December 16, 2010
Vol 3, Issue 12
DFW Financial Planning

Jean KeenerGood afternoon.


November was a mixed month in the markets, with the S&P 500 flat, gains in U.S. small- and mid-cap stocks, and losses in many bond funds and international stocks.  December is off to a great start in stocks with the S&P 500 up 4.6%.  Bond funds have continued to struggle giving us even more reminders about the importance of diversification (as if we needed those).


We're in a period of uncertainty right now as we wait for clarity on many tax rate questions for this year and next.  But if you haven't yet considered year-end investment and tax moves, you should at least start the process of reviewing your situation.  A year-end investment checklist and a year-end tax checklist were published in previous newsletters.


In this month's newsletter, we have information on a significant social security rule change, 2011 mileage rates, rolling your traditional 401(k) to a Roth IRA, and more.  As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  


I hope you have a wonderful time with family and friends this holiday season.  Thank you, and live well.

In This Issue
Social Security Rules Change
2011 Mileage Rates
Rolling traditional 401(k) to Roth IRA
New Adoption Assistance Rules
Investing Workshop
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Important Change in Social Security Rules

Social Security Rule ChangeAs of last week, the ability to withdrawal your application, repay benefits, and reapply for social security retirement benefits at a later age is no longer an option if you filed more than 12 months ago.  This change makes the initial filing decision that much more critical, since there is now a very limited time-frame for do-overs.


The change was effective on December 8, the date of the announcment.The new rules limit the time period for beneficiaries to withdraw an application for retirement benefits to within 12 months of the first month of entitlement and to one withdrawal per lifetime. In addition, beneficiaries entitled to retirement benefits may voluntarily suspend benefits only for the months beginning after the month in which the request is made.  The new rules are open to comment for the next 60 days, and the social security administration may release new final rules in February to address comments made.


If you filed within the last year with the consideration that you might withdrawal in the future, it's really important for you to take action now to decide if you want to withdrawal your benefits and start the process to avoid reduced benefits for life.  If you filed more than 12 months ago and were planning on withdrawing your application, updating your retirement income plans to see how they look without this option is a good idea.


For complete information on this change, visit the Federal Register government website and please feel free to give me a call with any questions.

2011 Mileage Rates

2011 mileage ratesOn December 3, the IRS announced the optional standard mileage rates for 2011 for use in computing the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes. 


Effective January 1 through December 31 of 2011, the standard mileage rates are as follows:

  • Business use of auto: 51 cents per mile may be deducted (up from 50 cents per mile in 2010) if an auto is used for business purposes
  • Charitable use of auto: 14 cents per mile may be deducted (remaining unchanged) if an auto is used to provide services to a charitable organization
  • Medical use of auto: 19 cents per mile may be deducted (up from 16.5 cents per mile in 2010) if an auto is used to obtain medical care (or for other deductible medical reasons)
  • Moving expense deduction: 19 cents per mile may be deducted (up from 16.5 cents per mile in 2010) if an auto is used to effect a work-related move to a new home

Don't forget to track your mileage if you're using your vehicle for any of these purposes.  It can really add up!

Rolling over traditional 401(k) to Roth IRA

Traditional 401(k) to Roth IRAYou can generally roll over your traditional (pre-tax) 401(k) to a Roth IRA, but there are some exceptions.  You cannot roll over required minimum distributions (RMDs). You also cannot roll over hardship distributions from your 401(k) plan, or certain periodic payments you receive from the plan. Most other distributions are eligible for rollover.


A rollover of regular 401(k) assets to a Roth IRA is similar to a conversion of a traditional IRA to a Roth IRA (and it's often referred to as a conversion). You'll need to pay taxes on the amount you roll over to the Roth IRA, except to the extent your distribution includes your own after-tax contributions (you receive those back tax free). But a special rule applies to rollovers in 2010 only--you can elect either to pay all of the conversion taxes in 2010, or instead include half of the resulting income from the conversion on your 2011 federal tax return, and the other half on your 2012 tax return.


Your rollover can be either direct (the 401(k) plan transfers the funds directly to your Roth IRA for you) or indirect (the plan distributes the funds to you, and then you roll the funds over to the IRA within 60 days). A direct rollover is almost always the best way to transfer the funds. If you choose to make an indirect rollover, you run the risk of missing the 60-day deadline. More importantly, the plan will be required to withhold 20% of the taxable portion of your distribution for federal income taxes. If you want to roll over the full amount of your distribution, you'll need to come up with other funds to make up for the 20% that was withheld (you'll get credit for those withheld funds when you file your income tax return).


Qualified distributions from your Roth IRA will be tax free. To be qualified, your distribution must satisfy a five-year holding period and must be made after you reach age 59, become disabled, or have qualifying first-time homebuyer expenses (up to $10,000 lifetime). The five-year holding period begins on January 1 of the year you first opened any Roth IRA (either by a regular contribution, rollover, or conversion).   (Note: special rules apply if you inherit a 401(k) plan account or IRA.)


