$7,500 EV Tax Credit: Use It or Lose It

Claiming the $7,500 tax credit for buying an EV (electric vehicle) or hybrid vehicle may not be as easy as you think.  First, it’s a “use it or lose it credit” meaning if you do not have a federal tax liability of at least $7,500 in the year that you buy your electric vehicle, you cannot claim the full $7,500 credit and it does not carryforward to future tax years.   Normally, most individuals and business owners adopt tax strategies to reduce their tax liability but this use it or lose it EV tax credit could cause some taxpayers to do the opposite, to intentionally create a larger federal tax liability, if they think their federal tax liability will be below the $7,500 credit threshold. 

There are several other factors that you also have to consider to qualify for this EV tax credit which include:

• New income limitations for claiming the credit

• Limits on the purchase price of the car

• The type of EV / hybrid vehicles that qualify for the credit

• Inflation Reduction Act (August 2022) changes to the EV tax credit rules

• Buying an EV in 2022 vs 2023+

• Tax documents that you need to file with your tax return

• State EV tax credits that may be available

Inflation Reduction Act Changes To EV Tax Credits

On August 16, 2022, the Inflation Reduction Act was signed into law, which changed the $7,500 EV Tax Credits that were previously available. The new law expanded and limited the EV tax credits depending on your income level, what type of EV car you want, and when you plan to buy the car.   Most of the changes do not take place until 2023 and 2024, so depending on your financial situation it may be better to purchase an EV in 2022 or it may be beneficial to wait until 2023+.

$7,500 EV Tax Credit

If you purchase an electronic vehicle or hybrid that qualifies for the EV tax credit, you may be eligible to claim a tax credit of up to $7,500 in the tax year that you purchased the car.  This is the government’s way of incentivizing consumers to buy electric vehicles.   The Inflation Reduction Act also opened up a new $4,000 tax credit for used EVs.

New Income Limits for EV Tax Credits

Starting in 2023, your income (modified AGI) will need to be below the following thresholds to qualify for the federal EV tax credits on a new EV or hybrid:

• Single Filers:                                 $150,000

• Married Filing Joint:                     $300,000

• Single Head of Household:           $225,000

There are lower income thresholds to be eligible for the used EV tax credit which is as follows:

• Single Filers:                                       $75,000

• Married Filing Joint:                        $150,000

• Single Head of Household:           $112,500

Before the passage of the Income Reduction Act, there were no income limitations to claim the $7,500 Tax Credit.  Taxpayers with incomes level above the new thresholds may have an incentive to purchase their new EV before December 31, 2022, before the income limitations take effect in 2023.

Restriction on EV Cars That Qualify

Not all EV or hybrid vehicles will qualify for the EV tax credit. The passage of the Inflation Reduction Act made several changes in this category. 

Removal of the Manufacturers Cap

On the positive side, Tesla and GM cars will once again be eligible for the EV tax credit.  Under the old EV tax credit rules, once a car manufacturer sold over 200,000 EVs, vehicles made by that manufacturer were no longer eligible for the $7,500 tax credit.  The new legislation that just passed eliminated those caps making Tesla, GM, and Toyota vehicles once again eligible for the credit.   The removal of the cap does not take place until January 1, 2023.

Purchase Price Limit

Adding restrictions, the Inflation Reduction Act introduced a cap on the purchase price of new EVs and hybrids that qualify for the $7,500 EV tax credit. The limit on the manufacturer’s suggested retail price is as follows:

• Sedans:                              $55,000

• SUV / Trucks / Vans:       $80,000

If the MSRP is above those prices, the vehicle no longer qualified for the EV tax credit.

Assembly & Battery Requirements

Another change was made to the EV tax credit under the new legislation that will most likely limit the number of vehicles that are eligible for the credit. The new law introduced a final assembly and battery component requirement. First, to be eligible for the credit, the final assembly of the vehicle needs to take place in North America. Second, the battery used to power the vehicle must be made up of key materials and consist of components that are either manufactured or assembled in North America.

Leases Do Not Qualify

If you lease a car, that does not qualify toward the EV tax credit because you technically do not own the vehicle, the manufacturer does. You have to buy the vehicle to be eligible for the $7,500 EV tax credit.

Are You Eligible For The EV Tax Credit?

Bringing everything together, starting in 2023, to determine whether or not you will be eligible for the $7,500 EV Tax Credit, you will have to make sure that:

1.  Your income is below the EV tax credit limits

2. The purchase price of the vehicle is below the EV tax credit limit

3. The vehicles assembly and battery components meet the new requirement

Once there is more clarification around the assembly and components piece of the new legislation there will undoubtedly be a website that lists all of the vehicles that are eligible for the $7,500 tax credit that you will be able to use to determine which vehicles qualify.

Timing of The Tax Credit

Under the current EV tax credit rule, you purchase the vehicle now, but you do not receive the tax credit until you file your taxes for that calendar year.   Starting in 2024, the tax credit will be allowed to occur at the point of sale which is more favorable for consumers.  Logistically, it would seem that an individual would assign the credit to the car dealer, and then the car dealer would receive an advance payment from the US Department of Treasury to apply the discount or potentially allow the car buyer to use the credit toward the down payment on the vehicle.

However, car buyers will have to be careful here.  Since your eligibility for the tax credit is income based, if you apply for the credit in advance, but then your income for the year is over the MAGI threshold, you may owe that money back to the IRS when you file your taxes. It will be interesting to see how this is handled since the credits are being awarded in advance.

A Use It or Lose It Tax Credit

There are going to be some challenges with the new EV tax credit rule beyond limiting the number of people that qualify and the number of cars that qualify.  The primary one is that the $7,500 EV federal tax credit is not a “refundable tax credit.”  A refundable tax credit means if your total federal tax liability is less than the credit, the government gives you a refund of the remaining amount, so you receive the full amount as long as you qualify.  The EV tax credit is still a “non-refundable tax credit” meaning if you do not have a federal tax liability of at least $7,500 in the year that you purchase the new EV vehicle, you may lose all or a portion of the $7,500 that you thought you were going to receive.

For example, let’s say you are a single tax filer, and you make $50,000 per year.   If you just take the standard deduction, with no other tax deductions, your federal tax liability may be around $4,200 in 2023.  You buy a new EV in 2023, you meet the income qualifications, and the vehicle meets all of the manufacturing qualifications, so you expect to receive $7,500 when you file your taxes for 2023.  However, since your federal tax liability was only $4,200 and the EV tax credit is not refundable, you would only receive a tax credit of $4,200, not the full $7,500.

No EV Tax Credit Carryforward

With some tax deductions, there is something called tax carryforward, meaning if you do not use the tax deduction in the current tax year, you can “carry it forward” to be used in future tax years to offset future income. The EV tax credit does not allow carryforward, if you can’t use all of it in the year of the EV purchase, you lose it.

Intentionally Creating Federal Tax Liability

If you are in this scenario where you purchase an EV but you expect your federal tax liability to be below the full $7,500 credit threshold, you may have to do what I call “opposite tax planning”. Normally you are trying to find ways to reduce your tax bill, but in these cases, you are trying to find ways to increase your tax liability to get the maximum refund from the government.  But how do you intentionally increase your tax liability? Here are a few ideas:

1. Stop or reduce the contributions being made to your pre-tax retirement accounts.   When you make pretax contributions to retirement accounts it reduces your tax liability.  But you have to be careful here, if your company offers an employer match, you could be leaving free money on the table, so you have to conduct some analysis here.  In many cases, 401(k) / 403(b) allows either pre-tax or Roth contributions.  If you are making pre-tax contributions, you may be able to just switch to Roth contributions, which are after-tax contributions, and still take advantage of the employer match.

2. Push more income into the current tax year. If you are a small business owner, you may want to push more income into the current tax year. If you are a W2 employee, you are expecting to receive a bonus payment, and you have a good working relationship with your employer, you may be able to request that they pay the bonus to you this year as opposed to the spring of next year.

3. Delay tax-deductible expenses into the following tax year. Again, if you are a small business owner and have control over when you realize expenses, you could push those into the following year.  For W2 employees, if you have enough tax deductions to itemize, you may want to push some of the itemized deductions into the following tax year.

4. Delay getting married until the following tax year. Kidding but not kidding. Nothing says I love you like a full $7,500 tax credit. Use it toward the wedding.  You may not qualify under the single file income limit but maybe you would qualify under the joint filer limit.  

State EV Tax Credit

The $7,500 EV tax credit is a federal tax credit but some states also have EV tax credits in addition to the federal tax credit and those credits could have different criteria to qualify. It’s worth looking into before purchasing your new or used EV.

EV Tax Credit Tax Forms

In 2022, you apply for the federal EV tax credit when you file your tax return.  You will have to file Form 8936 with your tax return.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

How Much Should You Have In An Emergency Fund?

Establishing an emergency fund is an important step in achieving financial stability and growth. Not only does it help protect you when big expenses arise or when a spouse loses a job but it also helps keep your other financial goals on track. When we educate clients on emergency funds, the follow questions typically arise:   

• How much should you have in an emergency fund?

