Inherited IRA's come with Critical Choices

Many people who inherit a tax-deferred IRA are confronted with a complex array of rules, restrictions, and deadlines that may make it difficult for them to determine how to proceed. Unfortunately, beneficiaries must often make binding decisions about inherited retirement assets before they may be prepared to do so.

Of course, beneficiaries can liquidate inherited IRA assets as they wish, but they should keep in mind that amounts withdrawn from a traditional IRA are taxed as ordinary income. A better long-term strategy might be to take only the withdrawals required by the IRS, leaving the rest of the inherited assets untouched to keep accumulating on a tax-deferred basis for as long as possible. This strategy may also help spread the tax liability over a longer period of time.

Understanding RMDs

Traditional IRAs are subject to required minimum distributions (RMDs). For original owners, RMDs must begin no later than April 1 of the year after the year in which the investor reaches age 70½. In subsequent years, RMDs must be taken by December 31. Annual RMD amounts are calculated based on the account value (on December 31 of the previous year) and the owner’s life expectancy. This information can be found in the IRS Uniform Lifetime Table.

IRA owners (as well as people who inherit a traditional IRA) who fail to take an RMD could be hit with a 50 percent tax penalty on the amount that should have been withdrawn. IRA beneficiaries are subject to special distribution rules. Spouses typically have more choices than nonspouses.

Three Options for Spouses

1. Roll assets to a new IRA. If the surviving spouse is the sole designated beneficiary, the funds can be rolled into a new account in his or her name. In this situation, the surviving spouse does not have to take RMDs until age 70½, and he or she can name new account beneficiaries. However, a 10% early-withdrawal penalty would apply to distributions prior to age 59½.

2. Transfer assets to an “inherited” or “beneficiary” IRA. If the deceased spouse died before age 70½, the survivor’s first RMD must be taken by December 31 of the year after the decedent’s death, or by December 31 of the year the deceased would have turned 70½ (whichever is later). If the deceased spouse died after age 70½, the surviving spouse must begin taking RMDs before December 31 of the year after death.

3. Pass assets to children or grandchildren. The surviving spouse (as sole beneficiary) can disclaim the IRA and allow it to pass directly to the account’s contingent beneficiaries.

Other Heirs

Generally, nonspouse beneficiaries must begin taking RMDs by December 31 of the year following the year of the original account owner’s death. However, if the original owner passed away after reaching age 70½ and did not take a current-year RMD, the beneficiary must take a distribution by December 31 of the year of death. It’s important for the IRA to be properly titled with the words “beneficiary” or “inherited.” There is no 10% early-distribution penalty for IRA beneficiaries.

RMD rules are even more complex when multiple beneficiaries are designated, and each choice could have far-reaching implications. You may want to seek legal or tax counsel before making any final decisions.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek Naperville tax, legal advice or Naperville investment advisor from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• What to Do if You Inherit Money from an IRA (mint.com)

Understanding Your Social Security Options

About half of retirees file for Social Security benefits when they first become eligible at age 62.¹ The age to receive “full” Social Security benefits is 66 for workers born between 1943 and 1954.

If you were born in this period and file for benefits at age 62, you would typically receive 75% of your full benefit. If you wait until age 70 before filing, your maximum monthly benefit would be equal to 132% of your full benefit.² Your decision on when to file for Social Security might be based on a combination of factors, including your health, life expectancy, work situation, retirement goals, and other sources of income.

If you are married, Social Security allows additional filing strategies that you and your spouse may want to consider. Here are two hypothetical examples shown for illustrative purposes only; individual results may vary. Both examples assume that the husband and wife have reached age 66 and are eligible for full retirement benefits.

