Tax and Financial News for January 2016
Tax Considerations When Delaying Social Security
The timing of when you take your Social Security can have a potentially significant impact on your overall tax strategy during retirement. While each person’s case is unique, delaying Social Security often tends to be the best move. Generally, delaying Social Security gives you a better ability to manage tax brackets when you are no longer earning a salary. Let’s look at the details behind the decision.
Consider the case of a 62-year-old couple who is married and files taxes jointly. Also, assume that both are no longer working and have not yet claimed Social Security benefits. They could potentially spend $20,600 from tax-qualified accounts up to their standard deduction and personal exemption. Further, they also could realize an additional $74,900 of qualified dividends and long-term capital gains and qualified dividends from brokerage accounts while still having a federal tax bill of zero. This is due to the 0 percent long-term capital gain and qualified dividends rate for taxpayers in the 10 percent and 15 percent tax brackets.
If such a couple is wealthy enough, keeping their tax bill at or near zero may not be necessary or advantageous. In cases such as this, it would be beneficial to use these early retirement years without both a salary and Social Security benefits taken to make additional Roth conversions from their traditional IRAs. While engaging in such a strategy would require higher taxes in the near term (as well as trigger tax on the previously untaxed qualified dividends and long-term capital gains from above), there might be much less tax to pay later on.
Tax bracket management is also relevant because Social Security benefits can be taxable. Couples who are married and filing jointly may pay income tax on up to 85% percent of their Social Security benefits once their provisional income* is greater than $44,000. The taxability of Social Security benefits is an important concept for people to keep in mind since the provisional income threshold is not indexed for inflation. As a result, under the current system more and more people will eventually end up paying income tax on their Social Security benefits.
Delaying Social Security until age 70 reduces taxable income and provides more room for Roth conversions and realizing long-term capital gains on taxable accounts. Additionally, subsequent Roth distributions do not count when determining how much of Social Security is taxable. As a result, if you have the capacity to get a large portion of your traditional IRAs converted to Roth accounts before age 70, you can enjoy significant tax savings. Doing so can allow you to pay taxes at lower marginal tax rates and may also help later to lower the amount of required minimum distributions.
Overall, there are many potential tax benefits to delaying Social Security. The actual potential depends on a number of factors, such as overall income levels, sources and types of non-wage income and the composition of one’s retirement accounts. As a result, if you have the cash flow to enable putting off Social Security benefits, it might be worth talking with your tax advisor.
*Provisional income is defined as your adjusted gross income plus one-half of Social Security benefits plus tax-exempt interest.
What’s New in Technology for January 2016
Will Encryption Be Banned?
In light of the recent terrorist attacks, domestic and foreign governments have questioned how much access they should have to encryption keys and electronic backdoors. The debate of balancing the privacy of individuals and the need for law enforcement to have access to the exchange of information for public safety is once again on the table. How can encryption standards keep information safe from criminal hackers while balancing the right of the individual’s privacy in the government’s quest to maintain public safety?
Understanding the Risks in the Debate
The first step is to understand the upside and downside of increased access to computers and networks.
The primary contention for opponents of backdoor access for governments is that it would defeat security best practices, especially when it comes to perfect forward secrecy, where decryption keys are removed immediately after they are utilized. Another concern about putting in backdoors for public safety officials is that it would add another potential exploit for hackers to cause harm. In other words, code that’s intended to be utilized by public safety officials to monitor criminal activity can also be used by criminals to cause harm on a targeted network.
Many proponents of backdoor access for encryption argue that while people have a right to privacy, public safety officials should have access to electronic communication in order to circumvent terrorists and criminals alike who use encryption through Virtual Private Networks (VPN), full-disk encryption programs and even popular mobile device operating systems.
Potential for Misuse
Just as encryption can be used for protection against hackers, it can also be used for illegal purposes. Vulnerabilities discovered by malicious parties or security researchers can also be used by state entities (or those acting in concert with state agencies) to spy on private individuals.
The potential for misuse by any organization already exists when a previously unknown vulnerability in computer code is used. One example is the alleged Israeli-American malware that meddled with the Iranian nuclear program. If backdoors are mandated for technology companies, the potential for unauthorized monitoring of incoming and outgoing data is a constant threat for Internet users.