• Does the amount vary if you are retired versus still working?

• Should your emergency fund be held in a savings account or invested?

• When is your emergency fund too large?

• How do you coordinate this with your other financial goals?

Emergency Fund Amount

In general, your emergency fund should typically be 4 to 6 months of your total monthly expenses.  To calculate this, you will have to complete a monthly budget listing all of your expenses.  Here is a link to an excel spreadsheet that we provide to our clients to assist them with this budgeting exercise: GFG Expense Planner. 

Big unforeseen expenses come in all shapes and sizes but frequently include:

• You or your spouse lose a job

• Medical expenses

• Unexpected tax bill

• Household expenses (storm, flooding, roof, furnace, fire)

• Major car expenses

• Increase in childcare expenses

• Family member has an emergency and needs financial support

Without a cash reserve, surprise financial events like these can set you back a year, 5 years, 10 years, or worse, force you into bankruptcy, require you to move, or to sell your house.   Having the discipline to establish an emergency fund will help to insulate you and your family from these unfortunate events.

Cash Is King

We usually advise clients to keep their emergency fund in a savings account that is liquid and readily available.  That will usually prompt the question: “But my savings account is earning minimal interest, isn’t it a waste to have that much sitting in cash earning nothing?”   The purpose of the emergency fund it to be able write a check on the spot in the event of a financial emergency.  If your emergency fund is invested in the stock market and the stock market drops by 20%, it may be an inopportune time to liquidate that investment, or your emergency fund amount may no longer be the adequate amount.

Even though that cash is just sitting in your savings account earning little to no interest, it prevents you from having to go into debt, take a 401(k) loan, or liquidate investments at an inopportune time to meet the unforeseen expense.

Cash Reserve When You Retire

I will receive the question from retirees: “Should your cash reserve be larger once you are retired because you are no longer receiving a paycheck?”  In general, my answer is “no”, as long as you have your 4 months of living expenses in cash, that should be sufficient.  I will explain why in the next section.

Your Cash Reserve Is Too Large

There is such a thing as having too much cash.  Cash can provide financial security but beyond that, holding cash does not provide a lot of financial benefits.  If 4 months of your living expenses is $20,000 and you are holding $100,000 in cash in your savings account, whether you are retired or not, that additional $80,000 in cash over and above your emergency fund amount could probably be working harder for you doing something else.  There is a long list of options, but it could include:

•  Paying down debt (including the mortgage)

• Making contributions to retirement accounts to lower your income tax liability

• Roth conversions

• College savings accounts for your kids or grandchildren\

• Gifting strategies

• Investing the money in an effort to hedge inflation and receive a higher long-term return

Emergency Fund & Other Financial Goals

It’s not uncommon for individuals and families to find it difficult to accumulate 4 months worth of savings when they have so many other bills.  If you are living paycheck to paycheck right now and you have debt such as credit cards or student loans, you may first have to focus on a plan for paying down your debt to increase the amount of extra money you have left over to begin working toward your emergency fund goal. If you find yourself in this situation, a great book to read is “The Total Money Makeover” by Dave Ramsey.

The probability of achieving your various financial goals in life increases dramatically once you have an emergency fund in place.  If you plan to retire at a certain age, pay for your children to go college, be mortgage and debt free, purchase a second house, whatever the goal may be, large unexpected expenses can either derail those financial goals completely, or set you back years from achieving them.

Remember, life is full of surprises and usually those surprises end up costing you money. Having that emergency fund in place allows you to handle those surprise expenses without causing stress or jeopardizing your financial future.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Selecting The Best Pension Payout Option

When you retire and turn on your pension, you typically have to make a decision as to how you would like to receive your benefits which includes making a decision about the survivor benefits.  Do you select….

• Lump sum

• Single Life Benefit

• 100% Survivor Benefit

• 50% Survivor Benefit

• Survivor Benefit Plus Pop-up Election

The right option varies person by person but some of the primary considerations are:

• Marital status

• Your age

• Your spouse’s age

• Income needed in retirement

• Retirement assets that you have outside of the pension

• Health considerations

• Life expectancy

• Financial stability of the company sponsoring the plan

• Tax Strategy

• Risk Tolerance

There are a lot of factors because the decision is not an easy one.  In this article, I’m going to walk you through how we evaluate these options for our clients so you can make an educated decision when selecting your pension payout option. 

Understanding The Options

 To give you a better understanding of the various payout options, I’m going to walk you through how each type of benefit works.  Not all pension plans are the same, some plans may only offer some of these options, others after all of these options, and some plans have additional payout options available.

Lump Sum:  Some pension plans will give you the option of receiving a lump sum dollar amount instead of receiving monthly payment for the rest of your life. Retirees will typically rollover these lump sum amounts into their IRA’s, which is a non-taxable event, and then take distributions as needed from their IRA.

Single Life Benefit: This is also referred to as the “straight life benefit”.  This option usually offers the highest monthly pension payments because there are no survivor benefits attached to it.  You receive a monthly payment for the rest of your life but when you pass away, all pension payments stop.

Survivor Benefits:   There are usually multiple survivor benefit payout options. They are typically listed as:

                100% Survivor Benefit

                75% Survivor Benefit

                50% Survivor Benefit

                25% Survivor Benefit

The percentages represent the amount of the benefit that will continue to your spouse should you pass away first.  The higher the survivor benefit, typically the lower your monthly pension payment will be because the pension plans realize they may have to make payments for longer because it’s based on two lives instead of one. 

Example: If the Single Life pension payment is $3,000, if instead you elect a 50% survivor benefit, your pension payment may only be $2,800, but if you elect the 100% survivor benefit it may only be $2,700.   The monthly pension payments go down as the survivor benefits go up.

Here is an example of the survivor benefit, let’s say you elect the $2,800 pension payment with a 50% survivor benefit. Your pension will pay you $2,800 per month when you retire but if you were to pass away, the pension plan will continue to pay your spouse $1,400 per month (50% of the benefit) for the rest of their life.

Pop-Up Elections:  Some pension plans, like the New York State Pension Plan, provide retirees with a “Pop-Up Election”.   With the pop-up, if you select a survivor benefit which provides you with a lower monthly pension payment amount but your spouse passes away first, thus eliminating the need for a survivor benefit, your monthly pension payment “pops-up” to the amount that you would have received if you elected the Single Life Benefit.

Example:  You are married, getting ready to retire, and you have the following pension payout options:

Single Life:  $3,000 per month

50% Survivor Benefit: $2,800 per month

50% Survivor Benefit with Pop-Up: $2,700 per month

If you elect the Single Life option, you would receive $3,000 per month, but when you pass away the pension payments stop.

If you elect the 50% Survivor Benefit, you would receive $2,800 per month, but if you pass away before your spouse, they will continue to receive $1,400 for the rest of their life.

If you elect the 50% Survivor Benefit WITH the Pop-Up, you would receive $2,700 per month, if you were to pass away before your spouse, your spouse would continue to receive $1,350 per month. But if your spouse passes away before you, your pension payment pops-up to the $3,000 Single Life amount for the rest of your life.

Why do people select the pop-up?  It’s more related to what happens to the social security benefits when a spouse passes away. If your spouse were to pass away, one of the social security benefits is going to stop, and you receive the higher of the two but some of that lost social security income could be made up by the higher pop-up pension amount.

Marital Status

 The easiest variable to address is marital status. If you are not married or there are no domestic partners that depend on your pension payments to meet their expenses, then typically it makes sense to elect either the Lump Sum or Straight Life payment option.  Whether or not the lump sum or straight life benefit makes sense will depend on your age, tax strategy, income need, if you want to preserve assets for your children, and other factors.   

Income Need

 If you are married or have someone that depends on your pension income, by far, the number one factors becomes your income need in retirement when making your pension election.  If the primary source of your retirement income is your pension and you were to pass away, your spouse would need to continue to receive all or a portion of those pension payments to meet their expenses, you have to weigh very heavily the survivor benefit options.  We have seen people make the mistake of electing the Single Life Option because it was the highest monthly payout and then the spouse with the pension unexpectedly passes away at an earlier age.  It’s a devastating financial event for the surviving spouse because the pension payments just stop. If someone were to pass away 5 years after leaving their company, they worked all of those year to receive 5 years worth of pension payments, and then they just stopped.   

We usually have to run projections for clients to answer this question, if the spouse with the pension passes away will their surviving spouse need 50%, 75%, or 100% of the pension payments to meet their income needs?  In most cases it’s worth accepting a slightly lower monthly pension payment to reduce this survivor risk.   

Retirement Assets Outside Of The Pension

 If you have substantial retirement savings outside of your pension like 401(k) accounts, investment accounts, 457, IRA’s, 403(b) plans, this may give you more flexibility with your pension options.  Having those outside assets almost creates a survivor benefit for your spouse that if the pension payments were to stop or be reduced, there are other retirement assets to draw from to meet their income needs. 

