You Retire, But Your Spouse Still Works

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That development may mean lifestyle as well as financial adjustments.
Provided by Joe Occhipinti

 Your significant other may retire later than you do. Sometimes that reality reflects an age difference, other times one person wants to keep working for income or health coverage reasons. If you retire years before your spouse or partner does, you may want to consider how your lifestyle might change as well as your household finances.

How will retiring affect your identity? If you are one of those people who derives a great deal of pride and sense of self from your profession, leaving that career for life around the house may feel odd. Who are you now? Who will you become next? Can you retire and still be who you were? Hopefully, your spouse recognizes that you may have to entertain these questions. They may prompt some soul-searching, even enough to affect a relationship.

How much down time do you want? That is worth discussing with your spouse or partner. If you absolutely hate your job, you may want weeks, months, or years of relaxation after leaving it. You can figure out what to do next in good time. Alternately, you may see every day of retirement as a day for achievement; a day to get something done or connect with someone new. Your significant other should know whether you prefer an active, ambitious retirement or a more relaxed one.

How will household chores or caregiving be handled? Picture your loved one arising at 6:30am on a January morning, bundling up, heading for work and navigating inclement weather, all as you sleep in. Your spouse or partner may grow a bit envious of your retirement freedom. One way to offset that envy is to assume more of the everyday chores around the house.

For many baby boomers, caregiving is also a daily event. When one spouse or partner retires, that can rebalance the caregiving “equation.” One or more individuals have to provide 100% of the eldercare needed, and retirement can make shared percentages more equitable or allow a greater role for a son or daughter in that caregiving. Some people even retire to become a caregiver to Mom or Dad.

Do you have kids living at home? Adult children? Right now, in this country, every fifth young adult is living with his or her parents. With so many new college graduates having to accept part-time or low-paying service industry jobs, and with education loan debt averaging roughly $30,000 per indebted graduate, this situation will persist for years and, perhaps, even become a new normal.1

You and your loved ones may find yourself on different timetables. Maybe your spouse or partner works from 8:00 a.m. to 5:00 p.m. in a high-stress job. Maybe your children attend school on roughly the same schedule. How do they get to and from those places? Probably through a rush-hour commute, either in a car or amid the crowds lined up for mass transit. If you have abandoned the daily grind, you may have an enthusiasm and a chattiness in the evening that they lack. Maybe they just want to unwind at 6:30pm, but you might be anxious to reconnect with them after a day alone at home.

Talk about retirement before you retire. What should your daily life look like? What are the most important things you want out of the retirement experience? How do your answers to those questions align or contrast with the answers of your best friend? As you retire, make sure that your spouse or partner knows your point of view, and be sure to respect his or hers in the bargain.

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com.

www.WarrenStreetWealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – chicagotribune.com/business/success/savingsgame/tca-boomerang-children-affecting-parents-retirement-plans-20160413-story.html [4/13/16]

Should You Downsize for Retirement?

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Some retirees save a great deal of money by doing so; others do not.
Provided by Joe Occhipinti

 

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower housing expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? When you took out your mortgage, your lender likely wanted your monthly payment to amount to no more than 28% of your total gross income, or no more than 36% of your total monthly debt repayments. Those are pretty standard metrics in the mortgage industry.1

What percentage of your gross income are you devoting to your mortgage payments today? Even if your home loan is 15 or 20 years old, you still may be devoting a significant part of your gross income to it. When you move to a smaller home, your mortgage expenses may lessen (or disappear) and your cash flow may greatly increase.

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could be in a state or region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital, another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows.

On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends close by).

Sometimes retirees underestimate the cost of downsizing. Even the logistics can be expensive. As Kiplinger notes, just packing up and moving a two-bedroom condominium’s worth of furniture will cost about $1,500 if you are resettling locally. If you are sending it across the country, the journey could take $5,000 or more. If you can’t sell or move everything, the excess may go into storage, and the price tag on that may be well over $100 a month. In selling your home, you will probably pay commissions to both your agent and the buyer’s agent that add up to 6% of the sale price.2

Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire if the real estate market slows. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars over time.