Example 1. Bill is eligible for a $2,000 monthly benefit at age 66, but he wants to keep working until age 70 in order to receive his maximum benefit of $2,640 ($2,000 x 132%). Bill’s wife, Alice, is eligible for a monthly benefit of $600 based on her own earnings history. If Bill applies for benefits and requests to have his benefits suspended, Alice could receive a spousal benefit of $1,000 (equal to one-half of Bill’s full benefit amount).³

Example 2. John and Mary are eligible for benefits of $2,000 and $1,600, respectively. If they both claim full benefits at age 66, they could receive a total of $1,036,800 over the next 24 years. Alternatively, Mary could claim her benefit and John could claim a spousal benefit of $800 (one-half of Mary’s $1,600 benefit amount); then at age 70 John could switch to his own maximum benefit of $2,640 based on his own work record. This strategy would yield the couple a total of $1,132,800 over 24 years, an additional $96,000.⁴

Social Security regulations are complex, so it might be wise to seek professional Naperville CPA guidance before taking any specific action.

1) smartmoney.com, March 2, 2012
2–4) Social Security Administration, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• Can I file a Social Security Disability Claim with out a Social Security Disability Attorney's help? (socialsecurityhome.com)

When the Low Rate Is Out of Reach

Mortgages are cheap, but many borrowers can't qualify for the best rates—or get a loan at all. Here's how to tilt the odds back in your favor.

By Sarah Max
For some would-be buyers and refinancers, today's mortgage rates are the ultimate tease.

Loan (Photo credit: Philip Taylor PT)

 While ads tout the lowest rates in history (recently under 4% for a 30-year fixed), qualifying for a mortgage that cheap can be an exercise in frustration or futility. Less-than-perfect credit will hurt, of course, but you may also find yourself struggling if your situation is deemed at all unusual—which could mean anything from owning a business to buying a condo instead of a single-family home. Read on for the best ways to get a deal.

Problem: You're self-employed.
Solution: Give up deductions.
Business may be booming, but don't expect the bank to take your word for it. If you haven't run your own shop for at least two years, you probably can't get a loan. Assuming you meet that hurdle, banks will use the average income on your past two tax returns or the most recent, whichever is lower, when determining the amount you can borrow and the rate on your loan. Try deferring or forgoing deductions, such as those for new equipment or travel, on your 2011 tax return, says Denver mortgage broker Todd Huettner. While that will up your tax bill this year, it may be worth it to nab that lower mortgage rate (lenders won't penalize you for IRA contributions and health-care write-offs).

Also, ask your business contacts for the name of a mortgage broker who knows your industry. A savvy broker should shop around with private lenders—that is, ones who don't resell loans via government agencies and aren't held to their restrictions—since they may give you more wiggle room.

Problem: You've lost equity.
Solution: Pay a fee or take a look at government programs.
If you're trying to refinance and have less than 25% equity, you may have to pay a quarter of a percentage point of the loan to get the lowest rate. As long as you plan to stay in your home a while, it's probably worth paying, says Rick Allen, chief operating officer of loan information site Mortgage Marvel.

Owners who are underwater can ask a lender about the government's revamped Home Affordable Refinance Program (HARP), which is slated to have no loan-to-value limits as of March 11, 2012, says Bob Walters, chief economist for Quicken Loans. To qualify, you must have taken out your loan before June 2009 and be up to date on your mortgage payments.

Problem: You're buying a condo.
Solution: Check the development's finances before you bid.
In many places condo prices have fallen more than those for single-family homes. But for you to get a federally insured loan on a condo, the development must meet strict criteria: 70% of units in new condos must be presold, no more than 10% of the development can be owned by a single entity, and no more than 15% of owners can be more than 30 days late on their maintenance.

A private lender may cut you some slack, but your loan rate will probably be two to three percentage points higher. So find out the details of the development up front. You may be better off buying in a building that meets the criteria for a federally backed loan, even if the property is more expensive, vs. taking a chance on one that has better days ahead (you hope).

Problem: Your credit isn't squeaky clean.
Solution: Fix it, explain it, or get an FHA loan.
The average credit score for a federally backed loan was recently nearly 760, the highest ever. A score of 720 vs. 760 can raise your rate by a quarter of a percentage point. So check your reports (free at AnnualCreditReport.com) and scores from all three credit bureaus ($10 each at MyFICO.com), and correct any errors before you shop for a loan.