Example: You have a retired couple, both have pensions, and they have also accumulated $1M in retirement accounts outside the pension, if one spouse were to pass away, even though the pension payments may stop or be reduced, there may be enough assets to draw from the outside retirement accounts to make up for that lost pension income. This may allow a couple to elect a 50% survivor benefit and receive a higher monthly pension payment compared to electing the 100% survivor benefit with the lower monthly pension payment.

Risk Management

 This last example usually leads us into another discussion about long-term risk.  Even though you may have the outside assets to accept a higher monthly pension payment with a lower survivor benefit, should you?  When we create retirement plans for clients we have to make a lot of assumptions about assumed rates of return, life expectancy, expenses, etc.  But what if your investment accounts take a big hit during the next recession or a spouse passes away much sooner than expected, accepting a lower survivor benefit may increase the impact of those risks on your plan.  If you and your spouse are both able to elect the 100% survivor benefit on your pensions, you then know, that no matter what happens in the future, that pension income will always be there, so it’s one less variable in your long-term financial plan.

While this could be looked at as a less risky path, there is also the flip side to that.  If you lock up the 100% survivor benefit on the pension, that may allow you to take more risk in your outside retirement accounts, because you are not as dependent on those accounts to supplement a survivor benefit depending on which spouse passes away first.

Age

 The age of you and your spouse can also be a factor. If the spouse with the pension is quite a bit older than the spouse without pension, it may make sense for normal life expectancy reasons, to elect a larger survivor benefit. Visa versa, if the spouse with then pension is much younger, it may warrant a lower survivor benefit elect. But in the end, it all goes full circle back to the income need if the pension payments were to stop, are there enough other assets to supplement income for the surviving spouse?

 Health Considerations / Life Expectancy

 When conducting a pension analysis, we will typically use age 90 as a life expectancy for most clients.  But there are factors that can alter the use of age 90 such as special health considerations and longevity.  If the spouse that has the pension is forced to retire for health reasons, it gives greater weight to electing a pension benefit with a higher survivor benefit.  When a client tells us that their father, mother, and grandmother, all lived past age 93, that can impact the pension decision.  Since people are living longer, it increases the risk of spending through their traditional retirement savings, whereas the pension payments will be there for as long as they live.

Financial Stability Of The Company / Organization

 You are seeing more and more stories about workers that were promised a pension but then their company, union, or not-for-profit goes bankrupt.  This is a real risk that should factor into your pension decision.  While there are government agencies like the PBGC that are there to help backstop these failed pension plans, there have been so many bankrupt pensions over the past two decades that the PBGC fund itself is at risk of running out of assets.   If a retiree is worried about the financial solvency of their employer, it may give greater weight to electing the “Lump Sum Option”, taking your money out of the plan, getting it over to your IRA, and then taking monthly payments from the IRA.   Since this is becoming a greater risk to employees, we created a video dedicated to this topic:  What Happens To Your Pension If The Company Goes Bankrupt?

Tax Strategy

 Tax strategy also comes into play when electing your pension benefit. If we have retirees that have both a pension and retirement accounts outside the pension plan, we have to map out the distribution / tax strategy for the next 10 to 20 years.  Depending on who you worked for and what state you live in, the monthly pension payments may be taxed at the federal level, state level, or both.  Also, many retirees don’t realize that social security will also be considered taxable income in retirement.  Then, if you have pre-tax retirement accounts, at age 72, you have to begin taking Required Minimum Distributions which are taxable. 

There are situations where we will have a retiree forego the monthly pension payment from the pension plan and elect the Lump Sum Benefit option, so they can rollover the full balance to an IRA, and then we have more flexibility as to what their taxable income will be each year to execute a long term tax strategy that can save them thousands and thousands of dollars in taxes over their lifetime.  We may have them process Roth conversions, or realize long term capital gains at a 0% tax rate, neither of which may be available if the pension income is pushing them up into the higher tax brackets.

There are so many other tax strategies, long term care strategies, and wealth accumulation strategies that come into the mix when deciding whether to take the monthly pension payments or the lump sum payment of your pension benefit.

Pension Option Analysis

 These pension decisions are very important because you only get one shot at them.  Once the decision is made you are not allowed to go back and change your mind to a different option.   We run this pension analysis for clients all of the time, so before you make the decision, feel free to reach out to us and we can help you to determine which pension benefit is the right one for you.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Buying A Second House In Retirement

More and more retirees are making the decision to keep their primary residence in retirement but also own a second residence, whether that be a lake house, ski lodge, or a condo down south.  Maintaining two houses in retirement requires a lot of additional planning because you need to be able to answer the following questions:

• Do you have enough retirement savings to maintain two houses in retirement?

• Should you purchase the house before you officially retire or after?

• Are you planning on paying for the house in cash or taking a mortgage?

• If you are taking mortgage, where will the down payment come from?

• Will you have the option to claim domicile in another state for tax purposes?

• Should you setup a trust to own your real estate in retirement?

Adequate Retirement Savings   

 The most important question is do you have enough retirement income and assets to support the carrying cost of two houses in retirement?   This requires you to run detailed retirement projection to determine what your total expense will be in retirement including the expenses associates with the second house, and the spending down of your assets over your life expectancy to make sure you do not run out of money.  Here are some of the most common mistakes that we see retirees make:

1. They underestimated the impact of inflation.  The ongoing costs associated with maintaining a house such as property taxes, utilities, association dues, maintenance, homeowners insurance, water bills, etc, tend to go up each year.  While it may look like you can afford both houses now, if those expenses go up by 3% per year, will you have enough income and assets to pay those higher cost in the future?

2.  They forget about taxes.  If you will have to take larger distributions out of your pre-tax retirement accounts to maintain the second house, those larger distributions could push you into a higher tax bracket, cause your Medicare premiums to increase, lose property tax credits, or change the amount of your social security benefits that are taxable income.

3.  A house is an illiquid asset.  When you look at your total net worth, you have to be careful how much of your net worth is tied up in real estate.  Remember, you are retired, you are no longer receiving a paycheck, if the economy hits a big recession, and your retirement accounts take a big hit, you may be forced to sell that second house when everyone else is also trying to sell their house.  It could put you a in a difficult situation if you do not have adequate retirement assets outside of your real estate holdings.

Should You Purchase A Second House Before You Retire?

 Many retirees wrestle with the decision as to whether to purchase their second house before they retire or after they have retired.   There are two primary advantages to purchasing the second house prior to retirement:

1. If you plan on taking a mortgage to buy the second house, it is usually easier to get a mortgage while you are still working.  Banks typically care more about your income than they do about your level of assets. We have seen clients retire, have over $2M in retirement assets, and have difficulties getting a mortgage, due to a lack of income.   

2. There can be large expenses associated with acquiring a new piece of real estate. You move into your second house and you learn that it needs new appliances, a new roof, or you have to buy furniture to fill the house.  We typically encourage our clients to get these big expenses out of the way before their paychecks stop in case they incur larger expenses than anticipated.

Mortgage or No Mortgage?

 The decision of whether or not to take a mortgage on the second house is an important one.  Sometimes it makes sense to take a mortgage and sometimes is doesn’t. Many retirees are hesitant to take a mortgage because they realize having a mortgage in retirement means higher annual expenses. While we generally encourage our client to reduce their debt by as much as possible leading up to retirement, there are situations where taking out a mortgage to buy that second house makes sense.

 But it’s not for the reason that you may think.  It’s not because you may be able to get a mortgage rate of 3% and keep your retirement assets invested with hopes of achieving a return of over 3%.   While many retirees are willing to take on that risk, we remind our clients that you will be retired, therefore there is no more money going into your retirement accounts.  If you are wrong and the value of your retirement accounts drop, now you have less in assets, no more contributions going in, and you have a new mortgage payment. 

In certain situations, it makes sense to take a mortgage for tax purposes.  If most of your retirement saving are in pre-tax sources like Traditional IRA’s or 401(k)’s, you withdrawal a large amount from those accounts in a single year to buy your second house, you may avoid having to take a mortgage, but it may also trigger a huge tax bill.  For example, if you want to purchase a second house in Florida and the purchase price is $300,000.  You take a distribution out of your traditional IRA to purchase the house in full, you will have federal and state income tax on the full $300,000, meaning if you are married filer you may have to withdrawal over $400,000 to get to the $300,000 that you need after tax to purchase the house.  

If you are pre-tax heavy, it may be better to take out a mortgage, withdrawal just the down payment out of your IRA or preferably from an after tax source, and then you can make the mortgage payments with monthly withdrawals out of your IRA account. This spreads the tax liability of the house purchase over multiple years potentially keeping you out of those higher tax brackets.

But outside of optimizing a tax strategy, if you have adequate after-tax resources to purchase the second house in full, more times than not, we will encourage retirees to go that route because we are big fans of lowering your fixed expenses by as much as possible in retirement.

