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This is a publication by Scott Anderson Financial. Scott K. Anderson, CPA, CFP®, EA is a Registered Investment Advisor in Newport Beach, California.
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Scott Anderson Financial

In This Issue

Financial Trivia

A (for Amadeo) P Giannini founded what was to become Bank of America in San Francisco in 1904.
A. What was the original name of the bank?
B. What was the innovative (for that time) marketing strategy of the bank?

Click here for the answer.

Monthly Quote

"Someone is sitting in the shade today because someone planted a tree a long time ago."

-- Warren Buffett,
investor and philanthropist

The Federal Budget Deal Tweaks a Social Security Claiming Strategy

Buried in the budget deal signed by President Obama last week were two tweaks to the relatively arcane though profitable Social Security claiming strategies known as “file-and-suspend” and the “spousal benefit”.  

The two claiming strategies were put into place by legislation signed by Bill Clinton.  The purpose was to give seniors an incentive to stay in the workforce longer.

For the most part, the two claiming strategies only affect couples both of whom will reach full retirement age by May 1, 2016. 

Basically, for everyone, Social Security benefits increase 8% per whole year that the claimant delays taking their Social Security benefit beyond full retirement age. This increase is called delayed retirement credits. Delayed retirement credits stop accruing at age 70. As a result, most financial planners will normally encourage people to wait/work as long as possible until the age of 70 as the 8% guaranteed increase in benefit each year is almost impossible to beat.  

The following table shows Social Security’s full retirement age by year of birth. 
 
For Couples

The file-and-suspend claiming strategy made it possible to both members of a couple who are past full retirement age to delay claiming benefits based on their own earnings records while the lower earning spouse received a spousal benefit based on the higher earning spouse’s earnings. The spousal benefit is generally calculated as 50% of the other person’s benefit that would otherwise be paid at full retirement age.   

To do this, one individual files for benefits and suspends them, while the other files a restricted application to collect only a spousal benefit – not his or her own earned benefit even if it would be higher than the spousal benefit. That way, both individuals can take advantage of the delayed retirement credits while getting some Social Security benefits in the meantime.  At age 70, the individual claiming the spousal benefit would then have the option to take the higher of the spousal benefit or the benefit based on their own earnings as escalated by the delayed retirement credits.  In effect, the party claiming the spousal benefit gets a second bite of the apple at age 70. 

The new law ends that strategy.

Under the new law, after May 1st 2016, Social Security will no longer allow spouses to submit a new claim for spousal benefits based on the earnings record of a worker who has suspended his or her own benefit.

So for a married couple who will both be Social Security’s full retirement age before May 1st, 2016, there is still a limited window to elect the file-and-suspend benefit claiming strategy.

Couples who are already using the file-and-suspend claiming strategy are grandfathered so there is no effect on their benefits as a result of this change in the law. 

The spousal benefit is also going away. Workers who turn 62 or older this year may still file for a spousal benefit but the benefit will be the higher of the spousal benefit or the workers own benefit at the time the claim is made. There is no ability to take a second bite of the apple. Workers who delay claiming their benefit until after full retirement age can still enjoy the 8% delayed retirement credits until age 70.

For workers under 62 years of age this year, that one time option of a spousal benefit is gone. 
 
For Widows and Widowers

Generally, widows and widowers won’t be affected by the new law. Individuals who are eligible for both earned and survivor benefits will continue to have several claiming strategies open to them. Starting at age 60, a survivor can take a reduced benefit based on his or her deceased benefit and then switch to his or her own benefit later if it is higher. Alternatively, the survivor can start with his or her own benefit as early as age 62 and then switch to a full survivor benefit at full retirement age. 

Ostensibly the changes are being made because it will save the Social Security administration on the order of 10 billion dollars a year over time.  Moreover, only about 100,000 people have actually elected the file-and-suspend strategy as most people in recent years have tended to claim early retirement benefits due to the job market and the urban myth that Social Security will run out of money.     

For Single People

For single people who will reach full retirement age before May 1st 2016, “file–and–suspend” allowed a single individual to file for benefits and then suspend them.  Delayed retirements would accrue but if for some reason, the individual did not wait until age 70, the individual could go back and claim the full retirement age benefit and get the lump sum payment of all benefits that should have been paid had the file-and-suspend application not been in place. Of course the 8% delayed retirement benefits were forfeited.  