If the blemish on your credit is a result of bad luck (illness or job loss, for example) rather than bad habits, a private lender might make an exception, says Huettner. Or run the numbers on a Federal Housing Administration loan, which requires only a 580 score. You'll pay a point up front, plus an annual premium of about 1.1% of the loan value for the first five years, but you're likely to get a better rate than you would with a traditional loan.

The information contained herein represents the opinions of a third party and does not necessarily represent the opinions of Naperville Tax Advisor, Susan S. Lewis or Platinum Financial and are unaffiliated with any of the entities referenced above.

Related articles

• Mortgage rates keep falling, setting new record lows (oregonlive.com)

Why It's Safe to Sell Your Home Again

As the real estate market begins to thaw, it's time to rethink strategies for pricing and marketing your house.
By Lisa Gibbs
Given the lackluster housing market, Meghann and Cort Battles didn't expect much when they listed their four-bedroom home in a Denver suburb for sale in January. So they were taken aback by the onslaught of interest. Meghann juggled 32 showings in the first month. "It's just crazy," she says.

Wait, isn't the real estate market still supposed to stink after five straight years of falling prices? Turns out that while analysts debate when the market will hit bottom, for a surprising number of cities the turnaround has already begun. In December prices rose in 109 of the 384 metro areas tracked by the data firm CoreLogic. Scrub out foreclosures, and that figure climbs to 169.

If you think that recovery means a return to the boom's double-digit price increases, forget about it. "The market won't suddenly snap back," warns CoreLogic economist Sam Khater, who has studied past housing busts. And for harder-hit areas, such as central Florida and the Rust Belt, improving may simply mean things are less bad than they were two years ago.

No matter where you live, though—or where you want to live next—the strategies you employ to sell your home must change to reflect the realities of what's now a healing market. The rebound is likely to creep rather than surge ahead. Yet if you know how to price and market your home properly, you can list your home with confidence that it will sell reasonably quickly and close to your asking price.

See if your town is near recovery. Many economists predict that 2012 will be the last year overall housing prices decline, as the final wave of foreclosures from the slump hits the market. After that, prices should inch up: 2% in 2013, 3% in 2014, according to a consensus of analysts tallied by Moody's Economy.com.

Why? Against a backdrop of low mortgage rates, employment has improved slightly, and home prices have fallen long and hard enough that buyers are beginning to realize that they won't necessarily lose their shirts by purchasing real estate. To see if your neighborhood is on the verge of a rebound, you have to look for the signs.

For instance, is local employment on the upswing? The improving jobs picture has led to shrinking housing stock across the country, as enough investors and bargain hunters have come on the scene to unclog the glut of foreclosures that's been blocking a recovery. Also, "builders are not putting up very many new homes," says Celia Chen, who follows housing for Economy.com.

Understand the buyers' psychology. For years buyers were scared of overpaying for a home. They're less so now, but they've grown accustomed to thinking that they'll score deals, so they tend to act slowly, and they typically start bidding around 10% to 15% below list price.

Denver real estate agent Ron Buss says he sees this all the time with clients such as Aaron Blankenship, who lost 10% when he sold his home in Rochester, N.Y. last year to move to Denver for a new job with Molson Coors. Blankenship, 37, is biding his time renting as he looks for a new home. "I'm much more risk-conscious," he says. "It's a challenge figuring out how much we really want to spend and how much we really want to be tied to our home."

The cautiousness is not just in people's heads. Lenders are still stingy about approving mortgages, and buyers must be sure that whatever price they offer will pass muster with the appraiser and the bank. "It's been a little better in the last few quarters, but credit will take five years to sort itself out," says Economy.com's Chen. Still, a growing number of buyers realize that if they wait too long in this market, they may miss out.

You can hold firm on price if you're patient. The days of having to deal with low-ball offers are coming to an end. Ask Deanna White. The divorced mother of two says she didn't need to sell her home in the Denver suburb of Highlands Ranch; she simply wanted to downsize. In July the house next door, smaller than White's, sold for its list price of $337,000 in three weeks. In August a three-bedroom down the street went for $341,700 in five days. So in the fall White, 41, decided to go for it, buoyed by the fact that she wasn't in a rush to move. Her home, listed at $365,000, attracted offers of around $330,000. White didn't bite but adjusted her price to $359,000. After a holiday lull, activity exploded, and White agreed to sell for $354,000.

