Jason Parker discusses taxes in retirement with Kelly Erb. 

Kelly Phillips Erb is an attorney for The Erb Law Firm, P.C. in southeastern Pennsylvania where she focuses on tax law for businesses and families. She is also a freelance author and writer.

Kelly has published Ask the TaxGirl: Everything Parents Should Know About Filing Taxes (Including Child Care Expenses, Medical Costs, and the Earned Income Tax Credit) together with Forbes.
Kelly authors the popular Taxgirl blog for Forbes.com; the blog has been recognized by the ABA Journal as one of the top 100 blogs written by lawyers for the past several years running and in 2013, was named to the Blawg Hall of Fame. Kelly has also written about taxes for Reuters, Time, and AOL’s WalletPop, and has been tapped for her ability to explain taxes in plain English by Esquire, National Public Radio’s Marketplace, CBS Radio’s Marketwatch, Inc., and the Philadelphia Inquirer.
View Kelly’s YouTube channel: http://www.youtube.com/taxgirlvideos
Below is the full transcript:

Speaker 1: Welcome back America to Sound Retirement Radio. Where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition to retirement. Now here is your host, Jason Parker.

Jason Parker: Seattle, Tacoma, Olympia, Gig Harbor, all the good people in Kitsap County and for those of you tuning in from around the country via Itunes or a podcast, thank you so much for making Sound Retirement Radio your place for excellent retirement advice. As you know this program is all about bringing experts to the program, people who we believe can add significant meaningful value to your financial life as you prepare for and transition through retirement. You’re listening to episode 048, so if you’re driving down the road this morning and you’re not able to catch the whole thing, I encourage you to visit soundretirementradio.com or soundretirementplanning.com. We archive all of these programs for you so you can go back and listen at your convenience. I’m Jason Parker and like I said, we’re looking to bring experts onto the program. I got a really great expert for you but before we bring them onto the program, I know how much you look forward to our jokes every Saturday morning so I have one here for you.

 What do you call a cow with no legs? Ground beef of course. Oh, that’s disturbing. All right, let’s take a minute and just renew our minds before we get started. I got a verse that I’d like to share with your. This comes from Luke Chapter 11 Verse 33. “No one lights a lamp and then hides it or puts it under a basket. Instead, a lamp is placed on a stand where it’s light can be seen by all who enter the house.” One more time just to let this soak in “No one lights a lamp and then hides it or puts it under a basket. Instead, a lamp is placed on a stand where it’s light can be seen by all who enter the house.”

 All right, with that let’s get started on our program and today’s episode we’re going to be talking all about taxes and retirement. This is everybody’s favorite subject. I have Kelley Phillips Herb, who is an attorney for the Herb law firm in South Eastern Pennsylvania. Where she focuses on tax law for businesses and families. She’s also a freelance author and writer. I know that she writes a blog at Forbes.com. She’s been named as Philadelphia’s 40 under 40 by the Philadelphia Business Journal. Just a real expert here on taxes so I’m really happy to have you on the program. Kelley Herb, welcome to Sound Retirement Radio.

Kelley Erb: Hi, thanks for having me.

Jason Parker: You’re welcome. So Kelley, everybody loves paying taxes and I know you have a Masters in Taxation so we’re going to talk a little bit more about taxes but at Sound Retirement Radio, we’re really focused on retirement issues. You had a couple of … Before the program, I was able to look at some of the questions that are most commonly asked of you. One of them that really stands out was you had a question here about, let me read this to you. What are the tax consequences of putting my child’s name on my bank accounts if I want them to help manage my finances? I thought that was a great one. Would you take a minute and address that one for us?