Some employers have also acted quickly on the new law that allows conversion from pre-tax contributions to Roth within the 401(k).  If you've received notification from your employer that this option is available, you probably need to act fairly quickly to determine if it makes sense for you and take advantage of 2010 tax treatment -- option to spread the taxes over 2011 and 2012 vs. paying them all with your 2010 taxes.  To do the analysis, it's important to look at your current tax rate and projected tax rate in retirement, as well as considering tax diversification and other parts of your financial plan.

New Adoption Assistance Opportunities and Requirements

Adoption AssistanceThere are some changes to federal adoption assistance programs.  If you know someone in the adoption process, please share this information with them.  The assistance can be substantial!


If you adopt a child, you may be able to claim a tax credit for qualifying expenses you paid. Further, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

Increased dollar amounts for 2010

If your employer has an adoption assistance plan, for each adoption you can exclude from income up to $13,170 (in 2010) of adoption assistance paid by your employer or paid by you through salary reduction. For adoption expenses paid by you and for which this exclusion is not available, a tax credit is available for up to $13,170 of adoption expenses per adoption. The $13,170 amount is subject to phaseout and is reduced if you have modified adjusted gross income (MAGI) above $182,520 and is fully phased out if you have MAGI of $222,520 (in 2010). If you adopt a child with special needs, the $13,170 amount (subject to phaseout) is available regardless of the amount of actual adoption expenses. The dollar limit is for aggregate expenses for all years with respect to an adoption. (Same rules and limits--adjusted for inflation--apply to adoptions in 2011.)

When to claim adoption expenses

Domestic adoptions: You generally claim the exclusion for qualified adoption expenses in the year your employer pays the qualifying expenses. For qualified adoption expenses you paid in a year before the adoption is final, you claim the credit in the year after you paid the expenses. You claim the credit for qualified adoption expenses you paid in the adoption year or a later year in the year you paid the expenses.

Foreign adoptions: You claim the exclusion or the credit for qualified adoption expenses you (or your employer) paid in a year before the adoption is final in the year the adoption is final. You claim the exclusion or the credit for qualified adoption expenses you (or your employer) paid in the adoption year or a later year in the year the expenses are paid.

Example: Veronica adopts a child in a domestic adoption that is final in 2010. Veronica paid qualified adoption expenses of $1,000 in 2008, $5,000 in 2010, and $2,000 in 2011. Veronica can claim a credit for $1,000 of qualified adoption expenses in 2009, $5,000 in 2010, and $2,000 in 2011.

Refundable credit in 2010

Starting in 2010, the adoption expenses credit is refundable. That is, if the credit exceeds the amount of income tax otherwise due, the excess is refundable to you.

Credits carried over to 2010

The adoption expenses credit was not refundable prior to 2010. As a result, you may have a credit from a prior year carried over to 2010. Such a credit is refundable in 2010. Furthermore, a credit carried over to 2010 is not subject to the phaseout income limitations in 2010.

Example: John and Mary adopted a child in 2009. They paid $10,000 of qualified adoption expenses and claimed a $10,000 adoption expense credit for 2009. Their income tax liability was $6,000 before the adoption expense credit, so they could use only $6,000 of the credit in 2009. John and Mary can carry forward $4,000 of adoption expense credit from 2009.

In 2010, John and Mary's income tax liability before the adoption expense credit is $3,000. John and Mary can offset their income tax liability with $3,000 of the adoption expenses credit and receive a refund of the remaining $1,000 of credit in 2010.

Substantiating the adoption

Starting with your 2010 tax return, you must substantiate the adoption or attempted adoption in order to claim the adoption expenses exclusion or credit. For a domestic or foreign adoption that has been finalized in the United States, you must attach a copy of an adoption order or decree to your federal income tax return. For a domestic adoption that is not final, you can use an adoption taxpayer identification number or attach various documents to your federal income tax return. If you claim adoption expenses under the special provision for a child with special needs, you must attach a copy of the state determination of special needs.

You must file paperwork

If you claim the adoption expenses exclusion or credit, you must send in a printed-out income tax form along with any substantiation documents--even if you file electronically.

Form 8839

For 2010, you claim the adoption expenses exclusion and credit on IRS Form 8839, Qualified Adoption Expenses.

Investing Workshop Tuesday, December 21
Keller Public Library Free Financial Education SeminarsI am providing a free investing workshop on Tuesday, Dec. 21 at 6:30 pm at the Keller Public Library.  Because it's right before the holidays, it will likely be a small group.  So if you have general questions about investing, asset allocation, costs of investing, or how to get started, this would be a great time to get them answered.

Registration is encouraged for planning purposes. RSVP to [email protected].

The personal finance series will continue at the library in 2011 -- always the third Tuesday.  Let me know if there are topics you'd like to hear about!   The Keller Public Library is located at 640 Johnson Road.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail [email protected]
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content Copyright 2010, Keener Financial Planning, LLC.