Planning For The Down Payment

 If we meet with someone who plans to purchase a second house in retirement and we know they are going to have to take a mortgage, we have to start planning for the down payment on that house.  Depending on what their retirement picture looks like we may:

• Determine what amount of their cash reserves they could safely commit to the down payment

• Reduce contributions to retirement accounts to accumulate more cash

• If their tax situation allows, take distributions from certain types of accounts prior to retirement

• Weigh the pros and cons of using equity in their primary residence for the down payment

• If they have permanent life insurance policies, discuss pros and cons of taking a loan against the policy

Becoming A Resident of Another State

 If you maintain two separate houses in different states, you may have the opportunity to have your retirement income taxed in the more tax favorable state.  This topic could be an article all in itself, but it’s a tax strategy that should not be overlook because it can have a sizable impact on your retirement projections.  If your primary residence is in New York, which is a very tax heavy state, and you buy a condo in Florida and you are splitting your time between the two houses in retirement, knowing what it requires to claim domicile in Florida could save you a lot of money in state taxes.  To learn more about this I would recommend watching the following two videos that we created specifically on this topic:

 Video 1:  Will Moving From New York to Florida In Retirement Save You Taxes?

Video 2:  How Do I Change My State Residency For Tax Purposes?

 Should A Trust Own Your Second House

 The final topic that we are going to cover are the pros and cons of a trust owning your house in retirement.  For any house that you plan to own during the retirement years, it often makes sense to have the house owned by either a Revocable Trust or Irrevocable Trust.   Trust are not just for the ultra wealthy.  Trust have practical uses for everyday families just as protecting the house from the spend down process triggered by a long term care event or to avoid the house having to go through probate when you or your spouse pass away.  Again, this is a relate topic but one that requires its own video to understand the difference between Revocable Trust and Irrevocable Trusts:

 Video:  Should You Put Your House In A Trust?

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Will Moving From New York to Florida In Retirement Save You Taxes?

Will moving from NY to FL For Retirement Save You In Taxes

I am getting the question much more frequently from clients - "When I retire, does it make sense from a tax standpoint to change my residency from New York to Florida?". When I explain how the taxes work between New York and Florida, most people are disappointed to find out that it either makes no difference tax wise, or it is less of a difference than they thought.  I think too many people wrongly assume that changing your state domicile from New York to Florida is a no-brainer. Whether or not it will have a big impact for you depends on your personal financial situation for retirement. For some individuals, it will save them a lot of taxes, but for most, the tax impact may be minimal.  You have to consider:

1. How Social Security is taxed in NY

2. The $20,000 NYS exemption on the distributions from retirement accounts

3. How state pensions are taxed

4. The property tax breaks in NY once you are over 65

5. Hidden Medicare cost if you leave New York

6. How much your NY tax liability would be in retirement

7. Cost of Living

8. Estate tax laws

It probably seems like a lot of factors to consider, but all of them should be factored in before you decide to pack up the car and move to Florida for retirement.

How Social Security Is Taxed In New York

Many people do not realize that when you receive Social Security payments in retirement, it is considered taxable income at the federal level for most individuals.  While most individuals will pay federal income tax on their Social Security benefits, you do not have to pay NYS income taxes on social security.  If you are married, you and your spouse are each receiving $25,000 for social security, and you do not save any state income taxes on the $50,000 by moving to Florida, since New York does not tax your social security benefits.

NYS Tax Exemption On First $20,000 Distributed From Retirement Accounts

If you are NYS resident and over the age of 59½, New York does not make you pay state tax on the first $20,000 distributed from a corporate pension, IRA, 401(k) or other retirement plan.  Married couples get to double that at $20,000 each for a total of $40,000.

If we build on the social security example above, assume you and your spouse are each getting $25,000 in Social Security, and you can withdraw $20,000 each out of your IRA account without having to pay NYS income tax:

Taxes on Retirement Accounts

So, now you are up to $90,000 in annual income without a dime in income tax paid to New York State.

Taxes on Public Pension

If you have a pension with New York State, local government, federal government, or certain public authorities, you do not have to pay state taxes on that pension income in retirement.

Given that we are based out of Albany, NY, we have a lot of financial planning clients that have pensions through New York State.  Building again on the social security and IRA example above, now assume we have a married couple that both worked for New Year State and each have pensions for $50,000 each.  They do not have to pay NYS income tax on the pension income, they have no NYS income tax on social security, and no state income tax on the first $20K each out of their NYS 457 Plan or IRA’s.

Taxes on Public Pension

We are now up to $190,000 in annual income with zero dollars paid in NYS income taxes.

Property Tax Credits

It is no secret that New York State has high property taxes compared to other states which can often be one of the larger expenses in retirement after the mortgage is paid off.  Most New York residents are familiar with the STAR program which reduces the property taxes for homeowners that make less than $500,000 in income.  What many retirees do not realize is that there is something called the “Enhanced STAR” credit once you reach age 65, which can further reduce your school taxes.

However, the income limitation for the Enhanced STAR credit is much lower than the regular STAR program.  The extra exemption is limited to individuals age 65 and older making less than $86,000 per year in income.  A special note: income from annuities and IRA’s do not count toward the $86,000 income limitation.

While Florida may have lower property taxes compared to New York State, if you can qualify for the Enhanced STAR program, the difference in property taxes may be closer than you think.

SNOW BIRDS:  This Enhanced STAR program is a big deal for our clients that are snowbirds that go back and forth from New York to Florida.  If you plan to maintain a residence in New York and the have a second house in Florida, if you formally change your state of domicile to Florida, your are no longer Eligible for the STAR program, because you are no longer a New York State resident.  So, you think you might be saving property taxes by making this move, but your property taxes for your house in New York could actually go up by thousands of dollars since you are no longer eligible for the STAR credit.

Medicare Consideration

When you retire, what is often the largest expenses for retirees?  The answer is healthcare.  While New York is known for its higher property taxes and higher income taxes, not many people realize are lucrative health insurance benefits until after they have left the state.  When you turn age 65, you typically have to enroll in Medicare, which provides you with your healthcare coverage.  But Medicare does not pay for everything, so most individuals will enroll in either a Medicare Supplemental or Medicare Advantage Plan to fill on the cost gaps that Medicare does not cover.  Unfortunately, most retirees do not understand the difference between a Medicare Supplemental Plan and a Medicare Advantage Plan.

If you do not know the difference, here is our YouTube Video on the topic:  Medicare Supplemental Plans (Medigap) vs Medicare Advantage Plans

Here is a quick summary of the issue: Medicare advantage plans can carry a lower monthly cost but you sign up for a Medicare Advantage Plan, you are no longer covered by Medicare.  With Medicare supplemental plans, you are covered by Medicare, and the insurance policy supplements your Medicare coverage.  In New York, we have the luxury that each year you can decide whether you want to switch from a Medicare Advantage Plan to a Medicare Supplement Plan and visa versa if your health needs change.  That is only allowed in two states right now, New York and Connecticut.

If you were to change your state of domicile from New York to Florida, as soon as you become a Florida resident, you no longer have that option available to you.  If you are enrolled in a Medicare Advantage plan, you may not be able to change back to Medicare coverage with a Supplemental Plan in the future if your healthcare need change.  That is a big deal in retirement, so you really to analyze what type of coverage you when you make the move to Florida.

What Is Your New Tax State Liability

It is a given that no one likes to pay taxes and we would all like to pay less, but before you go through all of these maneuvers to save taxes, you should quantify how much you are actually saving.  For example, let us say we have a marriage couple, and their retirement expenses required them to withdraw $30,000 annually from their retirement accounts over and above the NYS $20K exemption amount.  Ignoring for now any standard deduction for tax purposes, they would have a New York State tax liability of approximately $2,200. So you have to ask yourself the question, “Is moving to Florida worth saving $2,200 per year in taxes?”.

Cost of Living

There are a few other factors that should be considered in this decision.  The first being the difference in the cost of living between New York and Florida. It is not uncommon for the cost of living to be lower in the southern states compared to the northeaster so your retirement dollar may go further.

Estate Planning

While it is kind of morbid to think about, estate laws vary state by state, meaning, depending on the size of your state, your state tax liability may vary depending on whether you're a resident of New York versus Florida.  For individuals that have large estates, this could me a bigger factor in their decision of whether or not to make the move.

People That Save Taxes By Moving

All things considered, for some individuals, making the decision to change you state of domicile from New York to Florida, could save them a tremendous amount of tax dollars but it depends on what your income picture will look like in retirement.   For individuals that plan to take larger distributions out of retirement accounts and may have earned income in retirement, it could give more weight did the decision to change your state of domicile but it is important to talk with a tax professional to fully evaluate all the moving pieces before making the decision.

Changing Your State of Residency

If you plan to maintain houses in both New York and Florida but plan to change your state of domicile to Florida for tax purposes make sure you know all of the rules. It is not as easy as just declaring that I am a Florida resident because I spent more than half of the year in Florida.  Below is our video that details all of the items that need to be consider when changing your state of domicile from New York to Florida.

Video: How Do I Change My State Residency For Tax Purposes

Disclosure: This is for educational purposes only. It is not tax advice. For tax advice, please consult your financial professional. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future. 

