First the good news.  You have the right to reduce your military retirement income by the amount that your pay should have been reduced if your VA Disability Benefits would have started on time.  This right was established by the courts in the Strickland decision (Strickland v Commissioner, 4th Cir. 1976) and is codified in Revenue Rule 78-161.  That is about the end of the good news.

Now, the bad news.  You are going to get little to no “automatic” help to do this.  You won’t receive and updated 1099-R.  You might get a note from the VA saying that you have rights under the Strickland Decision.  You won’t get a notice from the IRS letting you know you overstated your income in a prior year due to the VA offset not being taken.  So, you are going to have to do this yourself or bring in a pro from Dover.

What needs to be done?

If you were awarded retroactive VA benefits in 2011 you will need to adjust the amount on your 1099-R by the reduction that should have occurred and use the adjusted amount on your tax return.  If you are like me, you’ll need to do two separate calculations, as I had to prove my sons were in college to get an increase in the Disability payment amount.  So I had a period where the offset was correct, a period where the offset was too little and a period of where there was no offset.  Now, when you file your return you’ll have to decide whether you want to e-file or not.  I’m not 100% sure, but I think your return will go through.  But your 1099-R and your tax return won’t agree and this could trigger an audit or at least some questions.  The other option is to file on paper, include a letter explaining that you reduced your 1099-R income IAW Rev Rul 78-161 and also include a copy of the letter from the VA establishing your retroactive benefits (including your 214 might not hurt either).  Easy, right?

If your retroactive benefits span two years (for example you retired in 2010 and didn’t get a determination until 2011) you’ll have to decide if it is worth your time to try to get the refund that is probably due.  If you are rated more than 50% disabled, the tax benefit may be small and you might want to just let it go.  If you are rated less than 50% disabled it may be worth your time.  What you will do in this case is file an IRS Form 1040X (amended tax return) changing your retirement income to reflect the offset that should have been taken.  Then include all the documentation mentioned above.  Even easier…

So the bottom line is: when you get retroactive VA Disability Benefits, you have the right to retroactively reduce your income.  But you’re going to have to do it yourself or hire someone to do it for you.

Estate Basics.   When you die, you establish an estate.  But you don’t have just one estate, you have several.

1. Gross Estate.  Your gross estate includes everything you own totally or partially.  It also includes those things in which you hold the “incidents of ownership”.  Incidents of ownership means that even though the asset isn’t in your name, you still control it.  For example, if an asset is in a trust, but you control how it is used, invested, spent or if you can take the asset out of the trust you have incidents of ownership.
2. Taxable Estate.  Your taxable estate includes everything from you gross estate minus deductions,credits and exemptions such as the unlimited marital deduction or a deduction contributions the estate makes to charity.
3. Probate Estate.  You probate estate includes all assets that transfer as directed by your will (or by state law if you do not have a will).  Things that are not included in your probate estate include:
   1. Assets owned as Joint Tenants With Rights of Survivorship
   2. Assets held in trust
   3. Assets that transfer via contract such as the beneficiary of a Life Insurance contract or Retirement Plan
4. Estate Taxes.  As of this writing most individuals will not pay federal estate tax as the current amount that you can transfer to someone other than your spouse without federal estate tax is $5 million.  This will change, if Congress doesn’t take action, at the end of 2012.  States vary.

What a Living Trust Can Do.  A Living Trust can help you reach specific planning goals such as:

1. Increase Estate Liquidity.  Assets in trust can immediately be accessed by the trustee.  There is no action required by the trustee to execute the trust’s instructions.  On the other hand, assets that pass via will require the executor to qualify with the county/state prior to doing anything with the estate’s assets.  Depending on the court workload and the executor’s availability this could delay access to the assets for weeks or maybe even a month or two.
2. Provide Privacy.  Probate proceedings are a matter of public record.  If someone desires, they can gain access to court records and gather data about the estate and heirs.  This is not the case with a trust.  A trustee has no requirement to publicly disclose the assets of a trust or the identity of beneficiaries.
3. Reduce Probate Expenses.  Probate expenses/court fees are normally calculated as a percentage of the probate estate value.  The more assets in a Living Trust the lower the value of the probate estate and thus lower fees.  Also, Real Estate passes through probate in the state where it is located, regardless of where the owner resides.  If “out-of-state” Real Estate is held in trust, the grantor eliminates the requirement and expense of probate in a second state.