The higher your price, the more patient you must be. Cheaper homes are affordable to more buyers and appealing to investors, so recoveries usually start there. Also, jumbo mortgages that aren't government-guaranteed—loans above $417,000 and up to $625,500 in high-cost areas like New York—not only charge higher rates but also come with tougher underwriting standards, further slowing things down.

Screen your buyers. Working only with buyers pre-approved for a sufficient mortgage has long been standard advice. But with more offers rolling in, a good agent will call loan officers for more information. There's an incentive for borrowers to grant their loan officer permission to talk. "If I'm going to speak with a listing agent to advocate on my borrower's behalf, I clear it with the borrower first," says mortgage consultant Kym Poladsky. "Most borrowers who are competing want you to help get their offer accepted."

Get the price right the first time. Set a realistic price from the get-go so your house doesn't look like a throwback to lousy price-slashing times. Think like an appraiser: Analyze comparable sales (look for price per square foot) and see how long competing homes have been on the market.

Scouting active listings is also crucial, says appraiser Matthew George. "You have to know what you're competing against," he says. Before listing, arm yourself with a simplified evaluation of your home, called a summary or restricted-use appraisal ($150 to $200). To find professionals in your area, go to appraisalinstitute.org.

If you think you erred in pricing, act quickly and decisively. Are you getting lots of showings but still no offers after 30 days on the market? Cut the price by at least $10,000, says Justin Knoll, chairman of the Denver Realtors organization. At that point, you can hold firm on price and try to negotiate offers up.

Let your home's value dictate the price. This advice may seem self-evident, but owners may have lost sight of it during the bust. On the one hand, some sellers clung to the false hope of a return to boom prices, so they set prices unrealistically high. Others may have gone too far the other way—by setting the price on their higher-end home below jumbo loan levels simply to draw more interest. In an improving market, that type of thinking isn't necessary.

Understand that you're no longer competing with gutted foreclosures. Buyers are tired of looking at worn-down, neglected, distressed properties and often don't have much extra money to do a lot of fixing up. "Clients tell me all the time, 'I'll spend a little more for something that's ready to move into,' " Knoll says. "Sellers need to take advantage of that."

Take care of structural and cosmetic necessities—but not much more. In lean times, forking over $50,000 for a new kitchen may have seemed like a necessary move to stand out. That's probably the wrong thing to do now, says George, the appraiser. Instead, stick with such basics as paint and flooring. Fix things that will come up in inspection. And respond quickly to feedback. If an issue arises over and over in buyers' reactions, it needs to be addressed immediately.

The information contained herein represents the opinions of a third party and does not necessarily represent the opinions of Naperville Accounting Firm, Susan S. Lewis LTD. and Platinum Financial and are unaffiliated with any of the entities referenced above.

Adapted from the April 2012 issue of Money. © 2012 Time Inc. All rights reserved.

Related articles

• Here's More Evidence That Home Prices Have Hit Bottom (blogs.wsj.com)
• Real Estate Investing Advice - MilitaryVALoan.com (militaryvaloan.com)

Naperville Estate Planning: A Will Isn't Enough

Unless you take extra steps, much of your net worth may not end up where you want it.

Drawing up a will may not be the most pleasant task, but it seems straightforward: You leave behind a legal document that specifies how you want your property doled out when your time on this earth is up. What you may not realize, though, is that much of your net worth can be passed along outside of that will. Without some planning, you could unwittingly disinherit intended beneficiaries, including your children, from significant portions of your estate.

Start with your 401(k) plan. If you’re married, your spouse is automatically entitled to every dime in the account when you die, regardless of what your will or the beneficiary form says. And that applies even to accounts you established with former employers years before you met your better half. If you want to leave a 401(k) to someone else, your spouse must first file a written statement waiving rights to it. In rare situations your 401(k) plan may not require this spousal consent if your marriage is less than a year old. But that’s not the norm, notes Ary Rosenbaum, a retirement-plan lawyer in Garden City, N.Y. In most cases your spouse will become the sole heir to all of your 401(k) accounts the minute you say “I do.”