How To Protect Assets From The Nursing Home

When a family member has a health event that requires them to enter a nursing home or need full-time home health care, it can be an extremely stressful financial event for their spouse, children, grandchildren, or caretaker.  The monthly cost of a nursing home is typically between $10,000 - $15,000 per month and without advanced planning it often requires a family to spend through almost all of their assets before they qualify for Medicaid. 

As we all live longer, we become more frail in our 80’s and 90’s, which increases the probability of a long term care event occurring.  Many individuals that we meet with have already experienced a long term care event with their parent or grandparents and they have seen first hand the painful process of watching them spend through all of their assets.  For couples that are married, it can leave the spouse that is not in need of care in a very difficult financial situation as pensions, social security, and martial assets have to be pledged toward the cost of the care for their spouse.  For individuals and widows, the burden is placed on their family or friends to scramble to liquidate assets, access personal financial records, and watch the inheritance for their heirs be depleted in a very short period of time. 

I often ask my clients this simple question, “Would you rather your house and assets go to your kids or go to the nursing home?”  As you would guess, most people say “my kids”.  With enough advanced planning you have that choice and today I’m going to walk you through some of the strategies that we use with our clients to protect assets from long term care events. 

Strategies Vary State By State

Since the Medicaid rules vary from state to state, the strategies that I'm presenting in this article can be used by New York State residents. However, if you are resident of another state, this article will still help you to understand asset protection strategies that are commonly used but you should consult with an elder law expert in your state to determine the appropriate application of these strategies. 

Long Term Care Insurance

While having a long term care insurance policy in place is ideal because if a long term event occurs it pays out and covers the cost, there are a number of challenges associated with long-term care insurance including: 

• Insurance companies will rarely issue policies after you reach age 70

• If you have any issues within your health history, they may not issue you a policy

• The cost of the policies can be expensive

It’s not uncommon for a good long-term care insurance policy to cost an individual between $4,000 and $6,000 per year.  The reason why the insurance is more expensive than other types of insurance is there is a high likelihood that if you live past age 65, at some point you will experience a long term care event.  Insurance companies don’t like that. Insurance companies like issuing policies for events that have a low probability of occurring, similar to life insurance.  In addition, when these long term care policies pay out, they pay out big dollar amounts because the costs are so high.  For these reasons, long-term care insurance policies have become more of a luxury item instead of a common solution that is used by individuals and family to protect their assets from a long term care event.

So if you don’t have a long-term care insurance policy, what can you do to protect your assets from a long-term event? 

Establish A Medicaid Trust

If an individual does not have a long term care insurance policy to help protect against the cost of a long term care event, the next strategy to consider is setting up a Medicaid Trust to own their non-retirement assets.  Non-retirement assets can include a house, investment account, stocks, non-qualified annuities, permanent life insurance policies, and other assets not held within a Traditional IRA or other type of pre-tax retirement account.  This is how the strategy works: 

• Establish a Medicaid Trust

• Transfer assets from the individual’s name into the name of the trust

• Assets are held in the trust for at least 5 years

• The individual experiences a long term care event requiring them to enter a nursing home

• Since the trust has owned the assets for more than 5 years, they are no longer countable assets, the individual can automatically qualify for Medicaid as long as their assets outside of the trust are below the asset allowance threshold; Medicaid pays the nursing home for their care, and the trust assets are preserved for the spouse and their heirs.

Medicaid 5 Year Look Back Period

In New York, Medicaid has a 5 year look back period.  The 5 year look back period was put into place to prevent individuals from gifting away all of their assets right before or after they experience a long term care event in an effort to qualify for Medicaid.  In 2020, New York requires residents to spend down all of their countable assets until they are below the $15,750 asset allowance threshold.  Once below that level, the individual qualifies for Medicaid, and Medicaid will pay the nursing home costs.  When an individual submits a Medicaid application, they request 5 years worth of financial records. If that individual gave any asset away within the last five years, whether it’s to a person or a trust, those asset will be brought back in as “countable assets” required to be spent down before the individual will qualify for Medicaid. 

Example:  Jim is 88 years old and has $100,000 in his savings account. His health is beginning to deteriorate and he gifts $90,000 to his kids in an effort to reduce his assets to qualify for Medicaid.  Two years later Jim has a stroke requiring him to enter a nursing home, and only has $10,000 in his savings account.  When he applies for Medicaid, they will request 5 years worth of his bank records and discover that he gifted $90,000 away to his kids two years ago.  That $90,000 is a countable asset subject to spend down even though he no longer has it.  But it gets worse, his kids spent the $90,000, so they are unable to return the $90,000 to Jim. Jim is not eligible for Medicaid and there is no cash available to pay for his care. 

Medicaid Trust Strategy

For the Medicaid Trust strategy to work, the assets have to be put into the trust 5 years prior to submission of the Medicaid application.  Once the assets are owned by the trust for more than 5 years, regardless of the dollar value in the trust, it’s no longer a countable asset, and the individual can automatically qualify for Medicaid. 

Example: At age 84, Jim sets up an Medicaid trust, and moves $90,000 of his $100,000 in cash into the trust.  At age 90, Jim has a stroke requiring him to enter a nursing home, but now since the assets were in the trust for more than 5 years, he is no longer required to spend down the $90,000, and he qualifies for Medicaid. That $90,000 is now reserved for his kids who are the beneficiaries of the trust. 

Establishing a trust instead of gifting assets away to family members can help to preserve those assets against the situation where the individual does not make it past the 5 year look back period and the money gifted has already been spent by the beneficiaries. 

How Do Medicaid Trusts Work?

Medicaid trusts are considered “irrevocable trusts” which means when you move assets into the trust you technically do not own them anymore.  By setting up a trust, you are essentially establishing an entity, with it’s own Tax ID, to own your assets.  The thought of giving away assets often scares individuals away for setting up these trusts but it shouldn’t.   Estate attorneys often include language in the trust documents to offer some flexibility.  Before I go into some examples, I first want to define some trust terms: 

Grantor:  The grantor is the person that currently owns the assets and is now gifting it (or transferring it) into their trust.  If for example, you are doing this planning for your parents, they would be the “grantors” of the trust. 

Trustee:  The trustee is the individual or individual(s) that are responsible for managing the assets owned by the trust.  This is typically not the grantor.  The reason being is if you gift your assets to a trust but you still have full control of it, the question arises, have you really given it away?   In most cases, the grantor will designate one or more of their children as trustees.  The trustees are responsible for carrying out the terms of the trust 

Beneficiaries:   The beneficiaries of the trust are the individuals that are entitled to receive the assets typically after the grantor or grantors have passed away. It’s common for the beneficiaries of the trust to be the same as the beneficiaries listed in a person’s will. 

Access to Income

When you gift assets to a Medicaid trust, you technically no longer have access to the principle, but grantors still have access to any “income” generated by the trust assets.  This is most easily explained as an example. 

Mark & Sarah have traditional IRA’s, their primary residence, and an investment account with a value of $200,000.  They do not anticipate needing to access the $200,000 to supplement their income and want to protect that asset from a long term care event so they know that their kids will inherit it.  They establish a Medicaid trust with their two children designated a co-trustees and they move the ownership of the house and the $200,000 investment account into the name of the trust.  If the holdings in the $200,000 investment account are producing dividend and interest income, Mark & Sarah are allowed to receive that income each year because they always have access to the income generated by the trust, they just can’t access the principal portion of the trust assets. 

Revoke Part Of The Trust

Estate attorneys may also build in a feature which allows the trustees to “revoke“ all or a portion of the trust assets.  Let’s build on the Mark & Sarah example above: 

Mark and Sarah gift their house and the $200,000 investment account to their Medicaid trust but two years later Sarah incurs an unforeseen medical event and they need access to $50,000.  Since the trustee was given the power to revoke all or a portion of the trust asset, the trustee works with the estate attorney to revoke $50,000 of the trust assets in the investment account and send it to the grantors (Mark & Sarah).  The $150,000 remaining in the investment account continues to work toward that 5 year look back period, and Mark & Sarah have the money they need for the medical expenses. 

Gifts To The Beneficiaries

An alternative solution to the same scenario listed above is that the trustees can be given the power to gift assets to the beneficiaries while the grantors are still alive.  Essentially the trustees, who are often also the beneficiaries of the trust, gift themselves assets from the trust, and then turn around and gift those assets back to the grantors.  In the Mark & Sarah example above, instead of revoking part of the trust assets, their children, who are the trustees, gift $50,000 to themselves, and then turn around and gift $50,000 to their parents (Mark & Sarah) to pay their medical bills. But with gifting powers, you really have to trust the individuals that are serving as trustees of your Medicaid trust because they cannot be required to gift the money back to the grantor. 

