Archives for January 18, 2020

Social Security provides a guaranteed source of income in retirement, but what many don’t realize is that you’re not guaranteed to keep it all. Some retirees owe taxes on their Social Security benefits, but it all depends on your income. Here’s a closer look at how your retirement fund withdrawals play into all of this.

It’s all about combined income

Your combined income determines whether you owe taxes on your Social Security benefits. This is defined as your adjusted gross income (AGI) plus nontaxable interest plus half of your annual Social Security benefits.

Your AGI is your income for the year minus certain tax deductions, like self-employment taxes and contributions to tax-deferred retirement accounts. Money you withdraw from tax-deferred retirement accounts, like most 401(k)s and traditional IRAs, does count toward your AGI, but Roth retirement account withdrawals do not. You already paid taxes on your initial contributions to these accounts and the money grows tax-free afterward. You shouldn’t have to worry about nontaxable interest in your combined income calculation unless you have tax-exempt bond funds in your portfolio.

So a single individual with an AGI of $20,000 with $1,000 in non-taxable interest and a $12,000 annual Social Security benefit would have a combined income of $27,000 ($20,000 + $1,000 + $6,000 = $27,000). 

Single adults with a combined income exceeding $25,000 and married couples filing jointly with a combined income exceeding $32,000 could pay taxes on up to 50% of their Social Security benefits. Single adults with a combined income greater than $34,000 and married couples filing jointly with a combined income greater than $44,000 could owe taxes on up to 85% of their benefits.

But just because you could owe taxes on 50% or 85% of your benefits doesn’t mean you’ll actually pay this much. The Social Security benefit tax formula is beyond the scope of this article, but here’s a more detailed guide explaining how it works. You can use these formulas to calculate how much you’ll actually owe.

How to avoid Social Security benefit taxes

Most retirees’ only sources of income are Social Security and withdrawals from their retirement accounts. Being smart with your retirement account withdrawals can reduce your odds of owing taxes on your Social Security benefits. If you know you’re approaching one of the taxation thresholds mentioned above, try to avoid withdrawing more money from your tax-deferred retirement accounts for the rest of the year. You can live off of Roth retirement savings if you have any, because these don’t affect your tax bill at all. Or you can just cut back your spending temporarily. Think carefully before doing this, though. Avoiding Social Security benefit tax may not be worth penny-pinching for several months. You might just be better off paying the taxes and spending your money as you choose.

Delaying Social Security benefits could also help reduce your risk of owing taxes on your benefits. The soonest you can sign up for Social Security is 62, but you must wait to claim benefits until your full retirement age (FRA) if you want your full scheduled benefit based on your work record. Starting early will cost you. You’ll only get 70% of your scheduled benefit per check if you begin benefits at 62 and have an FRA of 67 or 75% if your FRA is 66. You can also delay benefits past your FRA and your checks will keep increasing until you reach the maximum benefit at 70. This is 124% of your scheduled benefit per check if your FRA is 67 or 132% if your FRA is 66.

You can’t owe taxes on Social Security benefits if you’re not receiving any. Delaying benefits until your FRA or beyond will increase the size of your checks so that they’ll go further in retirement. This helps reduce how much you must withdraw from your retirement savings each month, which will in turn lower your AGI. Only half of your Social Security benefits count toward your combined income calculation, so while larger checks will increase your combined income somewhat, your lower AGI will partially or completely counteract this.

You might not be able to get around Social Security benefit taxes and still make ends meet. But it still pays to understand how all of this works so that you don’t run into any surprises come tax time. If you’re not retired or claiming Social Security benefits yet, start planning out when you’re going to start Social Security and consider stashing some money in Roth accounts to reduce your risk of Social Security benefit taxes when you are ready to retire.

By the time your 50s roll around, you should be well on your way to building a retirement nest egg. But new data from TD Ameritrade indicates that older Americans are pretty behind on retirement savings, and those who don’t improve risk struggling financially once their careers end.

