February 14, 2011Vol 4, Issue 2
DFW Financial Planning

Jean KeenerGood morning, and happy valentine's day.


2011 is off to a great start in the stock market with the S&P 500 index up more than 5% so far.  We also crossed a milestone on February 1 with the Dow closing above 12,000 for the first time since June 2008.  The bond markets have not fared as well with the Vanguard Total Bond Market index down almost 1% year-to-date.


In this month's newsletter, we have information on the portions of the health care law that go into effect this year, new investing cost basis reporting rules for 2011, and more.  I'm offering my social security planning workshop again tomorrow evening at the Keller Public Library -- details are below.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and Live Well.

In This Issue
Tax Free Charitable Contributions from IRAs
Health Care Changes Effective in 2011
Cost Basis Reporting Rule Changes
Social Security Workshop Tomorrow
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Tax Free Charitable Contributions from IRAs Extended for 2011

Tax Free Charitable Contributions from your IRAThe opportunity for taxpayers age 70 or older to exclude from gross income otherwise taxable distributions from their IRA that are paid directly to a qualified charity has been extended for 2011.  These are called "qualified charitable distributions" or QCDs.

How QCDs work for 2011


You must be 70 or older in order to make QCDs. You direct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income in 2011. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs in 2011. Note: You don't get to deduct QCDs as a charitable contribution on your federal income tax return--that would be double dipping.


QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.


Example: Assume that your RMD for 2011, which you're required to take no later than December 31, 2011, is $25,000. You receive a $5,000 cash distribution in February 2011, which you then contribute to Charity A. In June 2011, you also make a $15,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2011 gross income (but you may be entitled to a charitable deduction if you itemize your deductions). You exclude the $15,000 of QCDs from your 2011 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD. You'll need to withdraw another $5,000 no later than December 31, 2011, to avoid a penalty.


Example: Assume you turned 70 in 2010. You must take your first RMD (for 2010) no later than April 1, 2011. You must take your second RMD (for 2011) no later than December 31, 2011. Assume each RMD is $25,000. You don't take any actual distributions from your IRA in 2011. Prior to April 1 you make a $25,000 QCD to Charity B. Because the QCD is made prior to April 1, it satisfies your $25,000 RMD for 2010. Prior to December 31 you make a $75,000 QCD to Charity C. Because the QCD is made prior to December 31, it satisfies your $25,000 RMD for 2011. You can exclude the $100,000 of QCDs from your 2011 gross income.


As indicated above, a QCD must be an otherwise taxable distribution from your IRA. If you've made nondeductible contributions, then normally each distribution carries with it a pro-rata amount of taxable and nontaxable dollars. However, a special rule applies to QCDs--the pro-rata rule is ignored and your taxable dollars are treated as distributed first. (If you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA. RMDs are calculated separately for each IRA you own, but may be taken from any of your IRAs.)

Why are QCDs important?


Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive. You would need to request a distribution from the IRA, and then make the contribution to the charity. You'd receive a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to the limits that apply to charitable contributions under Internal Revenue Code Section 170. QCDs avoid all this, by providing an exclusion from income for the amount paid directly from your IRA to the charity--you don't report the IRS distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions. 



Health Care Changes Effective in 2011

Health care changes effective in 2011The Patient Protection and Affordable Care Act (PPACA), signed into law in 2010, makes significant changes to our health care delivery system. Some of these items took effect in 2010 while many others take place in 2011. The following is a brief description of some of the most significant provisions going into effect this year so you can be aware of those that may affect you.


Individual and group health insurance plans are required to extend dependent coverage for adult children up to age 26. While this requirement was effective November 2010 for active employees, enrollment elections made during the 2011 open enrollment period were effective on January 1, 2011.


The cost of over-the-counter drugs not prescribed by a doctor can no longer be reimbursed through a Health Reimbursement Account or a health Flexible Spending account, nor can these costs be reimbursed on a tax-free basis through a Health Savings Account or Archer Medical Savings Account. Also, the additional tax on distributions from health savings accounts or Archer MSAs that are not used for qualified medical expenses increases to 20%.


Medicare Part D participants will receive a 50% discount on brand-name prescriptions filled in the coverage gap (i.e., the donut hole) from pharmaceutical manufacturers, and federal subsidies for generic prescriptions filled in the coverage gap will start to be phased in.


Health plans that do not spend at least a minimum percentage of premiums (85% for plans in the large group market and 80% for plans in the individual or small group markets) on health care services must provide a rebate to consumers.


Certain preventive services covered by Medicare are no longer subject to cost-sharing (co-payments); the deductible is waived for Medicare-covered colorectal cancer screening tests; and Medicare now covers personalized prevention plans including a comprehensive health risk assessment.