Putting Your House In The Trust

It's common for individuals to think:  “Well all I have is my house, I don’t have any investment accounts, so there is no point in setting up a trust because my house is always protected.”  That's incorrect.  If you own your house and you experience a long term care event: 

• Your primary residence is not a countable assets for Medicaid eligibility and you can qualify for Medicaid while still owning your house

• Medicaid cannot force you to sell your house while you or your spouse are still alive and then spend down those assets for your care

However, and this is super important, even though your primary residence is not a countable asset and they can't force you to sell it while you or your spouse are still alive, Medicaid can put a LIEN against your house for the amount that they pay the nursing home for your care.  So when you or your spouse pass away, the value of your house is included in your estate, Medicaid will force the estate to sell the house and they will recapture the amount that they paid for your care. 

Example:  Linda’s husband Tim passed away three years ago and she is the surviving spouse.  Her only asset is the primary residence that she lives in worth $250,000 with no mortgage. Linda has a stroke and is required to enter a nursing home. Because she has no other assets besides her primary residence, she qualifies for Medicaid, and Medicaid pays for the cost of her care at the nursing home.  Linda passes away 2 year later.  During that two year period in the nursing home, Medicaid paid $260,000 for her care.  Linda's children, who were expecting to inherit the house when she passed away, now find out that Medicaid has a lien against the house for $260,000; meaning when they sell the house, the full $250,000 goes directly to Medicaid, and the kids receive nothing. 

If Linda had put the house into a Medicaid trust 5 years prior to her stroke, she would have immediately qualified for Medicaid, but Medicaid would not be entitled to put a lien against her primary residence. When she passes away, since the house is owned by the trust, there is no probate, and her children receive the full value of the house. 

Again, the way I phrase this to my clients is, would you rather your kids inherit your house or would you rather it go to the nursing home?  With some advance planning you have a choice. 

The Cost of Setting Up A Trust

The other factor that has scared some people away from setting up a Medicaid trust is the setup cost.  It’s not uncommon for an estate attorney to charge between $3,000 - $8,000 to setup a Medicaid trust. But in the example that we just looked at above with Linda, you are spending $5,000 today to setup a trust, that is going to potentially protect an asset worth $250,000. 

The next objection, “well what if I spend the money setting up the trust and I don’t make it past the 5 year look back period?”   If that’s the case, the $5,000 that you spent on setting up the trust is just $5,000 less that nursing home is going to receive for your care.  To qualify for Medicaid, you have to spend down your assets below the $15,750 threshold so if you have countable assets above that amount, you would have lost the money to nursing home anyway. 

Countable Assets

I have mentioned the term “countable assets” a few times throughout this article; countable assets are the assets that are subject to that Medicaid spend down.   Instead of going through the long list of assets that are countable it's easier to explain which assets are NOT countable.  The value of your primary residence is not a countable asset even though it's subject to the lien.   Pre-tax retirement accounts such as Traditional IRA’s and 401(k) plans are not countable assets.   Pre-paid funeral expenses up to a specific dollar threshold are also not a countable asset. Outside of those three assets, almost everything else is a countable asset. 

Retirement Accounts

As I just mentioned above, pre-tax retirement accounts are not subject to the Medicaid spend down, however, Medicaid does require you to take required minimum distributions (RMD’s) from those pre-tax retirement accounts each year and contribute those directly to the cost of your care. Notice that I keep saying “pre-tax”, that’s because Roth IRA’s are countable assets subject to spend down.  If you have $100,000 in a Roth IRA, Medicaid will require you to spend down that account until you reach the $15,750 in total countable assets qualifying you for Medicaid. 

Pensions & Social Security

You can use Medicaid trusts to protect assets but they cannot be used to protect “income”.  Monthly pension payments and Social Security income are subject to the Medicaid income threshold.  For individuals that are single or widowed, your income has to below $875 per month in 2020 to qualify for Community Medicaid and below $50 per month for Chronic Care Medicaid.  If an individual is receiving social security, pensions, or other income sources above that threshold, all of that income automatically goes toward their care. 

If you are married and your spouse is the one that has entered the nursing home, you are considered the “community spouse”.  As the community spouse you are allowed to keep $3,216 per month in income. 

Example:  Rob and Tracey are married, Rob just entered the nursing home, but Tracey is still living in their primary residence. Their monthly income is as follows: 

Rob Social Security:         $2,000

Tracy Social Security:      $2,000

Rob Pension:                     $3,000

Total Monthly Income:  $7,000

Of the $7,000 in total monthly income that Tracey is used to receiving, once Rob qualifies for Medicaid, she will only be receiving $3,216 per month. The rest of the monthly income would go toward Rob’s care at the nursing home. 

Community Spouse Asset Allowance

If you are married and your spouse has a long term care event requiring them to go into a nursing home and you plan to apply for Medicaid, you as the community spouse are allowed to keep countable assets up to the greater of: 

• $74,820; or

• One-half of the couple’s total combined assets up to $128,640 (in 2020)

Take Action

Unless you have a long term care insurance policy or enough assets set aside to offset the financial risk of a long term care event occurring in the future, setting up a Medicaid trust may make sense.   But I also want to provide you with a quick list of considerations when establishing a Medicaid trust: 

• You should only transfer assets to the trust that you know you are not going to need to supplement your income in retirement.

• Step up in basis: By establishing a Medicaid trust as opposed to gifting assets directly to individuals, the estate attorney can include language that will allow the assets of the trust to receive a step up in basis when the grantor passes away which can mitigate a huge tax hit for the beneficiaries.

• For these strategies to work it takes advanced planning so start the process now. Each asset that is transferred into the trust has its own 5 year look back period. The sooner you get the assets transferred into the trust, the sooner that clock starts.

• If you are doing this planning for a parent, grandparent, or other family member, it's important to consult with professionals that are familiar with the elder law and Medicaid rules for the state that the individual resides in. These rules, limits, and trust strategies vary from state to state.

Contact Us For Help If you are a New York resident doing this type of planning for yourself or for a family member that is a resident of New York, please feel free to reach out to us with questions.  We can help you to better understand how to protect assets from a long term care events and connect you with an  estate attorney that can assist you with the establishment of Medicaid trust if the trust route is the most appropriate strategy for asset protection. Disclosure:  This article is for educational purposes only.  It does not contain legal, Medicaid, or tax advice. You should consult with a professional for advice tailored to your personal financial situation. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Requesting Mortgage Forbearance: Be Careful

Due to the rapid rise in the unemployment rate as a result of the Coronavirus, Congress passed the CARES Act which includes a provision that provides mortgage relief to homeowners that have federally-backed mortgages.  Homeowners are eligible for a 180 day forbearance on their mortgage payments which can provide much needed financial relief for individuals and families that are struggling due to the COVID-19 containment efforts.   Even if you do not have a federally-back mortgage, some banks are voluntarily offering homeowners forbearance options on their mortgage payments. But before you choose this option, you should be aware of the following items: 

• How does forbearance work?

• Who qualifies for mortgage forbearance?

• What is the process for requesting a forbearance?

• Does forbearance hurt your credit score?

• What are the repayment options?

• The hidden costs of forbearance

• Other options for mortgage relief

How Does Mortgage Forbearance Work?

Mortgage forbearance allows homeowners to defer monthly mortgage payments for a specific period of time.  Under the CARES Act, homeowners that qualify, will be able to delay their mortgage payments for the next 6 months.  But it’s important to understand that “forbearance” delays mortgage payments, it does not forgive those payment.  At some point in the future, you will have to make up for those missed payments. 

Who Is Eligible For Mortgage Forbearance?

Under the CARES Act, homeowners that have federally-backed mortgages are eligible for a forbearance up to 180 days.  But as I mentioned above, homeowners that do not have federally-backed mortgages may also be eligible but it’s at the discretion of the loan servicer.  How do you know if you have a federally-backed mortgage?  Here is a list of the federal agencies: 

• FHA

• VA

• Freddie Mac

• Fannie Mae

• USDA

Do You Have A Government Backed Mortgage?

If you are not sure whether or not your mortgage is backed by the federal government, there are a few ways to find out but we recommend not blindly calling the bank that issued your mortgage.  The bank that issued your mortgage may be different than the company that “services” your mortgage.  It’s not uncommon for lenders to sell the servicing rights of their mortgages to other companies.  If you are considering applying for forbearance, you will need to consult with the loan servicer. 

As you can image, these loan servicing companies are being overwhelmed right now with homeowners requesting forbearance of their mortgage payments.  If you are able to determine whether or not you have a federally-backed mortgage yourself, it will save you time and frustration.  Here are a few different ways to determine if your mortgage is backed by a federal agency: 

• FHA Insurance Payments: If you look at your mortgage statement and you see FHA insurance payments being made, your loan is backed by the FHA. You can also look at your mortgage closing documents, specifically your HUD form.

• Fannie Mae & Freddie Mac Websites: Almost 50% of all mortgages issued in U.S. are backed by either Fannie Mae or Feddie Mac. You can run a search on their websites to determine if your mortgage is backed by either of those two agencies.

