2012 Inflation Adjustments Issued

The IRS recently issued inflation-adjusted numbers for tax year 2012.  The increases were greater than in the previous two years, when inflation was lower.

The value of each personal and dependent exemption will be $3,800, up $100 from 2011.  The new standard deduction is $11,900 for married couples filing a joint return, up $300.  For singles and married individuals filing separately, the standard deduction is now $5,950, up $150.  For heads of household, the deduction is up $200 to $8,700.

The $13,000 annual gift exclusion is unchanged, although the estate and gift lifetime exclusion for decedents dying during 2012 goes up from $5 million to $5.12 million.

The contribution limit for employees who participate in section 401(k), 403(b) or 457(b) plans and the federal government’s Thrift Savings Plan increases by $500 to $17,000. The catch-up contribution limit under those plans for those ages 50 and over is unchanged at $5,500.

New figures have also been established for many other items including the child tax credit, adoption assistance, medical savings accounts, American opportunity and lifetime learning credits, and the earned income credit—40 items in all.

For the official IRS notice,  click here.  Details on 401(k) and Profit-Sharing Plan Contribution Limits for 2012 can be found by clicking here.  403(b) contribution limits are outlined here and 457(b) limits are listed here.

The Debt Crisis

By Susan Tillery

This country’s debt crisis, as well as the embarrassing behavior exhibited by Congress during the last few weeks, is in large part, due to our government operating with mindsets, laws and traditions that are completely outdated. The U.S. Government is not addressing the needs of our country and its citizens; instead they are stuck in a 100 year old yoke.

 It’s Time for a Complete Overhaul 

This is a great country.  However, our government leaders have not taken a long, hard look at how the government, as an organization, is serving a constantly changing country.  A for-profit entity “re-tools” itself to stay efficient, effective and relevant.  It keeps what works and abandons what does not.  It stops throwing resources at things it should never have been doing or should no longer do.  Please don’t misunderstand; I am in no way speaking about the principles laid down by our Forefathers; they are unchangeable.  I am referring to the fact that the U.S. Government is operating with a tax code that is almost 100 years old. Our country has changed dramatically since Congress was given the right to impose a Federal income tax on February 3, 1913.  Any for- profit entity that existed in 1913 and did not drastically change how they operated over the last 100 years is no longer around. Why are we allowing our government to operate the same way it did 100 years ago?

A complete overhaul is needed; starting with the income tax system. A proposal has been made to abandon the Income Tax, as well as the IRS, and utilize the Fair Tax.  The Fair Tax is essentially a National Sales tax. I believe this proposal needs to be seriously considered and will be a great start to turning this country around.

How do you feel about the Fair Tax? If you don’t have enough information to respond, obtain a copy of “The Fair Tax Book” by Neal Boortz and John Linder. It’s an excellent read!

It’s Time to Revisit Whole Life Insurance

By Thomas N. Tillery

Much of the information available on whole life insurance is fabricated or, at best, anecdotal. From the advocates of A.L.Williams (Primerica Financial Services) who advise you to “buy term and invest the rest” to the pundits of talk radio who claim premiums are too expensive, whole life insurance has become the straw dog of what is wrong with financial services today—until recently.

 Whole Life Insurance

During the Great Depression, life insurance companies provided a much-needed source of cash for individuals, businesses, and even banks because these companies were considered to be very important to the business community. For example, from 1930–39, the Metropolitan Life Insurance Company provided life insurance benefits, including dividends, policy loans, and death benefits, in excess of $5 billion. This same financial strength recently surfaced during 2008 when, for example, the Massachusetts Mutual Life Insurance Company paid $1.38 billion in dividends, and the Northwestern Mutual Life Insurance Company paid $5.05 billion in dividends. If designed correctly, whole life insurance products may act as the cornerstone of a comprehensive financial plan. In addition to providing survivor benefits for risk management planning, whole life insurance also provides opportunities for asset protection; income tax planning; and other current economic benefits, including retirement supplement, emergency reserves, and college funding supplement.

Collective Investment Trusts and My Retirement

Tom -

Just got a letter in the mail that, effective 27 Jun 2011, “the company’s Target Date Funds will transition from mutual funds to collective trusts. The collective trusts will offer you the same investment strategy and risk, but the overall expenses will be lower – which is where participants save! As a result of this change the expense ratio will change.”

Exactly what’s changing here? How should I feel about this – Happy? Mad? Indifferent?

Great question!

You currently own a target date retirement fund. The target date retirement fund is a “hybrid” mutual fund which automatically resets its asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame, e.g. a 2040 fund. Managers of target date funds typically use time horizon rather than risk tolerance or investment objective to determine the fund’s asset allocation. Typically, the further out the target date, the more the manager invests in stock. As the target date fund approaches its “target date,” the manager will reduce the percent invested in stock based upon a pre-determined “glide path” or allocation.

A collective trust is not a mutual fund. Collective trusts are pooled investment vehicles and unlike mutual funds, they may only be offered by a bank or a trust company. Additionally, collective trusts are only available to qualified plans (your 401(k)) and certain governmental plans used to supplement retirement. As such they are not available to retail investors.

Other items of note regarding collective trusts: a collective trust has a fiduciary structure (bank or a trust company), and by definition must rise to a higher administrative standard than a mutual fund; because the trust is not available to retail customers, their fees do tend to be lower than that of a mutual fund; a collective trust has the ability to invest in alternative or non-correlated asset classes.

My vote would be for happy.

Huzzah!

Tom