An estimated 53% of Americans aged 50 to 59 have under $100,000 in retirement savings. And 37% have less than $50,000 socked away for the future. Meanwhile, as a good rule of thumb, it’s smart to end your career with 10 times your final salary socked away in an IRA or 401(k). The average annual salary today is $51,960, according to the Bureau of Labor Statistics, which means that if you’re a typical earner, you’ll need roughly $520,000 to live comfortably as a senior. If you’re already in your 50s with less than one-fifth that amount, consider this your wake-up call to start making changes — immediately.

Ramp up your savings

Social Security provides the average senior today with about $18,000 of annual income. Clearly, that’s not a whole lot to live on. If you don’t have an incoming pension to look forward to (which is the case for many older workers), then you’ll need savings of your own to bridge the gap between what your senior expenses look like and what your Social Security benefits pay you, keeping in mind that most seniors need roughly 70% to 80% of their former income to live comfortably on a year-to-year basis.

That’s why it pays to try to sock away 10 times your ending salary for retirement. If you close out your career with $520,000, and withdraw from your savings at an annual rate of 4%, which many financial experts recommend, you’ll have roughly another $21,000 a year coming your way to pay your senior living costs. But if you retire with, say, $150,000, you’ll only have $6,000 of annual income to add to your Social Security payments, and that makes for a less comforting picture.

The solution? Ramp up on savings while you can. That could mean cutting back on expenses drastically to free up cash for your IRA or 401(k), getting a second job to boost your savings, extending your career, or all three.

Imagine you’re 55 with $80,000 in retirement savings. If you manage to make serious lifestyle adjustments and/or boost your income with a second job so you’re able to start setting aside $1,000 a month for retirement, and you continue doing so for 15 years, you’ll wind up with just over $520,000 if your investment generate an average annual 7% return during that time, which is doable when you load up on stocks in your IRA or 401(k).

Even if you don’t manage to get to $520,000, or thereabouts, the more you’re able to save between now and retirement, the better, so make an effort to boost your savings rate even by $1,000 or so per year. The higher your nest egg going into retirement, the more long-term financial security you’ll buy yourself.

Looking for a six-figure job that makes you happy in 2020, but is also increasing in demand?

Front-end engineers had an average overall job satisfaction score of 3.9 on Glassdoor, making theirs the No. 1 profession for 2020 in terms of job satisfaction, salary and job openings, according to a new ranking, knocking data scientists off the No 1 spot. Front-end engineers develop the code that enhances a customer’s or user’s experience, and essentially create, install and test the user interface elements of a website.

As unemployment hovers at a 50-year low, there are more available professions that give people meaningful, in-demand work that pays well and offers opportunity for advancement. The job market may be less robust in 2020: The U.S. created 145,000 jobs in December as hiring slows and wage growth softens.

So why did front-end engineers top the list? Amanda Stansell, senior economic research analyst at Glassdoor, said there’s more competition between tech and non-tech companies for these roles. Google GOOG, +1.98%, Aetna US:AET and Microsoft MSFT, +0.56%  typically hire front-end engineers, but they are also increasingly in demand by any company that relies on a website for its business.

The “Best Jobs in America in 2020” ranking listed java developer at No. 2, followed by data scientist (which previously held the No. 1 spot), product manager, devops engineer (which oversees code releases and the testing of new programs), data engineer, software engineer, speech language pathologist, strategy manager and business development manager.

“Because of the stiff competition to recruit and retain this talent, more companies are investing in their employees’ experiences at work,” Stansell said. “As these companies look to develop and maintain their online experience for customers, they’re willing to offer competitive benefits and perks to keep tech workers, including front-end engineers, happy in their day-to-day jobs.”

A separate report by U.S. News & World Report that looked at work-life balance, salary and career development lists software developer as the No. 1 job, which has a median annual salary of $103,620. It was followed by a slew of jobs in the medical profession, including dentist and physician assistant, orthodontist and nurse practitioner.

Wages and salary now make up less than three-quarters of employees’ total compensation, according to an analysis of Bureau of Labor Statistics data by Bank of America BAC, -0.03%  Merrill Lynch. Meanwhile, more companies are offering “wellness programs” to help workers improve their fitness and health.

