Source: The New Case For Gold
Following a successful press conference for my friend Tres Knippa & Mr James Rickards: Financial Threat & Asymmetric Warfare Advisor CIA & Pentagon, portfolio manager, lawyer, economist & New York Times best seller author of Currency Wars.
I am looking forward to reading my advance copy of his new book: The New Case For Gold. Jim is the most visible, vocal & intelligent proponent for the gold standard today!
Ellen Brown is an American author, political candidate, attorney, public speaker, and advocate of alternative medicine and financial reform, most prominently public banking.
Brown is the founder and president of the Public Banking Institute, a nonpartisan think tank devoted to the creation of publicly run banks. She is also the president of Third Millennium Press, and is the author of twelve books, including Web of Debt and The Public Bank Solution, as well as over 200 published articles.
She has appeared on cable and network television, radio, and internet podcasts, including a discussion on the Fox Business Network concerning student loan debt with the Cato Institute‘s Neil McCluskey, a feature story on derivatives and debt on the Russian network RT, and the Thom Hartmann Show’s “Conversations with Great Minds.”
IRS Hunts Belize Accounts, Issues John Doe Summons To Citibank, BofA
A federal judge issued an order allowing the IRS to serve a John Doe summons to reveal Americans with offshore accounts in Belize. Targets are Belize Bank International Limited (BBIL) and Belize Bank Limited (BBL). The IRS wants to know who has accounts at BBIL, BBL, and others. But the order entitles the IRS to get records of correspondent accounts at Bank of America and Citibank.
BBL, BBIL, and Belize Corporate Services (BCS)–which sells off the shelf companies–are based in Belize. But the John Doe summonses direct Citibank and BofA to produce records identifying U.S. taxpayers with accounts at BBL, BBIL, and affiliates, including correspondent accounts to service U.S. clients. Transactions in correspondent accounts leave trails the IRS can follow. The IRS obtains records of money deposited, paid out through checks, and moved through the correspondent account through wire transfers.
The IRS already knows about these entities from the IRS offshore disclosure program, OVDP. And now the IRS can ferret out depositors who didn’t step forward. It shows the push me pull you of the many ways the government has of gaining secret bank records. Whistleblowers, cooperating witnesses, the OVDP treasure trove of data and more. A John Doe summons to UBS AG produced records on the now defunct Swiss bank Wegelin & Co.’s correspondent account at UBS.
A John Doe summons to Wells Fargo sought records of the Barbados-based Canadian Imperial Bank of Commerce FirstCaribbean International Bank. The government has it down to a science. Remember, coupled with a key whistleblower, in 2008, a John Doe summons blew the lid off the hushed world of Swiss banking. A judge allowed the IRS to issue a John Doe summons to UBS for information about U.S. taxpayers using Swiss accounts. That eventually led to Americans scrambling for cover and UBS forking over names and a $780 million penalty.
Unfortunately, pension promises for providing current income levels in retirement are unsustainable, mainly due to the ballooning liabilities of these unfunded schemes.
Government reforms to address this has created many new changes to the schemes, resulting in approximately 4 million public sector workers will see huge reductions in their pensions, along with raising the state retirement age for access.
Register for an in-depth overview now, and I’ll also send you the top actionable compliant strategies which many individual members are using to secure their pensions.
Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.
Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.
That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.
“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.
Banks are already preparing for the next re-evaluation of oil and gas credit lines, reviews which typically take place twice a year in April and October. The loans are based on the value of drillers’ producing reserves, which has shrunk as oil prices fell. Many companies are also losing protection as hedges that locked in prices as high as $90 a barrel begin to expire.
“There’s another redetermination cycle in the fall,” Marianne Lake, chief financial officer at JPMorgan in New York, said July 14 during a conference call to discuss the company’s earnings. “And I’m not going to say likely but it’s possible we’ll be selectively downgrading some clients.”
Banks so far have been willing to keep the money flowing because drillers that come close to maxing out their credit lines have paid them off by tapping public markets. U.S. producers have raised about $44 billion through bonds and share sales in the first half of this year, the most since 2007, according to data compiled by Bloomberg and UBS Group AG.
Now the appetite for that debt is dwindling. Bonds have become more expensive and are laden with more onerous terms, including liens against drillers’ oil and gas assets. The average coupon has increased to 6.84 percent in 2015 from 6.36 percent in 2014, according to data compiled by Bloomberg.
Some of the bonds issued this year are already trading at levels indicating financial distress, including $1.25 billion issued last month by SandRidge Energy Inc. More than $22 billion out of the $235 billion in debt owed by the 62 companies in the Bloomberg North America Independent Explorers and Producers index is trading at distressed levels. Their yields are more than 10 percentage points above U.S. Treasuries, as investors demand higher rates to compensate for the risk they won’t be repaid.