High income ($85,000 for individuals, $170,000 for married filing jointly) enrollees in Medicare Part B and Part D coverage will likely see their premiums increase. The income thresholds used to determine Medicare Part B and Part D premiums for higher income individuals is frozen at 2010 income rates through 2019 and will not be adjusted for inflation. Also, the federal subsidy for high income Part D participants is reduced, resulting in increased premiums based on income levels that exceed the applicable threshold.


Medicare Advantage (MA) plans can no longer impose higher cost-sharing for some Medicare-covered benefits than would be imposed by traditional Medicare Parts A or B insurance. Also, Medicare Advantage plans cannot exceed a mandatory maximum out-of-pocket amount for Medicare Parts A and B services. The maximum amount in 2011 is $6,700, but MA plans can voluntarily offer lower out-of-pocket amounts. Also, the annual enrollment period for MA plans is changed to October 15 to December 7 each year beginning in 2011 for plan year 2012.


Community Living Assistance Services and Supports Program (CLASS) is to be established to provide national long-term care insurance funded by voluntary participant premiums that can be paid through payroll deductions. How this will be implemented and its rules are still uncertain.


The disclosure of the nutritional content of standard menu items offered through chain restaurants and vending machines is required.


The requirement that employers report the total value of employer-sponsored health benefits on employees' W-2s was to begin in 2011. However, the IRS has deferred this requirement for 2011 so employers will not be subject to penalties for failure to meet this requirement. 


Changes in Cost Basis Reporting

2011 cost basis rulesIf you're contemplating selling stock in 2011 and beyond, you should be aware of new federal regulations affecting the tax impact of your investment decisions. The new regulations, which went into effect January 1, 2011, require brokers to track your cost basis. They also allow you to determine how your brokerage firm reports the cost basis of a sale.


Your cost basis represents the original purchase price of a security plus any commissions or other fees; your adjusted cost basis is that cost basis adjusted for a variety of factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends. Until now, reporting the gain or loss from your investments has been your responsibility, and could be very challenging for the average investor. The new regulations should make it easier to record your capital losses or gains accurately on your federal income tax form.  They also make it even more important to ensure that your brokerage's records are accurate to avoid inconsistencies between what you and your brokerage report to the IRS.


The Emergency Economic Stabilization Act of 2008 requires that, as of January 1, 2011, U.S. broker-dealers and other financial intermediaries must not only track the adjusted cost basis of their investors' accounts, but also report that basis to investor clients on their 1099 forms and to the Internal Revenue Service. The rules will be implemented over time. They'll apply to shares of individual stocks you buy after January 1, 2011, to investments in mutual funds and dividend reinvestment plans after January 1, 2012, and to bonds, options and other securities bought after January 1, 2013. Shares acquired before January 1, 2011 are exempt from the new rules, as are securities held in retirement accounts.

You can tailor your reporting method to suit your tax situation.  The new regulations allow you to determine in advance what accounting method you wish to use for each sale of stock after January 1, 2011.  Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).


Once you sell a stock and select a cost-basis accounting method for that particular security, you are required to use the same method for any future sales.  So if you sell stock this year and you've sold other shares of the same stock in the past, you may not be able to let your brokerage apply the default method.  You should check worksheets from prior tax returns if you have any doubts about what method you've used to make sure you maintain consistency.


The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three days after execution of the trade). After the trade settles, you cannot change your mind about the method used. This means that you actually have a lot less flexibility when you're preparing your taxes because decisions about how a gain or loss will be calculated have already been made.  When selling stock, it will be important to think ahead about the remainder of the year and consider possible scenarios to make the election that best suits your situation.


Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days).


Because the new regulations don't apply to investments purchased before January 1, 2011, you'll still need to do your own calculations on those transactions. The cost basis information will be included on the 1099 form you receive from your broker for tax year 2011.

Social Security Workshop Tomorrow
Keller Public Library Free Financial Education SeminarsI am holding my social security workshop again tomorrow evening (Tuesday, February 15) at 6:30 pm at the Keller Public Library.   If you haven't attended this session yet or worked with me personally to create your filing strategy, I strongly encourage you to attend!  Designed for baby boomers, we will cover changes in social security for 2011 and  strategies to maximize retirement income including: 
  • 5 factors to consider when deciding when to apply for benefits
  • Why you should always check your earnings record for accuracy
  • How to coordinate benefits with your spouse
  • How to minimize taxes on Social Security benefits
  • How to coordinate Social Security with your other sources of retirement income
Registration is encouraged for planning purposes. RSVP to library@cityofkeller.com.


Upcoming topics: 

  • March: Structuring your retirement income (designed for those in or very near retirement
  • April: Your retirement savings game plan (designed for those 5 - 30 years from retirement)
  • May: Investing: How to build a diversified portfolio and keep your costs low
  • June: Basics of disability and life insurance

Workshops are always the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.  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 jean@keenerfinancial.com.
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 2011, Keener Financial Planning, LLC.