I asked Riley, our Golden Retriever, what she thought of these changes.  She was sleeping beside my desk when I started the question and suddenly opened her eyes and tilted her head up when I mentioned that the benefits were ending.  I quickly told her that I, and not the US Government, was in charge of her social security and there would be no changes in her daily walk or meal schedule as far as I could see. She looked at me for another moment and then put her head back down and closed her eyes. No one likes change least of all dogs. I dread having to discuss with Riley the changes that will have to come in entitlements, government spending, and in the tax code if we are ever going to get the US Government back into some form of sustainable financial balance for ourselves, our dogs, our kids and their kids.
All the best,
Scott K Anderson Jr., CPA, CFP®, EA
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No Good Deed Goes Unpunished

When the Sum of the Contributions Is Greater Than the Parts

The US Tax Court showed no charity when it disallowed $37,315 of non-cash contributions (Kenneth Kunkel, TCM 2015-71).  The case is instructive because many people occasionally move their residence and make a significant non-cash contribution of furniture and other household goods in the process of downsizing.

Kenneth and Susan Kunkel claimed a $37,315 charitable deduction for non-cash contributions on their 2011 tax return. The Kunkels claimed to have donated property to four organizations: their church, Goodwill, Purple Heart, and Vietnam Veterans. They had no receipts, photos, or other documentation for the contributions, but claimed that they didn’t need receipts because each donation was less than $250.

What documentation is required?

$250 or more. For all contributions of $250 or more, the taxpayer generally must obtain a contemporaneous written acknowledgment from the donee (§170(f)(8)).

Less than $250. “Separate contributions of less than $250 are not subject to the requirements of Subscribe Share Past Issues Translate §170(f)(8), regardless of whether the sum of the contributions made by a taxpayer to a donee organization during a taxable year equals $250 or more” (§1.170A-13(f)(1)).

$500 or more. Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500 (§170(f)(11)(B)).

More than $5,000. Still more rigorous substantiation requirements, including the need for a “qualified appraisal,” are imposed for contributions of property with a claimed value exceeding $5,000 (§170(f)(11)(C). “Similar items of property” must be aggregated in determining whether gifts exceed the $500 and $5,000 thresholds (§170(f)(11)(F)).
 
Focus is the Aggregation of Donations Not the Individual Items

What are “similar items?” The term “similar items of property” is defined as “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware (§1.170A-13(c)(7)(iii)).  

The court categorized similar items from Kunkel’s list of non-cash items.
 
Clothing - $21,920
Books - $8,000
Furniture - $3,090
Household items - $1,653
Toys - $1,072
Telescopes - $800
Jewelry - $780
 
No appraisals and no receipts equal no deduction.

Clearly the clothing and book donations exceeded the $5,000 value and required appraisals to properly substantiate the deduction. All other categories exceeded $250 and required receipts. The court agreed with the IRS’s disallowance of all non-cash contributions.

Conclusion: Claiming a $6,000 contribution of “household goods” would require an appraisal. Claiming a $3,000 donation of furniture and a $3,000 donation of clothing would not. Categorize the donations carefully.
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By The Numbers: As of October 30, 2015

Click Here For The Monthly Update


Yield Curve: US Treasury Securities Versus Maturity

Dark Color – November 6, 2015; Light Color – One Year Ago



This is a “normal” yield curve – sloping upward – longer maturities command higher rates than shorter maturities reflecting higher risk of inflation in the meantime. All interest rates use the US Government yield curve as the reference as the US Government rates are considered riskless which means there is no chance of bankruptcy because the US Government can simply print money to pay off its obligations.

Analysis: rates are not moving much in anticipation of the Fed hiking the Fed Funds rate in the near term. Note that the Fed can only influence the very shortest maturities so there is a real question whether the Fed raising rates will have much effect at all on the entire yield curve.

Source: http://news.morningstar.com/TreasuryYield/bonds.aspx
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Financial trivia answer:  Bank of Italy. The name was not changed to Bank of America until 1930. For its time the Bank of Italy focused on needs of ordinary people (initially the Italian immigrant community) whereas most banks at that time catered to wealthy depositors.
IRS Circular 230 Disclosure: if this newsletter contains any type of tax advice, please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to the matter.
Copyright © 2015 Scott Anderson Financial, All rights reserved.​

P.O. Box 7463 | Newport Beach, CA 92658 ​| (949) 200-7111​

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