Kelley Erb: Sure. Well this is actually one that comes up a lot in our practice because a lot of well meaning folks often actually at the bank will suggest that you just put your kids name on your account as an easy way to help you manage your account, that way they get the statements, they can write checks on your behalf, that kind of thing. It feels really innocuous when you do it because, you know, especially if the banks advising you that this is a good idea. It’s actually potentially thought a disaster actually depending on what happens and where you live. There are couple of issues that you should think about not withstanding the estate planning issue which if your kids name is on there, it might end up that your kid, depending on the laws of your state and how it’s titled, your kid might get the entire thing when you die. Your intention might have been disbursed amongst your children.  There can be some consequences that aren’t tax related that can be pretty awful. But on the tax side, it’s an account that’s producing income if it’s a [inaudible 00:04:35] account or if it’s some kind of account that has other tax consequences attached to it.

 You have basis issues that kind of thing. You’re setting yourself up for all kinds of problems. One of them might be that the income could be attributed to you and your child. It could be that if you are hoping to make a gift or if later on you’re hoping to get a step up in basis when you pass away, you might lose that if it’s now, or at least half of that, if it’s jointly titled. On the inheritance and the state tax side something that people don’t always think about, again depending on the laws of your estate, it could be that … We always tend to think that we’ll die before our kids do. But if your kid dies before you do and you have this joint account that was your money to begin with, you just put that name on there for convenience, you might end up getting taxed on your money getting it back at the death of your child. I actually work, I do a lot of estate work and have seen that happen in Pennsylvania where a child may die more because of an illness or an accident. The parent actually has to pay inheritance tax to get their own money back.

 One of the thing I try to caution folks all of the time is don’t just think convenience. There’s lots of ways to get the results that you want that won’t necessarily have the same kinds of consequences. The one that might explain to mine automatically is the power of attorney. If you sign a power of attorney for your child to act as agent, they give that same kind of access to your accounts that you would want able to write checks, get statements, that kind of thing.  None of the tax consequences so it tends to be a better result.

Jason Parker: Let me ask you from a liability stand point. Say you have that child on a checking account and the child is involved in a car accident and they’re going to be sued as a result of that car accident, is that asset then looked at even though it was your money because the child’s name is on it?

Kelley Erb: It absolutely could be and again it’s going to depend a little on the titling and your state. There’s kind of two ways of titling it. One is survivorship where you have it so that the person automatically gets it if something happens to you and the other is tenancy in common which is a legal term. Basically means that you each own half and it’s your own half to do what you want. Most of the time when parents add kids it becomes a survivorship account which means that together you own 100% of it. You don’t have to have permission to take it out, you could go to the bank and withdraw all of it if you wanted. The kids could go and withdraw all of it the next day if they wanted. Because they have that kind of control over the account, that does make in many jurisdictions does make that entire amount subject to any kind of judgement if there was some kind of legal obligation such as proceeds that were payable because of fault of a car accident.

 You do really have to be careful with these kinds of things. Also I always say, not really from a tax perspective but from a liability perspective, I always tell my clients it’s not your children that I worry about so much, it’s the people whispering in their ear. You never know the child would have the right to remove all the money out of the account from the joint account. Maybe you don’t worry about them doing it, but maybe their wife or their husband or somebody else. There’s a lot of potential issues that can happen that are not just tax oriented that you want to be really aware of. Again, power of attorney, there’s a whole different level of judiciary responsibilities associated with that that’s beneficial for older adults.

Jason Parker: I want to ask you some more about the power of attorney. If you are just tuning in to the station this morning, again you’re listening to episodes 048. You can find this archived on soundretirementplanning.com. I have Kelley Phillips Herb who’s an attorney with the Herb law firm in South Eastern Pennsylvania on the program with us. Kelley one of the things I want to make sure listeners know, you’re doing a lot of work all over the internet to help educate people about some of these issues. What’s the best way for people to learn about you and the work that you’re doing if they want to follow you? How can they do that?

Kelley Erb: The easy way is to go to the blog and you can just go to Forbes and look up my name, Kelley Phillips Herb or look up tax girl at Forbes.  Tax girl is my moniker, it has been since law school so I’m also easy to find on the social media that way. Whether it’s YouTube or Twitter or Facebook. Pretty much if you Google Tax girl you’ll come to me one way or the other.