Fannie Mae Website

Freddie Mac Website

• Contact Loan Servicer: If you are still unable to determine whether or not your mortgage is federally-backed, you can contact your loan servicer. The contact information for your loan servicer is usually listed on your monthly mortgage statement but if you don’t have access to your statement, you may be able to locate your loan servicer via the Mortgage Electronic Registration System

Mortgages Not Backed By A Federal Agency

If your mortgage is not backed by a federal agency, you still may be eligible for a mortgage forbearance but that will be at the complete discretion of your loan servicing company.  You will need to contact your loan servicer but unlike federally-backed loans, they are not required to offer you a forbearance.   You should be prepared to answer a number of questions such as: 

• Why are you applying for the forbearance?

• How long do you need the forbearance for?

• Details about the status of your income, expenses, and employment

The Forbearance Process

Whether you have a federally-backed mortgage or not, you will have to pro-actively reach out to your loan servicing company to request the forbearance; it does not happen automatically.  If you qualify for the forbearance, there are two key pieces of information that you should obtain before that call is finished. 

• Determine the repayment terms for those missed payments

• Request your forbearance agreement in writing

Repayment Options

Since you have to repay these missed mortgage payments at some point in the future, it’s incredibly important to understand the terms of the repayment.  Some loan servicing companies are requesting a “balloon payment” which means if you are granted a 6 month forbearance, when you reach the end of that 6 month period, all of the missed mortgage payments are due in a lump sum amount; not a favorable situation for most homeowners.  Here are the three most common repayment options: 

• Balloon Payment: All of the missed payments are due as a single lump sum payment at the end of the forbearance term. This is the least favorable option for homeowners.

• Extended Term: This option extends the term of your mortgage by the length of the forbearance. If you receive a 3 month forbearance and you have a 30 year mortgage, they will extend the term of your 30 year mortgage by an additional 3 months. This is usually the most favorable option for borrowers.

• Re-amortize The Loan: Unlike the “extend the term” option, the maturity date of your mortgage stays the same, and when you restart mortgage payments at the end of the forbearance period, they spread those missed payments over the remaining life of the mortgage. This will result in a slightly higher mortgage payment compared to your mortgage payment prior to the forbearance period.

Get The Forbearance Offer In Writing

With all of these moving parts, it’s extremely important to request that your loan servicer sends you the forbearance agreement in writing.  You definitely want to make sure nothing was missed or miscommunicated otherwise you could damage your credit score, end up in a foreclosure situation, or have an unexpectedly large mortgage payment waiting for you at the end of the forbearance period. 

Does Mortgage Forbearance Affect Credit?

If done correctly, a mortgage forbearance will not negatively impact your credit score. 

Hidden Cost of Forbearance

While there are no late fees assessed on these missed mortgage payments associated with a forbearance agreement, there is additional interest that accumulates over the remaining life of the mortgage when the repayment option involves either an extended term or re-amortization. 

Example:  Homeowner has a $250,000 federally-backed mortgage, 4% interest rate, with 20 years left on the mortgage.  This homeowners was financially impacted by COVID-19 and is granted a 6 month forbearance with an extended term repayment. How much additional mortgage interest did that individual pay over the remaining life of the mortgage due to that 6-month forbearance? 

Answer:  $3,159 

So this option is not “free” by any means but it may be a reasonable price for homeowners to pay compared to the negative financial impact of missing mortgage payments without forbearance. 

Other Options Beside Forbearance

If your bank does not grant you forbearance, or you want to consider other options, the CARES Act did open up other forms of financial relief to taxpayers in the form of: 

• Penalty Free Distributions From IRA’s & 401(k) Plans

• 401(k) Loans Up To $100,000

• IRS Stimulus Checks

Each option has it’s own pros and cons but you can read more about these options via the links above. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Should I Refinance My Mortgage Now?

Should I Refinance My Mortgage Now?

With all the volatility going on in the market, it seems there is one certainty and that is the word “historical” will continue to be in the headlines.  Over the past few months, we’ve seen the Dow Jones Average hit historical highs, the 10-year treasury hit historical lows, and historical daily point movements in the market.  Market volatility will always lead the headlines as it does impact anyone with an investment account.  With that in mind, it is important to use these times to reassess your overall financial plan and take advantage of parts of the plan that are in your control.

For a lot of people, their home is their most significant asset and is held for a longer period than any stock or bond they may have.  This brings us back to “historical” as mortgage rates continue to drop.  Whenever this happens, our clients will call and ask if it makes sense to refinance.  In this article, we will help you in making this decision.

3 Important Questions

• How much will I be saving annually in interest with a lower rate?

• What are the closing costs of refinancing?

• How long do I plan on being in the home and how many more years do I have on the mortgage?

If you can answer these questions, then you should have a pretty good idea if it makes sense for you to refinance.

How Much Will I be Saving Annually in Interest with a Lower Rate?

With most financial decisions, dollars matter.  So how do you determine how much you will be saving each year with a lower interest rate?  Below, I walk through a very basic example, but it will show the possible advantage of the refinance.

One important note with this example is the fact that most loan payments you make will decrease the principal which should decrease the cost of interest.  To make this simple, I assume a consistent mortgage balance throughout the year.

                Higher Interest                                                                                 Lower Interest

Mortgage Balance:          $300,000                                            Mortgage Balance:          $300,000

Interest Rate:                    4.5%                                                      Interest Rate:                    3.5%

Annual Interest:               $13,500                                                 Annual Interest:               $10,500

By refinancing at the lower rate, the dollar savings in one year was $3,000 in the example when the mortgage balance was $300,000.

Savings over the life of a mortgage at 3.5% compared to 4.5% on a $300,000, 30-year mortgage, should be over $60,000 in interest over that time period if you are making consistent monthly payments.

What are the Closing Costs of Refinancing?

After walking through the exercise above, most people will say “Of course it makes sense to refinance”.  Before making the decision, you must consider the cost of refinancing which can vary from person to person and bank to bank.  There are several closing costs to consider which could include title insurance, tax stamps, appraisal fee, application fees, etc.

If the cost of closing is $5,000, you will have to determine how long it will take you to make that back based on the annual interest savings.  Using the example from before, if you save $3,000 in interest each year, it should take you 2 years to breakeven.

One tip we give clients is to start at your current lender.  Banks are in competition with other banks and they usually do not want to lose business to a competitor.  Knowing the current interest rate environment, a lot of institutions will offer a type of “rapid refinance” for existing customers which may make the process easier but also give you a break on the closing costs if you are staying with them.  This should be taken into consideration along with the possibility of getting an even lower interest rate from a different institution which could save you more in the long run even if closing costs are higher.

How Long do I Plan on Being in the Home and How Many More Years do I have on the Mortgage?

This is important since there is a cost to refinancing your mortgage.  If it will take you 10 years to “breakeven” between the closing costs and interest you are saving but only plan on being in the house for 5 more years, refinancing may not be the right choice.  Also, if you only have a few years left to pay the mortgage you would have to weigh your options.

In summary, taking advantage of these historical low mortgage rates could save you a lot of dollars over the long term but you should consider all the costs associated with it.  Taking the time to answer these questions and shop around to make sure you are getting a good deal should be worth the effort.

Public Service Announcement:  Like the stock market, it is hard to say anyone has the capability of knowing for sure when interest rates will hit their lows.  Make sure you are comfortable with the decision you are making and if you do refinance try not to have buyer’s remorse if the historical lows today turn into new historical lows next year.  

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

New Rules For Non Spouse Beneficiaries Of Retirement Accounts Starting In 2020

The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts starting in 2020.  Unfortunately, with the passing of this law, Congress took away one of the most valuable distribution options available to non-spouse beneficiaries called the “stretch” provision.  Non-spouse beneficiaries would utilize this distribution option to avoid the tax hit associated with having to take big distributions from pre-tax retirement accounts in a single tax year.  This article will cover: 

• The old inherited IRA rules vs. the new inherited IRA rules

• The new “10 Year Rule”

• Who is grandfathered in under the old inherited IRA rules?

• Impact of the new rules on minor children beneficiaries

• Tax traps awaiting non spouse beneficiaries of retirement accounts

The “Stretch” Option Is Gone

The SECURE Act’s elimination of the stretch provision will have a big impact on non-spouse beneficiaries. Prior to January 1, 2020, non-spouse beneficiaries that inherited retirement accounts had the option to either:

• Take a full distribution of the retirement account within 5 years

• Rollover the balance to an inherited IRA and stretch the distributions from the retirement account over their lifetime. Also known as the “stretch option”.

Since any money distributed from a pre-tax retirement account is taxable income to the beneficiary, many non-spouse beneficiaries would choose the stretch option to avoid the big tax hit associated with taking larger distributions from a retirement account in a single year.   Under the old rules, if you did not move the money to an inherited IRA by  December 31st of the year following the decedent’s death, you were forced to take out the full account balance within a 5 year period.

On the flip side, the stretch option allowed these beneficiaries to move the retirement account balance from the decedent’s retirement account into their own inherited IRA tax and penalty free.  The non-spouse beneficiary was then only required to take small distributions each year from the account called a RMD (“required minimum distribution”) but was allowed to keep the retirement account intact and continuing to accumulate tax deferred over their lifetime. A huge benefit!