Factors Affecting the Debate
There are many private and public sector factors that impact the debate for government mandated backdoors against encrypted data. One common argument is that while terrorists are known to use encryption for unlawful purposes, many civilians use VPNs to protect themselves against hackers when conducting personal or financial transactions.
The question is also raised as to who really owns the data that’s subject to search by public safety officials. When data is created and sent through a telecommunication company’s system, questions could arise as to whether the customer or the telecommunication company can disclose the data.
The fight to insert encryption backdoors has met resistance on many fronts, including consumers, the technology sector, organizations with limited resources, and foreign developers who want to create their own encryption standards. Technology companies have already asserted that they value their customers’ privacy. Many customers are concerned with how companies hold and share their data, including how the company responds to data requests from the government. While there are reports the National Security Agency has the capability to break some encryption algorithms, the budget for these activities is limited. Also, foreign developers of encryption programs might be hesitant to disclose source code or add a backdoor.
The pushback from the private sector, along with the government’s limited capability, is expected to keep the encryption debate alive and well for the foreseeable future.
Tip of the Month for January 2016
Tip: How Gamification Plays With Employees
The International Foundation of Employee Benefit Plans conducted a study that revealed when health and wellness programs are executed as part of a comprehensive healthcare strategy, the cost can generate a return on investment of $3 for every $1 spent.
When it comes to wellness, factors such as stress, inertia and overindulgence can play a huge part in why we don’t do things we know are good for us. However, some workers might feel it’s intrusive for an employer to try to influence good health. Their response may be to experience even more stress, inertia and overindulgence – because now they’re expected to engage in healthier behaviors in addition to their work performance. This is why many companies have implemented a relatively new trend in wellness programs: gamification. Instead of setting up heavy-handed expectations and financial disincentives, they create a game out of adopting healthy behaviors.
Wellness gaming strategies have proven to be effective at engaging workers and motivating them to make changes in their behavior. This tactic generally involves three components: rules, rewards and social interaction/collaboration. For example, one company embarked on a companywide 10,000 steps walking program. Some employers pursued their goal as individuals, while others formed teams. Soon, employees were seen walking outside their workplace before and after work and during lunch hours. Individual and team goals were tracked and rewarded.
Some companies have introduced games that incorporate an immersion experience, where players are encouraged to role play by creating a game name and simulated personality. Some even develop their own game-generated catch-phrases to help stay motivated and share their enthusiasm for the game with others.
If you’re familiar with video gaming, the concept of gamer tags and role playing are very similar. For example, a department head may call himself Head Honcho and his assistant, The Gatekeeper.
Departments may stoke the fires of competition to see who or what team reaches their fitness goals first. Rather than a daily chore or item that must be checked off a worker’s to-do list, exercise becomes a shared and fun experience for employees.
Gamification typically incorporates social networking tools so that participants can track each other’s progress and interact from both work and home computers, tablets and smartphones. This helps many workers stay engaged in healthy activities even away from the office, so they don’t slack off over the weekend or when on vacation.
While early research has revealed positive results, the strategy is not without drawbacks. These drawbacks might include:
- Impact on work productivity
- Perceived infringement on personal time
- Conflicts that can arise between competitive vs. recreational participants
- Whether short-term rewards and incentives are effective at maintaining healthy behaviors over the long term
While fun and games may produce results in the short run, ultimately it’s up to each of us to make changes to our lifestyle. After all, without intrinsic motivation, people tend to return to their regular (often unhealthy) behaviors when the games get old.
Regardless, one study revealed that more than three-fourths of employees say rewards provide the incentive to participate in an employer wellness program. Consider that workers who already live healthy lifestyles will do so whether you introduce a game or not. It’s the ones that don’t that you need to motivate, and gaming often provides the right type of incentive.
The following are some guidelines to consider when developing a wellness gamification strategy:
- Keep it simple, easy and achievable
- Points, levels and rewards help drive engagement, ongoing employee participation and healthier behaviors
- Periodically deploy new challenges to re-energize enthusiasm
- Make it easy to track and monitor progress
- Make it social – provide ways for employees to connect socially to share scores, talk about leader-boards, exchange tips/tricks and brag about their success
- Get C-level buy in and participation, if possible
- Capture data to gauge the game’s efficacy and use it to adjust the game to achieve ongoing results