Jason Parker: One of the things that I’ve heard that has been an issue for people with power of attorney’s is many times power of attorneys don’t got into effect until, or their written in such a way that there has to be some kind of health event or someone has to be declared incompetent or incapable of acting on their own behalf. Do you generally recommend people set up their power of attorney so that it’s effective immediately or do you like that clause that says that it doesn’t go into effect until there’s some kind of health event?

Kelley Erb: What you’re talking about is the springing power of attorney. That’s what we like to call them. Springing means that some event has to happen and it can be health, it can also be leaving the country, it can be all kinds of things. I’m a stickler for facts and circumstances. I think that’s actually the tax attorney part of me. I don’t have a general rule that I would give because I think it depends so much on who you are, your age, who your children are, where they are, what you’re hoping to accomplish. I know that a lot of my colleagues do not like the springing power of attorney because they believe very strongly that the power of attorney should be effective at signing. If it’s springing, you’re adding another layer of complexity to the whole process because if it’s a health event, generally there’s something in that power of attorney that says two doctors have to declare that you’re not capable of making your own decisions and that sort of thing. They feel that adds an extra layer.

 I think sometimes that extra layer is good. I have clients that they may trust their kid but they don’t feel comfortable giving them that sort of power automatically. I have colleagues that say, if you trust them enough to give it to them incapacitated why not give it to them when you’re not. I don’t have an answer for which one is better. It really depends on your facts and circumstances. I will say this, that if you know that someone is in decline or you are concerned a potential decline, maybe [inaudible 00:11:01] diagnosis that would lead you to believe that they’re not going to be capable of, even if it’s physically. Writing checks or taking care of themselves, that would be an instance where an immediate power of attorney would make a lot more sense. It’s really difficult to say. One of the things I would say is no matter where you are if you’re thinking about any kind of estate planning, whether it’s a will or power of attorney or whatever, you sit down with an attorney and you talk to them about the circumstances and you kind of see what they recommend. Again, depending on laws of each state and depending on your own circumstances, there’s not one size fits all.

Jason Parker: That’s good. One of the other things that caught my attention as I was preparing for this interview was this idea of grandkids and their education costs. Is there anyway to deduct the cost for paying for grand-children’s education?

Kelley Erb: Sadly, no. If they’re not your dependent, you’re not going to get a deduction for paying for their education. In certain circumstances you might be able to get a credit if they’re dependent. Mostly for grandparents not. My kids are very funny, we are watching all the Gilmore Girls reruns right now and everybody wishes they had that wealthy grandparent that’s going to pay for all of their education from private school on to college. If your grandparent does do that, or you as a grandparent wish to fund your kids education, you might be able to get a tax break on estate plan with a 529 plan. You may get a deduction on the estate tax side but for federal purposes the real benefit that you get is that normally when you make gifts to your children, those gifts are going to count towards your gift tax exemption for the year.

 However, if you write a check directly to the educational institution, then that’s not going to be included in that amount. If you were funding your kids education, you would have to pay tax on it. It’s not the same as getting a tax break but it’s still good news. It’s something that I recommend but it can’t be to your kids and they get to spend it as they see fit. Even if they spend it on education. It would have to be directly to the school. If you do give it to your kid or your grandkid and then they turn around and use it for education, that amount that you gifted to them would count towards your annual amount for gift tax.

Jason Parker: Our national debt, we’re approaching, if we haven’t already hit 18 trillion dollars of debt. I think we’re still spending 500 billion dollars more than we’re bring in tax revenue every year. Most retiree’s I’ve found, have most of their money tied up in 401K’s and IRA plans. Take a minute and share with us, answer the question is that money taxable? Then also share your thoughts, should people be planning for higher taxes in the future, just given the reality of the financial situation of our country today?

