Social Security Closes Free Loan Loophole - Bargaineering

Social Security Closes Free Loan Loophole

Posted: 15 Dec 2010 09:06 AM PST

Social Security Card Before the Social Security Administration published new guidance to change it, you could effectively take an interest free loan against your Social Security benefit if you were eligible to receive benefits. Once you were eligible to receive benefits, you could start taking your benefits early (and thus a reduced benefit) and then withdraw your benefit application once you hit full retirement (and thus maximum SSA benefits). Once you withdrew your application, you’d have to pay back the benefits you received. Once you did that, you were all square with the SSA and you could continue to wait until full retirement age, when you’d receive the maximum benefit. The end result was an interest free loan.

You can start taking Social Security benefits at age 62 but it’s reduced compared to what you’d at 66, which is full retirement age. You would start claiming the benefits at 62, put them in an interest bearing account, and then withdraw your application when you turned 66. At that point, you’d pay back whatever benefits you received and keep the interest. Then immediately apply again and get full benefits.

The door has pretty much been closed on the free loan loophole (OK, technically it’s been shut to a sliver) when the SSA created a 12-month deadline to withdraw your application. In other words, you can get a loan but it’s only for a year. A percent or two in interest each year for four years might be worth the paperwork but it’s not really worth it for just 12 months.

Hat tip to the fine folks at the NY Times Bucks blog, where I first read about this change.

(Photo: thehi)

Social Security Closes Free Loan Loophole from personal finance blog Bargaineering.com.

Why You Should Put Off Year-End Charitable Contributions

Posted: 15 Dec 2010 04:42 AM PST

We’re getting close to the end of the year and as everyone does their year end tax planning, it’s important to remember that not all “last minute tax tips” work for everyone. It’s important to analyze your particular tax situation before blindly following these ideas – RJ Weiss shares with us why you might want to wait until January 1st, 2011 to make those charitable donations.

Now that December is here, prepare yourself for Christmas music, crowded malls, and of course, the hundreds of personal finance articles about "Year-End Tax Planning."

Many of these articles do serve a purpose. However, the majority, do more harm than good.

A common topic among articles about year-end tax planning is the deduction of charitable contributions. What many taxpayers don't understand is that charitable contributions are only deductible if you itemize your deductions, which only makes sense for about 25% of taxpayers.

The purpose of this article is to discuss how you still might be able to benefit from charitable contributions, even if you don't plan on itemizing this year. In order to do that, let's review what deductions are.

Tax Deductions

A deduction reduces the amount of income you're taxed on. The greater your deductions, the lower your taxable income.

There are two deduction categories, standard and itemized. With very few exceptions, you're allowed to take one or the other when filing your taxes for the previous year.

The standard deduction is a flat amount that you're allowed to deduct based on your filing status. For 2010, the standard deduction for a single is $5,700 and $11,400 for a married couple filing jointly.

Itemized deductions are a variable amount that you're allowed to deduct from your income. This amount is based off of your expenses during the year that qualify as itemized deductions.

Taxpayers that choose to itemize, due to the amount of their itemized deductions being greater than the standard deduction, include:

The Homeowner – Mortgage interest, property taxes, and PMI are all itemized deductions.
The Sick – If you spend over 7.5% of your income on medical care, your costs can be itemized.
The Charitable – Charitable contributions to a qualified charity, can be itemized.

Click the following for more on itemizing.

Thinking Ahead

Next time you come across an article about year-end tax planning moves, it's important not only to think back about what deduction you plan to take this year, but think ahead as to what deduction you plan to take next year.

For example, in 2009 I became a homeowner. Up until that point, I had always taken the standard deduction. However, now as a homeowner paying mortgage interest and property taxes, my itemized deductions were greater than the standard deduction.

Looking back, I made a few charitable contributions in December 2008, even though I knew I wasn't going to itemized deductions that year. If I delayed those gifts just a few more days until January 1, 2009, I could have deducted those gifts in 2009.

For those of you thinking about making a year-end donation, I applaud your generosity. However, before you blindly accept the advice that making charitable contributions is a good tax move, think ahead to what deduction you plan to take this year and next year.

If you're more likely to use the standard deduction again on your 2010 taxes, wait until January 1, 2011 to make your charitable gifts. Doing this increases your chances of you being able to deduct your charitable gifts.

This is a guest post from RJ Weiss. RJ is an aspiring financial planner, who writes about financial planning for a small community of young adults, at Gen Y Wealth.

Why You Should Put Off Year-End Charitable Contributions from personal finance blog Bargaineering.com.