Halcon swapped some of its debt for shares this year to help reduce borrowing costs, leaving some bondholders with stock that was worth less than they were owed. The company also issued a $700 million second-lien bond in May.
In the event of a Halcon default, Standard & Poor’s estimates that unsecured bondholders would get, at most, 10 percent of the almost $2.6 billion they are owed. Banks have first dibs on most of the company’s assets. Other investors will get next to nothing. Even so, banks aren’t eager to take over drilling the oilfields themselves.
“They certainly don’t want to push anybody over the edge because the last thing the banks want to do is to try to run a company,” said Robert Gray, a partner at law firm Mayer Brown LLP who has worked on company restructuring.
Banks are under pressure from regulators to more frequently review their energy lending and cut back credit lines as the value of collateral drops. In April, the U.S. Office of the Comptroller of the Currency flagged oil and gas loans as one of the lending industry’s biggest emerging risks.
Wells Fargo saw a $416 million increase in past-due loans in the second quarter, most of them energy-related, the company said in a July 14 presentation. The impact is “relatively immaterial,” CFO John Shrewsberry said.
JPMorgan set aside $140 million to cover potential losses on oil and gas loans, Lake, the CFO, said during the bank’s conference call.
“For the weaker companies, it could be very, very painful,” Vallee, the partner at Paul Hastings, said of the potential downgrades. “Some of them are essentially running on fumes.”
For many, the two most important sources of retirement income are Social Security benefits and distributions from retirement accounts, including required minimum distributions after age 70 ½.
But these two present a tax challenges.
The rules for calculating taxes on distributions from retirement plans are not the same as those for taxing Social Security.
Withdrawals from employer retirement plans and IRAs are taxed as ordinary income, but Social Security benefits may or may not be taxable, depending on a few factors.
Advisor’s must help their clients create a plan that will optimize both income sources in terms of benefits and taxes.
Under the tax code, there are special rules for calculating the taxation of Social Security benefits. No one ever pays taxes on more than 85% of their benefits.
This means 15% is tax-free for everyone. However, these tax rules do not apply to distributions from retirement plans.
The amount of your clients’ Social Security benefits that are subject to income tax depends on the total amount of combined, or provisional, income they have.
The formula for calculating this can be a bit confusing; see the “Add It Up” graphic.
Note that adjusted gross income includes wages, self-employment income, dividends and interest, capital gains, pension payments and rental income, among other items.
If a client is single and has a combined income between $25,000 and $34,000, up to 50% of the Social Security benefits are subject to tax. If the combined income is more than $34,000, up to 85% of Social Security benefits are subject to tax.
If clients are married filing jointly, they may have to pay taxes on 50% of Social Security benefits if their combined income is between $32,000 and $44,000. And if their combined income is more than $44,000, up to 85% of their Social Security benefits are subject to tax.
Unlike many thresholds in the tax code, these amounts are not indexed for inflation.
RETIREMENT PLAN RMDs
RMDs and other distributions from retirement plans add a layer of complexity to the taxation of Social Security benefits.
When calculating combined income for the taxation of Social Security income, you must include distributions from retirement plans, including RMDs from both IRAs and employer plans.
RMDs can increase the taxation of Social Security because they raise the AGI and thus boost combined income. But, of course, clients should not stop taking RMDs to lower the taxation of their Social Security, because there is a 50% excess accumulation tax for not taking (or not taking enough of) an RMD.
Clients should plan, however, for the potential impact RMDs may have on Social Security benefits. There are several planning strategies advisors should at least consider.
SPENDING DOWN THE IRA
One strategy that could make sense for clients is “spending down” IRAs in early retirement to delay claiming Social Security benefits.
This approach offers several primary benefits. Among them:
- Delaying Social Security benefits can result in higher monthly payments for life (and, potentially, over the lifetime of a surviving spouse).
- Required minimum distributions will be smaller due to lower year-end balances. As a result, combined income may be lower, resulting in a smaller amount of Social Security benefits becoming taxable.
- By swapping out IRA income for Social Security benefits, a client may be able to have more spendable dollars due to the relative tax efficiencies of those benefits.
However, there are also some drawbacks to this approach:
- There is no guarantee a client will live long enough to see the benefits of delaying Social Security payments.
- IRA assets remaining at a client’s death can be passed on to beneficiaries, but Social Security benefits generally die along with the client (or spouse).
Another potential strategy to consider is converting IRAs and other pretax retirement account funds to Roth IRAs prior to taking Social Security benefits.
The primary benefits of this approach include:
- Unlike supposedly tax-free municipal bond interest, tax-free distributions from Roth IRAs don’t increase combined income. Therefore, tax-free distributions from Roth IRAs can be taken without subjecting Social Security benefits to increased taxation.