Kelley Erb: I’ll answer the last question first because we’re coming up on elections so you’re going to hear a lot about how folks want to reduce taxes. I don’t know that, as you mention, that with the current economic picture that a reduction in taxes, especially with a permanent reduction in taxes is realistic. Even if it’s desirable, even if it’s the kind of thing that people are going to talk about in the run up to the presidential elections. What we’re really looking at is that the tax rates are going to stay pretty stable or they might bump up. If they do bump up, they’ll probably bump up the higher end again like they did a couple years ago. Higher income tax payers might see a bump. That is something to keep in mind. Fortunately there are some seniors that get a lot of extra tax breaks. We might talk about that in a bit. Some get a lot of extra tax breaks but they tend to have more conservative kinds of investments and there are opportunities for deferral. IRA’s and 401k plans are opportunities for deferral and that’s why we do them when we’re younger. The idea that we’re putting away money and IRA is giving a tax break immediately or we’re just deferring tax for later.

 The downside of that does mean that when you do take it out it’s going to be subject to tax. The short answer is that IRA’s and 401K’s money that you take out is going to be subject and reportable as taxable income. Whether or not you’re going to pay tax on it depends on your bracket. It’s definitely reportable for tax purposes and that get a little confusing because some folks feel like when they’re looking at their required minimum distributions, they think well the government is making me take this out, I don’t have to pay tax on it. That’s not true. You’re going to have to pay tax on the taxes that’s been deferred all this time when you pull it out. It’s not necessarily going to be 100% taxable to you, it depends on how you put it away to begin with and whether you claim a deduction up front and those kinds of things. Generally when you take it out, some or all of it is going to be taxable or at the very least reportable.

Jason Parker: Okay. Folks again if you’re just tuning in I have Kelley Phillips Herb on the program. She’s an attorney with the Herb Law Firm, she writes a column on the Forbes blog and she’s known as the Tax girl. Which is how you can find her online. Kelley I wanted to ask you … For our listeners too, this is episode 048 on Sound Retirement Radio. When it comes to the Roth IRA, you talk about the idea that taxes are probably aren’t going to go down they’ll likely stay the same or potentially go up in the future. Then we have this opportunity right now for Roth IRA’s, what are your thoughts and feelings about a Roth IRA both contributing to Roth IRA’s and also potentially converting some of those IRA assets into Roth IRA’s?

Kelley Erb: Well, here’s my lawyerly answer again which is going to be that I do think it’s very facts and circumstance dependent. Whether or not you will go for a traditional IRA versus a Roth. Roth has lots of appeal, the main one being that when you take out the Roth IRA proceeds after retirement, those are going to be tax free which is a really terrific benefit. The [inaudible 00:17:24] kind of way a couple things. One of them is that with a traditional IRA you get a deduction when you make a contribution. Generally you get a deduction when you make a contribution. The idea is that you’re putting this money away and you’re going to get a tax break and then later you’re going to pay the tax on it. If you’re in a high tax bracket, when you’re making the contribution and you’re idea is that you’re going to be in a lower tax bracket when you’re taking the money out, a traditional IRA can make a lot of sense.

 Roth IRA’s, although again, there’s tax free appreciation which is a really appealing concept. You have to balance where your tax bracket is now and where you expect it to be and how much growth you think you’ll see. Then it’s a gamble on the tax bracket. What I like to have folks do is talk to their tax and financial advisors and have them run numbers. It’s facts and circumstances dependent. If you’re young and you’re paying at a relatively low tax bracket and you think your taxes are going to go up, that makes a Roth even more appealing. Again, kind of facts and circumstances dependent. In terms of the roll over, again it’s the same kind of thing. Roll overs can be very advantageous. They’re a little less advantageous than they used to be because there was a period of time years ago the roll over were more advantageous. The big thing with the roll over that you have to think about is if you can’t afford to pay the tax on the rollover because when you go from a traditional to a Roth, you have to pay the tax due now that’s why you get a tax free appreciation later.