Don’t count on a prenuptial agreement to solve this kind of quagmire either. A person can’t give up spousal rights to inherit a 401(k) until actually married. “A prenup by itself is not a valid waiver according to the rules governing 401(k) plans,” says Rosenbaum.

Then there’s the money sitting in your IRA accounts. In most states your will has no bearing on who inherits any of your IRAs at the time of your death. The person who gets the cash will be the one you named on the beneficiary form. And it doesn’t matter how long ago you named the recipient. A spouse you divorced 30 years ago, for instance, will usually collect if his or her name is still on the form.

Here, at least, you’ve got a bit more flexibility. In most states an IRA, unlike a 401(k), doesn’t revert automatically to your current spouse when you die; you can name anyone you want as beneficiary. Beware, though: Once you’re married, you can’t transfer the assets of a 401(k) account into an IRA and then name a new beneficiary—effectively disinheriting your spouse from the 401(k)—without obtaining your spouse’s written consent first, notes Ed Slott, a C.P.A. and IRA specialist in Rockville Centre, N.Y. But if you’re about to get married, it’s perfectly legal to roll a 401(k) account into an IRA before you walk down the aisle.

Finally, remember that another financial asset not governed by your will is life insurance. Once again, those who get the money are the people you named on the beneficiary forms. The bottom line: It’s crucial that you get the full picture of who really stands to cash in on your estate. Review the beneficiary designations on your retirement and insurance accounts on a regular basis, and make sure they’re in sync with the intentions outlined in your will. After all, it’s your loved ones you ultimately want to enrich at the end of the day, not their attorneys.

Information provided is general in nature.  Consult an attorney, Naperville Estate Planning advisor or Naperville CPA regarding your specific legal or tax situation.

From the Aug. 15, 2011 issue of Fortune. © 2011 Time Inc. All rights reserved. By Janice Revell 

Related articles

• Significant Assets Not Covered By Wills (lawprofessors.typepad.com)

The Benefits of Giving

A recent study using data from 136 countries suggests that spending money for the benefit of others promotes a feeling of happiness in the giver.¹ This may not be surprising to the many people who donate to charity. Almost three-fourths of charitable giving in the United States comes from individuals (see chart).

Charitable contributions could also help ease your tax burden; therefore, it’s important to keep appropriate records and follow IRS guidelines. Here are some tips that could help you derive tax benefits as you provide help to others.

Qualified organization. Make sure that the charity is a qualified charitable organization under IRS rules. Not all charitable organizations are able to use all possible gifts, so it’s a good idea to check before you give. The type of organization you select can also affect the tax benefits you receive.

Records. Keep written records for all cash and noncash contributions. Cash contributions of $250 or more require a specific written statement from the organization or an appropriate bank or payroll deduction record. Documentation for noncash contributions depends on the amount of the deduction, with progressively more rigorous requirements at thresholds of $250, $500, $5,000, and $500,000.²

Contributions from which you benefit. If you receive a benefit as part of your contribution, such as a “gift” or a dinner, you must deduct the fair market value of the benefit from your charitable contribution.

Volunteering. Although you cannot deduct the value of your time or services, you can deduct unreimbursed out-of-pocket expenses for the benefit of a charitable organization, such as supplies for a fundraiser. You may also deduct vehicle expenses directly related to serving a charitable organization, using actual expenses or a 2012 rate of 14¢ per mile. You need specific documentation for unreimbursed expenses of $250 or more.³

IRS rules for charitable contributions can be complex, and these are only basic guidelines. Before you take any specific action, be sure to consult with your Accounting firm in Naperville.