- Roth IRAs have no required minimum distributions, so clients can supplement their other income (including Social Security benefits) with distributions from Roth IRAs as they please, without triggering taxation of Social Security benefits.
There are, of course, some downsides to this approach as well.
For one thing, it may be more tax efficient for a client to have more of their future Social Security benefits included in their income than it is for them to complete a Roth IRA conversion today.
And, of course, there’s no guarantee that the rules for Roth IRAs today will be the same as when a client is eligible to claim Social Security benefits.
If the Roth IRA conversion strategy is going to be used to minimize the taxation of Social Security benefits, it’s often best to do so before benefits are received. That’s because, when clients are receiving Social Security benefits, converting IRA or employer plan funds to a Roth IRA may increase the taxation of Social Security for the year of the conversion.
On the other hand, affluent clients who have higher combined income from wages, interest, dividends and RMDs may already be paying tax on 85% of their Social Security benefits. A Roth IRA conversion won’t affect their Social Security, because the taxes they’ll owe on this income can’t increase.
Of course, the Roth IRA conversion itself will add to their tax bill and could push them into a higher tax bracket.
A recent tax court case illustrates the confusion over how the tax rules work for both Social Security benefits and RMDs, and how they can affect each other.
In this case in question, Dennis J. McCarthy et. ux. v. Commissioner, Holly and Dennis McCarthy, a married couple, were both receiving Social Security benefits. Holly — a retired school nurse who participated in Ohio’s State Teachers Retirement System’s qualified retirement plan — was also taking distributions from that plan.
In 2011, she received a $27,701 plan distribution. She received a copy of IRS Form 1099-R reporting a $27,701 gross distribution and a taxable amount of $27,413. (The small difference between the gross and taxable amount was $288 of tax-free basis, or after-tax, funds.)
No federal income taxes were withheld, in all likelihood because she chose to have zero withheld for taxes.
The McCarthys then filed a joint federal income tax return for 2011 in which they reported only one-third ($9,233) of the retirement plan distribution, with the tax able amount as $8,945 ($9,233 – $288 basis = $8,945).
Holly and Dennis also reported receiving Social Security benefits totaling $37,600 — an amount that, in truth, included some of Holly’s plan distribution — with a zero taxable amount on their tax return.
In 2013, the IRS sent the couple a Notice of Deficiency for errors in their 2011 federal income tax return. The IRS claimed the McCarthys owed over $1,000 more in taxes, because they had failed to include over $18,000 of Holly’s plan distribution as income.
The IRS also claimed that the couple should have included in income more than $3,800 of Dennis McCarthy’s Social Security benefits that year.
FIGHTING THE FEDS
The McCarthys disagreed with the IRS and took the issue to Tax Court, where they represented themselves. They were age 82 at the time.
Unfortunately for the McCarthys, the court agreed with the IRS and ruled that the pair owed taxes as a result of their miscalculations with respect to both the retirement plan distributions and the Social Security benefits. The court noted that the McCarthys had mistakenly claimed some of the Ohio teachers plan distribution as Social Security benefits.
In its ruling, the court found that “by classifying a portion of the STRS Ohio distribution as Social Security benefits, petitioners sought to minimize tax on the untaxed benefits Mrs. McCarthy accrued during her career.”
The court also ruled that the couple miscalculated the taxable amount of Dennis McCarthy’s Social Security benefits. He received $19,132 in Social Security benefits and reported none of it as taxable for 2011.
The McCarthys’ only argument was to ask the court to make an “equitable resolution” in this case. They obviously were confused, and argued that it was unfair that two agencies of the federal government tax their retirement distributions differently.
They said: “In essence, what we seek is ‘Judicial Redress’ of the financial inequity created by two different Arms of Government (SSA and IRS) defining the same monies (2/3 of the STRS Pension) in two completely opposite ways each to the detriment of the taxpayer. This seems to violate Court Rulings that the Government ‘Can’t Have Its Cake And Eat It.’ ”
The McCarthys are right that this is confusing. Even so, the court responded by saying that it must enforce the law as written and cannot change it to give them a break; only Congress can do that.
No one wants to spend their retirement years fighting the IRS. Advisors must ensure that their clients avoid a fate similar to that of the McCarthys by helping them understand the often confusing rules of taxation for different income sources.
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Original article by Ed Slott, a CPA in Rockville Centre, N.Y., is a Financial Planning contributing writer and an IRA distribution expert, professional speaker and author of several books on IRAs. Follow him on Twitter at @theslottreport.
The number one financial concern of baby boomers nearing retirement is not being able to maintain their current lifestyle throughout their golden years, reveals a new survey by one of the world’s largest independent financial advisory organizations.
The second biggest worry is not being able to stop work when they want to; and the third is not being in a position to financially support close relatives…
The Top 3 Financial Concerns of Boomers Approaching Retirement | ThirdAge.