In its own research, Glassdoor previously looked at perks that lead to an increase in employee satisfaction. The analysis concluded that workplace health insurance was the No. 1 perk, followed by generous paid vacation time and paid time off, pension plans, 401(k) plans, retirement plans, dental insurance and maternity and paternity leave.

Access to career-momentum opportunities in the workplace is one of the strongest predictors of employee satisfaction, based on millions of reviews left on Glassdoor, in addition to culture and values and quality senior leadership, according to Glassdoor. Tech, finance, health-care and marketing roles all have strong career paths, the site said.

For those seeking a six-figure job with no experience necessary, Jeff Gillis and Mike Simpson, who operate the career and resume advice site TheInterviewGuys.com, said pharmacists came out at No. 1. They analyzed the Bureau of Labor Statistics’ Occupational Requirements Survey, which gives information on factors including physical demands and cognitive requirements.

Approximately 64% of pharmacist jobs require no previous work experience in that field, and have a median salary of $126,000 per year, more than twice the national average. Some 60% of nurse practitioners, who have a median salary of $114,000 per year, also require no work experience, according to the analysis by Gillis and Simpson and the latest Bureau of Labor Statistics figures. (Some such jobs could still come with educational requirements, they added.)

Here are the top 5 jobs on Glassdoor’s list:

1. Front-end engineer

Job Satisfaction Rating: 3.9/5

Number of job openings: 13,122

Median base salary: $105,240

2. Java developer

Job satisfaction rating: 3.9/5

Number of job openings: 16,136

Median base salary: $83,589

3. Data scientist

Job satisfaction rating: 4/5

Number of job openings: 6,542

Median base salary: $107,801

4. Product manager

Job satisfaction rating: 3.8/5

Number of Job Openings: 12,173

Median base salary: $117,713

5. Devops engineer

Job satisfaction rating: 3.9/5

Number of job openings: 6,603

Median base salary: $107,310

A decade-long bull market and continued economic growth have contributed to a tighter labor market in 2019. The Dow Jones Industrial Average DJIA, +0.17%  is up 20% over the last 12 months, while the S&P 500 SPX, +0.39%  is up 25.8%. A recession is more of a risk in 2021 than next year, according to a recent survey of the National Association for Business Economics.

Software developers, physical therapists and physician assistants crop up frequently among the highest-paid and fastest-growing jobs in every U.S. state, according to a separate analysis by CareerBuilder, a jobs and careers site. The site analyzed government data to project the careers most likely to be lucrative and in demand. Most of these jobs require some level of college education.

Home-health and personal-care aides were among the lowest paid, fastest-growing in every U.S. state and Washington, D.C. Only one state (Michigan) didn’t list home-health aide or personal-care aide as among the lowest paid, most in-demand jobs. (It did, however, list physical-therapy aides, in addition to nonfarm animal caretakers, and meat, poultry and fish cutters and trimmers.)

During tax filing season, which will start any day now, it’s not unusual to learn that you botched a previously filed return. Been there, done that. Say you just figured out that you missed some tax-saving deductions and credits on your 2018 Form 1040, which you filed only a little while ago. You discover the error of your ways while reviewing your 2019 tax situation. Happens all the time.

Or you just found out that recently enacted “tax extenders” legislation retroactively resurrected a bunch of previously expired federal income tax breaks that can now be claimed for 2018. Now you need to file an amended 2018 return to cash in on one or more of those resurrected breaks. (See the sidebar below for more information.)

Whatever your reason for needing to file an amended return, here’s the drill.

Amended return basics

You file an amended individual federal income tax return using Form 1040X (Amended U.S. Individual Income Tax Return). While this might sound like a daunting task, it’s actually pretty easy in most cases.

Don’t file another Form 1040

The very first thing to know is that you should not attempt to correct the situation by filing another original return using Form 1040. That will just confuse the IRS and cause headaches for you. Instead, be sure to file a Form 1040X, even if you’re amending a 2018 return that you filed on Oct. 15, 2019 (the deadline for filing if you got an extension), which may seem like yesterday.