Run the numbers as accurately as you think you can before you make a move. Downsizing always seems to have a hidden cost or two, but for many retirees, it can open a door to long-term savings. Other seniors may find it cheaper to age in place.

 

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com.

www.WarrenStreetWealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – nerdwallet.com/blog/mortgages/two-ways-to-determine-how-much-house-you-can-afford/ [2/3/16]
2 – kiplinger.com/article/retirement/T010-C022-S002-downsizing-costs-add-up.html [4/1/16]

 

National Lineman Appreciation Day

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We at Warren Street Wealth Advisors want to personally thank all of the lineman out there in the world.

These brave people are on call 24/7, 365 to make sure that we still can still have power in all of our house, along with all the other luxuries we enjoy in our home.

From all of us at Warren Street, thank you for all that you do. We greatly appreciate it.

Reduce your Tax Bill: ESPORTS & Streamer Edition

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Co-Authored by:
Blake Street CFP® & Joe Occhipinti

 

The world of eSports has turned a hobby into a full time profession for many people around the world. Streamers, professional players, and YouTube stars have been able to take their specific talents and turn their passion into a career.

However, with this newly found cash flow comes a new liability in the form of taxes. The knock from Uncle Sam will only get louder as revenue streams, prize pools, and sponsorship deals increase.  Many eSports professionals find themselves scratching their heads come tax time, trying to sort through W2 wages, 1099 income, and even how to handle income from organizations that didn’t report it in the first place.

The burden remains on the the individual to accrue cash to pay taxes, keep their books, properly report income, and make sure they are in compliance with the IRS. The IRS, as always, does no favors in helping you make your tax bill small.

If you’re a streamer, influencer, or competitor there is a high likelihood that you yourself are considered a small business in the eyes of the IRS. This means you’re liable for the 15.3% payroll tax on your earnings that you might only otherwise be liable for half of as a W2 employee. In addition, you may have liabilities from your business activities and even employees or contractors you may hire to do work for you.  From what we’ve found thus far, few have addressed these variables with adequate intent.

 

How do you fix this problem?

 

1) Keep Good Books

First things first get setup to adequately track  business related expenses and any deductions that may reduce your tax burden.  This is the first and easiest thing to control. A good start is separate banking for your business efforts and a solid piece of accounting software.

2) Incorporation

Next, how are you incorporating your business? Sole proprietor? LLC? S-Corp? Each classification has its own nuances that will impact the bottom line dollars you keep and the liability you bare. It is important to look at not only the amount you make, but also the consistency of earnings, and the amount of liability your services or content generate before choosing a type of incorporation.

3) Build Cash Reserves

As money comes in the door, aside from saving for goals, you need to save for taxes. Companies should be withholding taxes on your W2 wages, but any other forms of income the burden is on you. Generally our clients set aside 20-30% of every dollar of revenue aside for potential taxes. The struggle is real!

4) Tax Deferral & Planning

Still have lots of profits left and nothing to spend it on? Why pay taxes on those dollars now? Consider opening a tax advantaged savings plan. Depending on your need, one might consider a Traditional IRA, ROTH IRA, SEP IRA, SIMPLE IRA, or Solo 401(k). All of these plans allow for tax deferred or tax advantaged savings and investing but each offers a different level of complexity and contribution limits.

5) Hire the Right People

Find folks with the expertise to guide you through the setup and management of each step we detailed above. This person or firm will need to network with their CPA’s and attorney’s or even your existing team to make the most of your new found success. The goal is to minimize your tax bill, grow your net worth, and protect you from some of the common financial pitfalls seen in both traditional and eSports.

 

More About Us

Warren Street Wealth Advisors was founded by a retired Counter-Strike: Source professional, and we are well aware of the challenges you face. We offer services that give streamers, professional esports players, and interactive media talent the ability to transform themselves from just a  revenue generating entity to a well rounded and tax efficient business. If you’d like to learn more, feel free to contact Blake Street or Joe Occhipinti directly.