What a Living Trust Can’t Do.  A Living Trust is a tool and just like any tool it can’t do everything.  For example:

1. A Living Trust can’t reduce your Estate Taxes.  If you are at risk of paying Federal Estate Taxes, a living trust won’t help you out as you retain “incidents of ownership”.  Other types of trusts can be used to reduce Federal Estate Taxes, but Living Trusts can’t
2. Anything…if you don’t fund it.  Once the Living Trust is established it must be “funded”.  That means changing the ownership of all assets you want in the trust.  You must for example:
   1. Change the deeds on real property to state the trust now owns the property
   2. Re-title vehicles
   3. Change bank accounts to be held “In Trust For”

So with an understanding of the basics, when might a Living Trust be a good idea for you?  Some instances that come to mind are:

1. Like a lot of other military members, you own Real Estate in states other than the one you live in.  In one case I worked with a military member who owned property in Nevada, New Mexico and Colorado.  That member lived in Virginia so the estate was subject to four different probate processes.  This would result in a large probate expense (expenses in each state) and a great deal of paperwork.  A Living Trust could solve that problem.
2. Privacy is very important to you.  If you don’t want anyone to have the ability to find out about your finances then putting your assets in a Living Trust will help you.
3. Liquidity is critical.  If you are providing support to a dependent that is unable to support themselves without you (special needs child, dependent parent) a trust might be indicated.  The trust will prevent your assets from being “tied up” in probate and forcing your dependent to survive without support.

These are just some examples of how a Living Trust might help you.  It might also show that the effort of funding a trust may not be appropriate in your case.

The important thing to remember about Estate Planning is that you have to be very precise.  This is not something you want to try to do on your own or with an on-line software program.  Get competent legal advice when drafting documents and consider working with a Financial Planner to make sure your Estate Plan integrates with your overall Financial Plan.

The EITC is a tax credit that has been around for quite a few years…back to the seventies in one form or another.  The purpose of the EITC is to help low to moderate earners.  The IRS says its purpose is to provide an incentive to work by helping to defray the costs of Social Security and Medicare taxes paid by all wage earners.  The EITC is substantial too.  The maximum EITC is $5,751 and remember since the EITC is a refundable credit you could get that amount back even if you had zero withheld from your military pay and owed zero tax.

Not everyone will qualify for the EITC.  Here are some of the criteria:

1. The taxpayer must have less than $3,150 in investment income
2. The taxpayer must have Earned Income
3. The taxpayer must be at least 25 and younger than 65
4. The taxpayer can not file as Married Filing separately
5. The taxpayer’s Earned Income must be below certain limits (2011)
   1. With 3 or more qualifying children your Adjusted Gross Income (AGI) must be less than $49,078 for Married Filing Jointly (MFJ) or $43,998 for all others (Single, Head of Household, Qualifying Widow)
   2. With 2 qualifying children your AGI must be less than $46,044 for MFJ or $40,964 for all others
   3. With 1 qualifying child your AGI must be less than $41,132 for MFJ or $36,052 for all others
   4. With no children your AGI must be less than $18,740 for MFJ or $13,660 for all others

As mentioned above the credit can be substantial.  The maximum credit amounts are:

1. $5,751 for 3 or more qualifying children
2. $5,112 for two qualifying children
3. $3,094 for one qualifying child
4. $464 for no children

One other thing to keep in mind with the EITC is it starts low at low income levels; then increases as income increases and levels off on a plateau; it then decreases with increasing income until reaching zero at the income limits listed above.  This is an important point.

So, what does this all have to do with Combat Pay?  As I’m sure most readers are aware, Combat Pay is not included in your income on your W-2 and it is not taxable. But in a rarity for the IRS, you are allowed to decide whether you want to include your Combat Pay when you calculate your EITC.  You must include all or none of your Combat Pay in the calculation but regardless of what you decide the Combat Pay will not be included as taxable income.

You can use this option to your advantage as follows;

1. If you are an Officer or Senior NCO most likely you will want to exclude your Combat Pay from the EITC calculation.  Depending on how much of 2011 you were deployed in the combat zone your Earned Income may be low enough to qualify for some or all of the EITC.
2. For those more junior, including Combat Pay in the EITC calculation may actually increase your refund (remember the plateau).  Again, it will depend on your rank and how long you were in the combat zone.