1) National Bureau of Economic Research, 2010
2–3) Internal Revenue Service, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• Charitable Work Helps Your Bottom Line (turbotax.intuit.com)

To Trim the Bills, Dodge the Draft

True to our motto, Lewis CPA want to help you keep more of what you earn.  Not just as your Naperville Accountant, in your everyday life as well. Periodically we will be providing tips and information that we feel can be useful to all of us. Here's the first!
A few simple do-it-yourself projects could save you 18% on your heating bill this winter.
By Josh Garskof

You don't have to invest thousands in high-tech insulation or a superefficient furnace to cut heating costs. Just sealing drafts could lower your bills by 3% to 18%, according to Danny Parker, a research scientist who works with the Department of Energy. In the high-heating-cost Northeast, that translates to annual savings of as much as $250 if you use natural gas or $550 for oil. Pretty good for low-costprojects you can do yourself.

GO FOR DURABLE WEATHER STRIPPING

If you can easily slide a sheet of paper between a door (exterior, basement or attic) and its frame, it needs weather stripping, says Jen Schwab, director of sustainability for Sierra Club Green Home. Skip cheap self-adhesive foam, which will work loose before the spring thaw. Instead, buy bronze strips and cut them to size with metal scissors. Fasten the strips in place with the provided nails and you’ll never have to replace them. (Drafty windows can be sealed too, but they can be tricky; hire a handyman.)

INSTALL AUTOMATIC DOOR SWEEPS

Sweeps, draft-blocking strips that you attach to the bottom of exterior doors, prevent icy gusts from coming inside. But they can scratch wood floors and catch on welcome mats as the door swings open. Try a spring-loaded automatic sweep, which lifts as the door is opened and presses down to form a tight seal when it's closed.

INSULATE THE ATTIC HATCH

Pull-down attic ladders are notorious energy losers because they’re built with little regard for air sealing or insulation, says Paul Zabriskie, director of EnergySmart of Vermont, a nonprofit home-weatherizing service. You can fix both problems with an attic tent—an insulated fabric hut that youinstall over the hatch, staple to the attic floor and unzip when you need to climb through it.

COVER YOUR AC
An in-wall air conditioner—or a window unit that's too large to remove for the off-season—will cool your home in the winter too, thanks to drafts blowing right through it. Order an insulated wrap custom-made to fit snugly over the unit, keeping the heat in.

SEAL REMAINING CRACKS
Close all doors and windows, and turn on bath, attic and range-hood exhaust fans. They'll suck air out of the house, encouraging drafts to rush in to replace it. Hold a stick of burning incense near gaps, such as where pipes penetrate the wall under sinks and baseboards meet the floor. Where smoke dances near hidden cracks, spray Great Stuff insulating foam; use caulk for visible ones. That's how the pros do it.

From the October 2011 issue of Money. © 2012 Time Inc. All rights reserved.

Landmark Decision: The Supreme Court and the Affordable Care Act

On June 28, 2012 — two years and two months after passage of the Patient Protection and Affordable Care Act (ACA) — the U.S. Supreme Court upheld the constitutionality of the law by a vote of five to four.¹ Unless Congress takes further action, the provisions of the act currently in effect will remain so, and most others will become effective as planned in 2013 or 2014. As a consumer, taxpayer, and investor, you may want to consider the potential ramifications of this landmark decision.

The Individual Mandate — Commerce or Tax?

A primary issue under consideration was the individual mandate, which requires that most U.S. citizens have or buy health insurance beginning in 2014 or pay a penalty. The government had argued that the mandate was within Congress’s power to regulate interstate commerce as well as its power to levy taxes.²

The court’s majority opinion, written by Chief Justice John Roberts, rejected the interstate commerce argument on the grounds that failing to buy health insurance is actually a lack of commerce and thus there is nothing to regulate. However, the majority upheld the individual mandate as a tax, pointing out that no one is forced to purchase health insurance under the law; rather, people can choose not to do so and instead pay a penalty (tax).³

The annual penalty is $95 per adult (up to $285 for a family) or 1% of adjusted gross income (AGI), whichever is greater, in 2014; $325 per adult (up to $975 for a family) or 2% of AGI in 2015; and $695 per adult (up to $2,085 for a family) or 2.5% of AGI in 2016. After 2016, there will be annual adjustments for inflation.