Refund situation

If amending your return will produce a tax refund, the deadline for filing Form 1040X is generally the later of: (1) three years after the original return for the year in question was filed or (2) two years after the tax for that year was paid. In most cases, the three-year rule is the one to focus on. If you filed your original Form 1040 before the April 15 due date, you’re considered to have filed the return on April 15 for purposes of the three-year rule. However if you extended the return to October 15, you’re considered to have filed on the earlier of the actual filing date or the October 15 extended due date.

For example, say you filed your 2016 Form 1040 on 3/1/17 and paid the tax due on that date. After a conversation with a golf buddy at the 19th hole, you realize you should have itemized deductions instead of taking the standard deduction. Based on the three-year rule, you have until 4/15/20 to file an amended 2016 return, on Form 1040X, to claim your refund. On the other hand, if you extended your 2016 return to 10/15/17 and then filed before the extended deadline on 9/1/17, the three-year period for filing an amended return starts running on 9/1/17.

Key Point: You need not worry about the deadline rule if you’ll be filing an amended 2018 return to collect one or more of the resurrected tax breaks listed in the sidebar below. You have plenty of time to get the job done. Naturally, however, the sooner you file, the sooner you’ll get your refund. So don’t wait.

Tax due situation

This is a trickier scenario. If you now realize you understated your tax liability on the original Form 1040, you’re expected to file an amended return and pay the additional tax. If you don’t and the IRS discovers the error, the government will bill you for: (1) the unpaid tax amount plus interest (currently at a 5% annual rate), (2) the additional failure-to-pay interest charge penalty (at a 6% annual rate), and (3) maybe other penalties too. But the IRS can waive penalties if you show you had a reasonable cause for the underpayment. For example, you might have reasonable cause if you relied in incorrect advice from a paid tax professional or received incorrect information from a third party (like an erroneous Schedule K-1 from a partnership or S corporation investment).

The sooner you file an amended return on Form 1040X and pay the tax due, the sooner you’ll stop racking up interest and the failure-to-pay penalty.

While you probably know the IRS doesn’t audit very many returns these days, you’re highly likely to get caught if your Form 1040 omitted income that was automatically reported to the IRS on an information return, such as Form W-2 or Form 1099. Also understand this: the IRS generally has three years after the date the original return was filed to discover errors and omissions and assess additional tax, interest, and penalties. This is the so-called statute of limitations rule. However, a longer six-year statute of limitations rule applies if the original return understated gross income by over 25%. There’s no statute of limitations on a fraudulent return.

Bottom line: If the original return understated your tax bill by only a relatively small amount, you should probably file Form 1040X and pay the Feds if for no other reason than to clear your conscience. But if there was a large understatement, this is a can of worms you don’t want to open before understanding all the consequences (including the possibility that your friendly state income tax collector will get into the act). Consider hiring a tax pro with experience in dealing with past-due tax problems. Hopefully, you can get off the hook with minimal or no penalties. But be prepared to pay at least the past-due tax plus interest.

Form 1040X in a nutshell

Assuming there’s no big past-due tax problem, you can probably prepare Form 1040X yourself if you take your time and carefully follow the instructions. The form is only two pages long. Basically, you enter numbers from your original Form 1040 in column A of Form 1040X, any changes to original amounts in column B, and the corrected amounts in column C. You then explain each change in the space provided on page 2 of Form 1040X.

Be sure to use the current version of Form 1040X, which you can print out from the IRS website at www.irs.gov. (Right now, the current version is dated January 2019.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2017, you’ll need to attach a corrected 2017 version of Schedule A (Itemized Deductions). The IRS website has prior-year tax forms too. Click on Forms & Instructions and then click on Find prior years forms, instructions & publications).

The bottom line

In 2020, we will probably see more amended returns filed than ever before, thanks to the retroactive resurrection of the 2018 tax breaks listed in the sidebar below and retroactive Kiddie Tax changes also listed in the sidebar. Feel free to join in the amended return filing fun.You now know how, but you might want to hire a tax pro if there are significant dollars at stake.

Sidebar: Tax breaks retroactively resurrected for 2018

“Tax extenders” legislation enacted in late December reinstated the following individual tax breaks for 2018.