No one is required to pay more tax than what is owed and there is nothing unpatriotic about reducing your taxes.  If you deployed to a combat zone in 2011 for an extended time the odds are favorable that you will be able to qualify for the EITC when you file this year.  Don’t miss the opportunity.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication

Make sure you understand the financial realities of divorce. You may feel 110% ready to divorce, but have you considered the financial implications of splitting up?

“When people are thinking about divorce, many are just ready to get out at any cost. That is exactly the wrong attitude to have. You have to plan carefully,” says June Walbert, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA. “In virtually every divorce, there is a major lifestyle change. You have to keep in mind the financial ramifications for today as well as for decades to come.”

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The Right Paperwork

If you’re splitting funds from your spouse’s 401(k) or other retirement account or pension, you’ll need a Qualified Domestic Relations Order, which:
– Officially directs the ex’s employer how to pay your portion of the account, as determined by the divorce decree.
– Must be submitted to the plan administrator.
If an annuity is divided in a divorce decree, a similar document may be required to finalize the payment plans. Check with an attorney for additional legal information regarding your particular situation.
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Dollars and Divorce

The good news is that many people seem to grasp the connection between their bank accounts and their marital status. Among the 44 states that collect divorce stats, divorce rates dropped by 5% between 2006 and 2009 — just when the economy was at its worst, according to the Centers for Disease Control and Prevention. In fact, 38% of those who responded to a survey by the National Marriage Project at the University of Virginia who were considering separation or divorce said the recession caused them to put aside their plans. However, law firms nationwide are reporting a recent surge of business, as couples feel more confident that the improving economy can more easily sustain two households.

“The economy affects whether people can afford to divorce. It affects what you do with the house, a family business, child support and alimony,” says Linda Lea M. Viken, president of the American Academy of Matrimonial Lawyers and a Rapid City, S.D., family law attorney with more than 30 years of experience. “If people don’t have money, they can’t even afford appraisers or lawyers. When considering divorce, you have to take off your emotional hat and put on your business hat because you’re making business decisions.”

Even if the recovering economy has boosted your confidence in your ability to afford divorce, make sure you have a clear picture of your financial reality.

Make a Budget

Before you divorce, sit down with a paper, pen and calculator to figure out how you will pay for everything, Walbert says. A divorced couple will suddenly have two households to maintain financially and two retirement accounts to fund.

“When going through a divorce you need to know how the numbers shake out, so know what you can afford and what you can’t,” she says. “The numbers don’t lie.”

Even if one party earns the bulk of the income, it is unlikely that person will walk away with the bulk of the monthly income or assets. Keep in mind, however, that in many states a great deal of discretion is left to the judge or courts. If children are involved, child support and even spousal maintenance often are awarded, making the keeping of the proverbial lights on in two homes a question mark for both parties.

Tax Impact

Even if you calculate your current income and expenses down to the nickel, you probably still don’t have an accurate picture of what your checkbook will look like after a divorce. Divorced couples lose out on the tax benefits of filing jointly, and only one person will have the tax advantage of filing as head of household if awarded primary custody of the kids. Child tax credits, child care deductions, and the family home’s interest and property taxes likely will be declared by just one of the parties — assuming the couple’s house was not sold. “It’s a big difference whether you have those deductions or not,” Viken says.

Further, make sure to tidy up past years’ filings before calculating your new bottom line. There is nothing worse than finding out too late that a dishonest spouse lied about paying or filing previous taxes — or worse, cheated on the filings. Remember, you will be liable for any tax obligations incurred during the marriage.

Bottom line: There’s a good chance that at least one party will be paying more taxes, which slashes take-home pay for everyone. And that further squeezes what is likely a tight financial situation.

Retirement — Your Future Now

“Even if you’re in your 30s or 40s, you must consider the impact that a divorce today will have on your retirement in decades to come,” says Walbert. In many cases, retirement funds amassed during a marriage are split 50-50 — no matter who earned the money. A spouse’s military retirement paycheck or corporate pension may also be considered part of the settlement. Likewise, when couples have been married at least 10 years, the poorer spouse is eligible for up to 50% of the ex-spouse’s Social Security benefits at age 62, if greater than his or her own.

That said, use an online calculator to figure out how far these divvied-up retirement assets will help each of you in retirement, and what earning potential you and your spouse have between now and then. Chances are both parties will have to save more and work longer than originally planned.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.