The Congressional Budget Office estimated that the law would extend health coverage to an additional 30 million Americans by 2016, leaving about 26 million without insurance.⁴ A private study suggested that about 7.3 million people would have to obtain unsubsidized coverage or pay the penalty.⁵

Benefits, Cost Controls, & Funding

The individual mandate is intended to provide insurance companies with a larger pool of consumers to help reduce individual costs.⁶ The ACA requires insurers to spend at least 80% of annual premiums on health care or activities that could help improve health-care quality.

Other key provisions:

• Individuals with pre-existing medical conditions cannot be rejected or charged higher premiums (currently in effect for children under 19; effective for adults starting in 2014).
• Lifetime benefit limits are prohibited for all new or reissued policies. Annual benefit limits will be prohibited beginning in 2014.
• Young adults up to age 26 can be covered under their parents’ policies.
• State-based insurance exchanges can offer coverage to individuals and small businesses with up to 100 employees beginning in 2014.

To help pay for the law, an additional 0.9% Medicare tax will apply to earned income exceeding $200,000 ($250,000 for joint filers) in 2013, and a 3.8% Medicare tax on net investment income will apply for people with AGIs exceeding $200,000 ($250,000 for joint filers).

Other funding comes from fees and taxes on drug makers, health insurance providers, tanning salons, and certain medical devices.

Investment and Business Impact

After the court’s decision, insurance company stock prices fell and hospital stock prices rose.⁷ Although this is no guarantee of future performance, it probably reflects concern over the cap on insurance company earnings and the potential for more insured consumers of hospital services.

Starting in 2014, employers with 50 or more employees will face a penalty if they don’t offer employee health coverage. Businesses with 25 or fewer employees may be eligible for a tax credit based on the amount they contribute to employee health insurance premiums.

Expansion of States’ Rights

The Supreme Court struck down a provision that requires states to expand their Medicaid programs or lose all existing federal funding. States that choose to opt out of the expansion would lose only the additional federal funding earmarked for the expansion. The ruling, along with the limitation on federal control over interstate commerce, seems to strengthen the states’ autonomy in their relationship with the federal government. Ultimately, this decision could limit the expansion of Medicaid coverage to many low-income families.⁸

The fate of the Affordable Care Act may depend on the outcome of the 2012 elections, and the impact of the law might not come into focus until the individual mandate takes effect in 2014. It’s likely that the debate on health-care reform will continue.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

1–3, 8) U.S. Supreme Court, 2012
4) Congressional Budget Office, 2012
5–6) Urban Institute, 2012
7) Yahoo! Finance, June 28, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville tax advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• Health Care Insurance Mandate Upheld: What Does It Mean for You and Your Taxes? (turbotax.intuit.com)

11 Ways to Beat the Hidden Costs of College

How to outfit a dorm room, acquire textbooks, get around campus and more — for less.

So you've managed to get a grip on tuition and housing costs. Good work, but you're not done yet. You're about to be hit up for dozens of nonacademic costs—from frat dues and dorm furnishings to laundry services and late-night eats—that can easily add up to thousands more dollars per year. "There are just so many ways for a kid to spend money on a college campus without even being aware of it," says Rod Bugarin, a financial aid consultant and a former financial aid officer at Brown and Columbia universities. To ward off sticker shock, we tallied the tab for the most common extras at universities around the country, then gathered tips from dozens of experts on how to keep those unexpected costs under control.

1. SETTING UP THE ROOM

The damage: Almost all colleges send out a suggested shopping list that adds up to several hundred dollars. If you pony up for high-quality stuff, you can easily spend twice as much.

The fix: Buy used. Some campuses have a Goodwill-like depot where upperclassmen leave dorm furnishings. Ask a resident adviser. And be sure to coordinate with roommates: One person brings the TV, the other can tote the mini-fridge.

2. GREEK LIFE

The damage: Most members pay $1,000 to $3,500 a year to participate in a fraternity or sorority; that price includes dues, insignia clothes and charitable contributions.