The New 10 Year Rule

For non-spouse beneficiaries, the stretch option was replaced with the “10 Year Rule” which states that the balance in the inherited retirement account needs to be fully distributed by the end of the 10th year following the decedent’s date of death.  The loss of the stretch option will be problematic for non-spouse beneficiaries that inherit sizable retirement accounts because they will be forced to take larger distributions exposing those pre-tax distributions to higher tax rates. 

No RMD Requirement Under The 10 Year Rule

Even though the stretch option has been lost, beneficiaries will have some flexibility as to the timing of when distributions will take place from their inherited IRA.  Unlike the stretch provision that required the non-spouse beneficiary to start taking the RMD’s the year following the decedent’s date of death, there are no RMD requirements associated with the new 10 year rule. Meaning in extreme cases, the beneficiary could choose not to take any distributions from the retirement account for 9 years and then in year 10 distribute the full account balance.

Now, unless you love paying taxes, very few people would elect to distribute a large pre-tax retirement account balance in a single tax year but the new rules give you a decade to coordinate a distribution strategy that will help you to manage your tax liability under the new rules.

Tax Traps For Non-Spouse Beneficiaries

These new inherited IRA distribution rules are going to require pro-active tax and financial planning for the beneficiaries of these retirement accounts. I’m lumping financial planning into that mix because taking distributions from pre-tax retirement accounts increases your taxable income which could cause the following things to happen: 

• Reduce the amount of college financial aid that your child is receiving

• Increase the amount of your social security that is considered taxable income

• Loss of property tax credits such as the Enhanced STAR Program

• Increase your Medicare Part B and Part D premiums the following year

• You may phase out of certain tax credits or deductions that you were previously receiving

• Eliminate your ability to contribute to a Roth IRA

• Loss of Medicaid or Special Needs benefits

• Ordinary income and capital gains taxed at a higher rate

You really have to plan out the next 10 years and determine from a tax and financial planning standpoint what is the most advantageous way to distribute the full balance of the inherited IRA to minimize the tax hit and avoid triggering an unexpected financial consequence associated with having additional income during that 10 year period. 

Who Is Grandfathered In?

If you are the non-spouse beneficiary of a retirement account and the decedent passed away prior to January 1, 2020, you are grandfathered in under the old inherited IRA rules. Meaning you are still able to utilize the stretch provision.   Here are a few examples:

Example 1: If you had a parent pass away in 2018 and in 2019 you rolled over their IRA into your own inherited IRA, you are not subject to the new 10 year rule.  You are allowed to stretch the IRA distributions over your lifetime in the form of those RMD’s.

Example 2:  On December 15, 2019, you father passed away and you are listed as the beneficiary on his 401(k) account. Since he passed away prior to January 1, 2020, you would still have the option of setting up an Inherited IRA prior to December 31, 2020 and then stretching the distributions over your lifetime.

Example 3:  On February 3, 2020, your uncle passes away and you are listed as a beneficiary on his Rollover IRA. Since he passed away after January 1, 2020, you would be required to distribute the full IRA balance prior to December 31, 2030.

You are also grandfathered in under the old rules if:

• The beneficiary is the spouse

• Disabled beneficiaries

• Chronically Ill beneficiaries

• Individuals who are NOT more than 10 years younger than the decendent

• Certain minor children (see below)

Even beyond 2020, the beneficiaries listed above will still have the option to rollover the balance into their own inherited IRA and then stretch the required minimum distributions over their lifetime. 

Minor Children As Beneficiaries

The rules are slightly different if the beneficiary is the child of the decedent AND they are still a minor.  I purposely capitalized the word “and”.   Within the new law is a “Special Rule for Minor Children” section that states if the beneficiary is a child of the decedent but has not reached the age of majority, then the child will be able to take age-based RMD’s from the inherited IRA but only until they reach the age of majority. Once they are no longer a minor, they are required to distribute the remainder of the retirement account balance within 10 years.

Example:  A mother and father pass away in a car accident and the beneficiaries listed on their retirement accounts are their two children, Jacob age 10, and Sarah age 8.  Jacob and Sarah would be able to move the balances from their parent’s retirements accounts into an inherited IRA and then just take small required minimum distributions from the account based on their life expectancy until they reach age 18.  In their state of New York, age 18 is the age of majority.  The entire inherited IRA would then need to be fully distributed to them before the end of the calendar year of their 28th birthday.

This exception only applies if they are a child of the decedent. If a minor child inherits a retirement account from a non-parent, such as a grandparent, then they are immediately subject to the 10 year rule.

Note: the age of majority varies by state.

Plans Not Impacted Until January 1, 2022

The replacement of the stretch option with the new 10 Year Rule will impact most non-spouse beneficiaries in 2020.  There are a few exceptions to that effective date: 

• 403(b) & 457 plans sponsored by state and local governments, including Thrift Savings Plans sponsored by the Federal Government will not lose the stretch option until January 1, 2022

• Plans maintained pursuant to a collective bargaining agreement also do not lose the stretch option until January 1, 2022

Advanced Planning

Under the old inherited IRA rules there was less urgency for immediate tax planning because the non-spouse beneficiaries just had to move the money into an inherited IRA the year after the decedent passed away and in most cases the RMD's were relatively small resulting in a minimal tax impact.   For non-spouse beneficiaries that inherit a retirement account after January 1, 2020, it will be so important to have a tax plan and financial plan in place as soon as possible otherwise you could lose a lot of your inheritance to higher taxes or other negative consequences associated with having more income during those distribution years. 

Please feel free to contact us if you have any questions on the new inherited IRA rules.  We would also be more than happy to share with you some of the advanced tax strategies that we will be using with our clients to help them to minimize the tax impact of the new 10 year rule. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Potential Consequences of Taking IRA Distributions to Pay Off Debt

Potential Consequences of Taking IRA Distributions to Pay Off Debt

Once there is no longer a paycheck, retirees will typically meet expenses with a combination of social security, withdrawals from retirement accounts, annuities, and pensions.  Social security, pensions, and annuities are usually fixed amounts, while withdrawals from retirement accounts could fluctuate based on need.  This flexibility presents opportunities to use retirement savings to pay off debt; but before doing so, it is important to consider the possible consequences.

Clients often come to us saying they have some amount left on a mortgage and they would feel great if they could just pay it off.  Lower monthly bills and less debt when living on a fixed income is certainly good, both from a financial and psychological point of view, but taking large distributions from retirement accounts just to pay off debt may lead to tax consequences that can make you worse off financially.

Below are three items I typically consider before making a recommendation for clients.  Every retiree is different so consulting with a professional such as a financial planner or accountant is recommended if you’d like further guidance.

Impact on State Income and Property Taxes

Depending on what state you are in, withdrawals from IRA’s could be taxed very differently.  It is important to know how they are taxed in your state before making any big decision like this.  For example, New York State allows for tax free withdrawals of IRA accounts up to a maximum of $20,000 per recipient receiving the funds.  Once the $20,000 limit is met in a certain year, any distribution you take above that will be taxed.

If someone normally pulls $15,000 a year from a retirement account to meet expenses and then wanted to pull another $50,000 to pay off a mortgage, they have created $45,000 of additional taxable income to New York State. This is typically not a good thing, especially if in the future you never have to pull more than $20,000 in a year, as you would have never paid New York State taxes on the distributions.

Note:  Another item to consider regarding states is the impact on property taxes.  For example, New York State offers an “Enhanced STAR” credit if you are over the age of 65, but it is dependent on income.  Here is an article that discusses this in more detail STAR Property Tax Credit: Make Sure You Know The New Income Limits.

What Tax Bracket Are You in at the Federal Level?

Federal income taxes are determined using a “Progressive Tax” calculation.  For example, if you are filing single, the first $9,700 of taxable income you have is taxed at a lower rate than any income you earn above that.  Below are charts of the 2019 tax tables so you can review the different tax rates at certain income levels for single and married filing joint ( Source: Nerd Wallet ).

There isn’t much of a difference between the first two brackets of 10% and 12%, but the next jump is to 22%.  This means that, if you are filing single, you are paying the government 10% more on any additional taxable income from $39,475 – $84,200.  Below is a basic example of how taking a large distribution from the IRA could impact your federal tax liability.

How Will it Impact the Amount of Social Security You Pay Tax on?

This is usually the most complicated to calculate.  Here is a link to the 2018 instructions and worksheets for calculating how much of your Social Security benefit will be taxed ( IRS Publication 915 ).  Basically, by showing more income, you may have to pay tax on more of your Social Security benefit.  Below is a chart put together with information from the IRS to show how much of your benefit may be taxed.

To calculate “Combined Income”, you take your Adjusted Gross Income + Nontaxable Interest + Half of your Social Security benefit.  For the purpose of this discussion, remember that any amount you withdraw from your IRA is counted in your Combined Income and therefore could make more of your social security benefit subject to tax.

Peace of mind is key and usually having less bills or debt can provide that, but it is important to look at the cost you are paying for it.  There are times that this strategy could make sense, but if you have questions about a personal situation please consult with a professional to put together the correct strategy.

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.