“The reality is, we GenXers trust the baby boomers less than they trusted the Greatest Generation—and with good reason. Baby boomer financial advisers have taken more and left less than any other generation throughout history. These advisers say we shouldn’t be conservative at our age, but I think our grandparents, the Greatest Generation, would disagree. We hear their message; we just don’t agree with them.”

Disclosure: I’m a Baby Boomer. I’m a Baby Boomer financial adviser. I have two daughters who just made it into the Gen X era. Based on the points I make in this blog, I think it’s safe to say, GenXer disagrees with me. And I’m okay with that.

However, I think GenXer may want to expand his/her breadth of knowledge before going down the path of the Greatest Generation.

Assuming the philosophy behind the Greatest Generation is one of conservative savings, this philosophy is full of risks and is based on emotion; the fear of failure. We know the Greatest Generation’s fear stems from the Great Depression. As I have stated before on these pages, being conservative can be more risky than investing in stocks and bonds. And making any decision based on emotions is asking for trouble.

Being conservative means you are purposely choosing to “save” money instead of “investing” it. Saving money specifically means, protecting its value. Investing money means building wealth through capital appreciation.

Saving money doesn’t build wealth because it doesn’t provide enough return to offset the taxes and inflation eating away at its return. Looked at the returns on money market, savings accounts, CDs, and bonds lately? Pathetic. Will their returns go up over time? Sure. I’ve lived through better times with returns on savings. But I also lived through the rising inflation and interest rates that caused the better returns on savings. Those eventual better returns on conservative savings will not keep up with the costs associated with taxes and inflation that will exist in that time.

Oh, and those who point to the great bond returns over the last few decades…  We lived through a unique environment of falling interest rates over that time.  That provided rich soil for bond holders to cultivate decent returns. Those days are over with current interest rates at rock bottom levels. The future is one of rising interest rates.  That is a killer for bond values. Best case scenario for bond holders is interest rates continuing to scrape the bottom which would mean bond values stay relatively stable with their low coupon rates. Not a future to bank on.

So if you follow the Greatest Generation down the path of conservative savings realize this; you are doomed to returns behind the power curve and a strategy that’s based in fear. Due to your lack of wealth building returns in a conservative account, you’ll have to compensate for your poor returns by pouring huge sums of your income into savings. Good luck with that. I’ve met plenty of folks who chose the conservative route who ultimately found they didn’t have enough savings to live the life they imagined in retirement—due to the fact, they didn’t save enough. Those that are satisfied with their savings either have no idea of how much they sacrificed in potential wealth or don’t care as they are willing to make do with less. Are you?

So where does that leave you? You have no choice but to be an investor. Only by being an investor can your money work hard enough to offset the taxes and inflation and build wealth. But, that’s where you disagree with me and you think investing is a time wasting, money losing proposition.

I’ll take a few wild guesses why you belief us baby boomers are wrong…

• You judge your success by your account value.
• You think account values and investments should produce fairly consistent positive returns year after year.
• Your account is up and down and generally going nowhere.
• The economy is rocky and unpredictable.
• People and the media talk about individuals losing their shirts, investment losses, and financial firms’ greed.
• The 99% protesters.
• The movies Wall Street and Margin Call.
• Mortgage companies stealing from people.
• Housing prices falling.
• Unemployment.
• The wealthy 1%.

For the most part, none of the items in the list matter concerning your ability to create wealth. I suggest the problem isn’t investing. The problems are:

1. personal beliefs based on incomplete knowledge, and
2. media/marketing efforts based on selling rather than providing a real public service.

To keep from writing a lengthy narrative to cover incomplete knowledge, you may want to check out these articles in this blog. They scratch the surface to explain why your beliefs are skewed at this point. They also explain how to manage investments to minimize risk. Believe it or not, “risk” is in all savings and investments. If you arm yourself with unbiased knowledge, you can manage and minimize risk using relatively simple investment techniques. As for the fear, fear is no match for knowledge.

• Chatting About Investments at Lunch
• Younger Worker-Investors Going Astray
• The Stock Market’s Not an Investment, it’s Gambling
• What’s a TSP/401k/IRA Investor To Do?