 

Disclaimer
Blake Street and Joseph Occhipinti are Investment Advisor Representatives of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Explaining the Basis of Inherited Real Estate

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What is cost basis? Stepped-up basis? How does the home sale tax exclusion work?
Provided by Joe Occhipinti

 

At some point in our lives, we may inherit a home or another form of real property. In such instances, we need to understand some of the jargon involving inherited real estate. What does “cost basis” mean? What is a “step-up?” What is the home sale tax exclusion, and what kind of tax break does it offer? Very few parents discuss these matters with their children before they pass away. Some prior knowledge of these terms may make things less confusing at a highly stressful time.

Cost basis is fairly easy to explain. It is the original purchase price of real estate plus certain expenses and fees incurred by the buyer, many of them detailed at closing. The purchase price is always the starting point for determining the cost basis; that is true whether the purchase is financed or all-cash. Title insurance costs, settlement fees, and property taxes owed by the seller that the buyer ends up paying can all become part of the cost basis (1).

At the buyer’s death, the cost basis of the property is “stepped up” to its current fair market value. This step-up can cut into the profits of inheritors should they elect to sell. On the other hand, it can also reduce any income tax liability stemming from the transaction (2).

Here is an illustration of stepped-up basis. Twenty years ago, Jane Smyth bought a home for $255,000. At purchase, the cost basis of the property was $260,000. Jane dies and her daughter Blair inherits the home. Its present fair market value is $459,000. That is Blair’s stepped-up basis. So if Blair sells the home and gets $470,000 for it, her complete taxable profit on the sale will be $11,000, not $210,000. If she sells the home for less than $459,000, she will take a loss; the loss will not be tax-deductible, as you cannot deduct a loss resulting from the sale of a personal residence (1).

The step-up can reflect more than just simple property appreciation through the years. In fact, many factors can adjust it over time, including negative ones. Basis can be adjusted upward by the costs of home improvements and home additions (and even related tax credits received by the homeowner), rebuilding costs following a disaster, legal fees linked to property ownership, and expenses of linking utility lines to a home. Basis can be adjusted downward by property and casualty insurance payouts, allowable depreciation that comes from renting out part of a home or using part of a residence as a place of business, and any other developments that amount to a return of cost for the property owner (1).

The Internal Revenue Code states that a step-up applies for real property “acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” In plain English, that means the new owner of the property is eligible for the step-up whether the deceased property owner had a will or not (2).

In a community property state, receipt of the step-up becomes a bit more complicated. If a married couple buys real estate in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, or Wisconsin, each spouse is automatically considered to have a 50% ownership interest in said real property. (Alaska offers spouses the option of a community property agreement.) If a child or other party inherits that 50% ownership interest, that inheritor is usually entitled to a step-up. If at least half of the real estate in question is included in the decedent’s gross estate, the surviving spouse is also eligible for a step-up on his or her 50% ownership interest. Alternately, the person inheriting the ownership interest may choose to value the property six months after the date of the previous owner’s death (or the date of disposition of the property, if disposition occurred first)(2,3).

In recent years, there has been talk in Washington of curtailing the step-up. So far, such notions have not advanced toward legislation (4).

What if a parent gifts real property to a child? The parent’s tax basis becomes the child’s tax basis. If the parent has owned that property for decades and the child cannot take advantage of the federal home sale tax exclusion, the capital gains tax could be enormous if the child sells the property (2).

Who qualifies for the home sale tax exclusion? If individuals or married couples want to sell an inherited home, they can qualify for this big federal tax break once they have used that home as their primary residence for two years out of the five years preceding the sale. Upon qualifying, a single taxpayer may exclude as much as $250,000 of gain from the sale, with $500,000 being the limit for married homeowners filing jointly. If the home’s cost basis receives a step-up, the gain from the sale may be small, but this is still a nice tax perk to have (5).

  

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com

www.warrenstreetwealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nolo.com/legal-encyclopedia/determining-your-homes-tax-basis.html [3/30/16]
2 – realtytimes.com/consumeradvice/sellersadvice1/item/34913-20150513-inherited-property-understanding-the-stepped-up-basis [5/13/15]
3 – irs.gov/irm/part25/irm_25-018-001.html
4 – blogs.wsj.com/totalreturn/2015/01/20/the-value-of-the-step-up-on-inherited-assets/ [1/20/15]
5 – nolo.com/legal-encyclopedia/if-you-inherit-home-do-you-qualify-the-home-sale-tax-exclusion.html [3/31/16]