The fix: Look for scholarships through your chapter's national Website. Rent clothes for rush and formals—gowns, for example, can be procured on loan from sites like RentTheRunway.com.

3. PARENTS' WEEKEND

The damage: Hotels jack up rates for the official dates. For the University of Iowa's Family Weekend, a room at the Sheraton Iowa City Hotel runs $339 per night, vs. $159 a night the following weekend.

The fix: Pick a different weekend to visit, or get a room farther out of town.

4. GOING TO THE GAME

The damage: Schools push bundled tickets, such as Arizona State's $149 pass to all football and basketball games.

The fix: Do the math. Season tickets are a good deal only if your kid attends most games. An ASU student will have to go to at least eight games to make the season pass worth it.

5. GETTING AROUND

The damage: Parking rates at urban campuses are astronomical. And that's not even counting the $6,800 it costs to own and operate a car, according to AAA.

The fix: Ditch the car. Most campuses give students a discount on a local transportation pass. Or try a car-sharing service like U Car Share or Zipcar. The occasional driver can access Zipcar for about $30 a month.

6. THE GADGETS

The damage: The average freshman spent $960 on a laptop last year, not including the printer, software, case and other accoutrements.

The fix: For PCs, comparison-shop. Most colleges hawk laptop discounts that amount to 10% to 15% off the price; you may get a better deal at a site like TigerDirect.com. For Macs, you'll get the best price buying a refurbished unit (see Apple.com). Buy software from the student store, which discounts up to 75%. Or tap your 529: Tech stuff counts as education spending.

7. SICK BAY

The damage: Most colleges automatically enroll students in their health insurance plan. Costs can range from a few hundred dollars to more than $2,000 a year.

The fix: Keep your kid on your own health plan. You may need to prove that your child has coverage already before you can turn down the school's offering.

8. THE LITTLE THINGS

The damage: Students spend an average of $300 per year in the school store on items such as toiletries, groceries and notebooks.

The fix: Set a $100 limit on insignia items; that should pay for a hoodie, a T-shirt and a few logo-covered notebooks. Load up on items like Gatorade and bar soap at big-box stores.

9. GETTING HOME

The damage: Your child will probably come home more often than you think; a few extra trips per year add up fast.

The fix: Get a $20 Student Advantage discount card for 15% to 20% off Greyhound buses and Amtrak trains, plus discounts at retailers like Barnes & Noble and Footlocker. Shop for air fares on StudentUniverse.com. Look on Facebook or on Zimride.com to find ride shares with other students.

10. OFF-CAMPUS MUNCHIES

The damage: The average student spent $765 last year to dine off campus, according to Student Monitor. Many eateries let kids pay by swiping their ID cards, which fuels overspending.

The fix: Set a limit. Off-Campus Meal Plan cards can be swiped at the register and funded with as little as $300. Look for restaurants that will cut 10% off the bill with an ID. Tap daily deal sites such as Deals4campus.com and Moocho.com. Recently students at Colorado State could get $10 worth of food for $5 at nearby Tios Burritos.

11. TEXTBOOKS

The damage: Students paid about $600 for books last year, according to Student Monitor.

The fix: Cut your costs by more than 50% by buying used books and reselling them at the end of the year. Try an online discounter like Chegg.com. If you don't need to scribble notes in the margin, download or rent e-books from Amazon.com (about 25% to 50% cheaper than buying new).

Sources: Student Monitor; National Association of College Stores; College Board; CheapScholar.org; eCampus.com; American College Health Association; Alltuition.com; American Student Assistance; Aristotle Circle; Campus Computing Project; CNET; Association for the Advancement of Sustainability in Higher Education; Money research.

The information contained herein represents the opinions of a third party and does not necessarily represent the opinions of Susan S. Lewis LTD or Platinum Financial Services and are unaffiliated with any of the entities referenced above. For additional Naperville Education Planning advice as well as how having a college student will affect your Naperville tax preparation, please feel free to contact us today.

Adapted from the April 2012 issue of Money. © 2012 Time Inc. All rights reserved.

Related articles

• Pay for College - Financial Aid Glossary (bigfuture.collegeboard.org)