Now about that media/marketing issue. The news and financial media are only interested in getting you to watch, listen or read them. Big and splashy stories are best. Plus they only care about what’s going on today. We are so short-sighted people can’t even go to the gym for a workout without constantly checking their phones and Facebook pages for fear of missing some lame information. To quote a current mobile phone company ad, “That’s so 27 seconds ago…”, who cares!?

The media won’t educate the public on useful market/economic information because it’s boring and takes time to explain. They won’t waste their precious time on complex issues. They sell the sizzle not the steak. That’s because we live our lives as people with no attention spans. So we get what we allow; 30 second sound bites and tweets rather than in-depth reporting. And we remain ignorant about the investment knowledge demanded to be good investors.

The evening news reports the DOW is up or the DOW is down. The message is, if it’s up you made money and if it’s down you lost money. That couldn’t be more wrong and misleading for the working aged public (this is not about you retirees out there). A good example of media public disservice. Did you realize a down market is actually your friend and the only time average investors can capitalize on wealth creation? If you don’t understand why this is case, start studying.

Personal finance magazines are all about the latest trends and the products and services to “help” you manage the current situation. Following this advice is a recipe for failure. Successful investing isn’t about today. It’s about what happened in the past and what’s likely to happen in the future based on long-term historical trends—50-100 years ago. Believe it or not, nothing is really new. We’ve been there and done that many times over. The times may change but people don’t. “100 Top Mutual Funds You Must Own Now,” anyone? Don’t understand this, start studying.

Your friends, family and the man on the street are uninformed about financial issues because they only know what they read, listen to or watch in the media. I don’t mean that in a pejorative way. We are all intelligent people for the most part but our knowledge is sketchy outside our areas of expertise. Where we lack knowledge we are more susceptible to following trends, hearsay and the media hype at the moment.

Same with investment strategies and techniques and the media. You won’t be taught valid, practical ways to invest your money; ways that work and don’t take long to learn, implement, and manage for average people. These methods are boring and once you learn them, there won’t be anything else to amaze you with. Better to paint investing as a game of chance with “make or break” opportunities because that’s exciting and gets viewers, listeners and readers. Another media public disservice.

Remember this…as members of the great unwashed masses; we are the last to know of a real investment opportunity. By the time an investment is discussed in the media or by your uncle Joe, it’s too late to participate. The media wouldn’t be hyping it unless it had already become news worthy and this is after the opportunity for investment has passed. All the hucksters pitching the next get-rich-quick-scheme are feeding off the media and your need for greed; another emotion looking to do you in. Gold anyone? Oil and gas investments? Commodities?

Forget the media. You need to operate on real economic data not tainted by politics or media hype. Study the history of markets and economies over long periods of time; 100 years and more. You need to realize that situations and technology may change but market and economic cycles aren’t new and they are fairly predictable. To get a better understanding of your situation, know where you are in the country’s economic cycle and where the country is heading according to the history. There will always be “bubbles” and they will always pop. Recognize a bubble and plan accordingly or you’ll be joining those on the news claiming they are victims.

One last thing…no one has “…taken more and left less…” because building wealth and the economy are not zero-sum games as the media wrongly suggests. The idea of the top XX% owning XX% of the wealth in this country is just plain wrong and misleading. And the media talk of the income gap and the loss of the middle class is also misleading and dangerous. These current day stories imply a zero-sum game that is patently false.

No one with wealth today inhibits your ability to have wealth tomorrow. And other than an unscrupulous financial huckster, the tax burden is the real threat to your financial future. Only taxes literally take your hard earned income away from you denying you the opportunity to save and invest. Your after-tax income is used at your discretion—even when you give it to hucksters. Ever figured your total tax burden by adding all federal, state, county, property, school, local, gasoline, tolls, and sales taxes you pay in a year? Compare that total tax bill to your gross pay. Steamed yet?

Some have said I’m cruel for piling on the individual as the cause of their investment woes. It’s not my intent to be mean. It’s meant to get people to wake up. The fact is the common denominator in all these financial hardship stories is us…individual people. No one cares about us like we do. No government bureaucracy will ever protect you from your actions like the politicians want you to believe. People spend more time picking out their next mobile phone or e-book reader than investing in their financial knowledge and health. Whether you like it or not, you have no choice but to get involved in your financial future for your own sake.

Take time to educate yourself on the history of markets and economies. Learn the proven methods to invest your income and build wealth. Start with this blog. Then you will understand why listening to this baby boomer may be time well spent.