 If you can’t afford to pay the tax from other money, you’re going to pay from inside the Roth when you do the rollover. It tends to be less beneficial. A quick example is about $1,000 the tax from that is going to be 300. If I can roll the whole $1,000 over and pay that $300 from my savings account, that would probably be a good benefit for me. But if I take the $1,000 pay $300 of tax and then roll over the remainder, it might be less beneficial to me depending on how long that money is going to stay in the account and how much it’s going to grow over time. When especially older folks are considering the roll over, it tends to be less advantageous. It tends to be more advantageous unless they can pay that tax about said money. If you’re rolling it over early on, it tends to be more advantageous. Again, kind of facts and circumstances. Somebody ought to be able to run those numbers for you and show you what it looks like. Nobody has a crystal ball but it’s good to know this is what the projections look like and here’s what we recommend. I don’t recommend rushing into a Roth just because you heard that it was a good idea.

Jason Parker: Good point. At this radio station and one of the things we’re always teaching is that retirement is all about cash flow. It’s your income that will determine your lifestyle at retirement, not necessarily your net worth. The more tax efficient in that cash flow the better. I want to remind our listeners too, if you’re getting ready for retirement visit soundretirementplanning.com. On the right hand side you’re going to see a blue box that says The Sound Retirement Blueprint. You can click that. We’ve put together a four step video series for you to actually be able to visualize what a good retirement plan should look like from a tax stand point. I want to transition here Kelley into Social Security because that for a lot of people represents about 40% of their income. We all know that that’s tax efficient income because not every dollar received from Social Security is necessarily taxable to people. We just heard recently, I think it was Chris Christy was talking about changing social security and people that had high incomes not being eligible for it in the future. There’s obviously social security’s a big obligation when it comes to our government spending. What should our listeners know about the taxation of social security right now? As they think about that in the future, what are some of your concerns there? We only have about 3 minutes.

Kelley Erb: Okay, well I’ll just say right off the bat kind of addressing the first point about social security is that there’s always been conference about social security funding and a lot of folks keep saying let’s plan like it’s not going to be there. I tell myself to you plan for the now and then you are really flexible as the law changes. For right now we still have social security benefits and nobody is going to take that away right now for higher income individuals. You should act like it’s still going to be there until you hear different. Right now, if you get a social security check, if that’s your only source of income for the year with a little bit of extra interest. If that’s your only source of taxable income, chances are those benefits are not going to be taxable. What makes social security taxable is your other income. You have to look at where do I get taxable income from other sources. It’s not always taxable income because tax exempt interest is includable in the calculation.

 It’s a formula. I can tell you the formula, it’s really simple. The formula is, you look at your social security take one half of those benefits add it to all of your other income, including your tax exempt interest, and if your total is more than the base amount for your filing status, then some of your benefits are going to be taxable. The base income is going to be 0 for married filing separately, which tends to not be beneficial anyways. For married couples the magic number is 32,000. For single head of household as filing status, it’s 25,000. That’s what it is right now. What you do is you look at those numbers and using that formula, if you’re over that formula, some of your social security is going to be taxable not all. In fact it only goes up to 80% even at the high end.

Jason Parker: Unfortunately, we’re at that point where we’re out of time. I know that time just flies when we’re having fun talking about taxes on the program. I just wanted to say thank you for being a guest and remind our listeners that they can learn more about the work that you’re doing just by visiting forbes.com and looking up your name Kelley Phillips Herb. E-R-B is how you spell that. Again thanks again for being a guest today.

Kelley Erb: Thanks much for having me.

Jason Parker: Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual. Does not constitute a solicitation for any security’s or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representative or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims payability of the company. Investing involves risks. Jason Parker is the president of Parker Financial an independent fee based wealth management firm located at 9057 Washington Ave NW. Silverdale, WA. For additional information call 1(800)514-5046 or visit us online at soundretirementplanning.com.