safety and some county, state or federal employees is who it can affect.  The rule pertains to employees that will receive a pension from work not covered by social security (ie: the employer did not withhold SS taxes).  As an example, I work with a number of educators that worked for county school systems that opted out of the social security system.  This means that neither the employee (teacher) or the employer (the school system) paid into social security.  If that teacher also had ”covered” work for a number of years where they did pay into the social security system (maybe a different employer that withheld SS taxes), the Windfall Elimination Provision will look at both their “uncovered” pension along with the accrued social security benefit on their statement and potentially reduce that SS benefit.  How this affects the retiree, is that the social security estimate that is shown on the statement may substantially overstate what their true SS benefit will be.

This affects teachers that have “covered” social security work for less than 20 years and could reduce the projected social security benefit by as much as 50%.  It’s a nasty trap if you are banking on the amount of social security shown on your statement or online via the SS website, and something to keep in mind.

For further reading:

Next post we will dive into the other surprise trap that affects the spousal / widows SS benefits of this group, called the Government Pension Offset.