Your Sacramento Tax Accountant Explains The Proper Place for Social Security

Your Sacramento Tax Accountant Explains The Proper Place for Social Security

As I write this from the best Sacramento tax preparer headquarters around, we’re celebrating St. Patrick’s Day, and most of the world is furiously analyzing and setting up their March Madness brackets — in order to vanquish and impress their friends and spouses, or perhaps to snag a shot at Mr. Buffett’s money (

Brackets, brackets, brackets. There’s even a bracket for Girl Scout cookies, for goodness sakes, on USA Today. (

And, of course, the old tax brackets — which we’re spending plenty of time with these days here at Team David MacMillan!

But no, St. Patrick did NOT create a retirement savings bracket. Not sure the fine old saint would have cared much about retirement, or basketball.

However, that doesn’t mean it’s a subject (retirement, that is) which you should ignore.

I did some simple math this week, based on a conversation with a Sacramento tax preparation client, and it prompted me to put together this explanation for you — or, perhaps, for your parents or those nearing retirement age.

It’s about the proper place for how we should see Social Security. Because aside from what I am writing about below, Social Security cannot be passed to heirs (notwithstanding spousal death benefits).

That’s one disadvantage, but it’s not the only one…

Your Sacramento Tax Accountant Explains The Proper Place for Social Security
“When I look back on all these worries, I remember the story of the old man who said on his deathbed that he had had a lot of trouble in his life, most of which had never happened.” -Winston Churchill

Imagine a Sacramento – area man named Bill Fredericks, born in 1948, who is celebrating his 66th birthday today by filing to collect Social Security at full retirement age. Bill’s final salary was $50,000 per year, although when he started working in 1968 he was only earning $7,304 annually.

For the past 46 years Bill has had Social Security withheld from his paycheck from a local Sacramento small business. When he first started, the total Social Security withholding was only 7.6%, which for Bill was $46.26 of his $609 monthly paycheck. On his last pay stub, the government took 12.4%, or $516.67 of his $4,167 monthly salary.

Because Bill was not subject to the current 12.4% withholding during his entire working career, his Social Security benefit will receive a more generous return than any of today’s young people will receive.

Social Security withholding is split into an employee portion and an employer portion. But practically speaking for the employer, both portions are just additional costs of hiring the employee. Neither gross nor net wages would change if technically the employee or the employer were paying the entire amount.

Bill’s lifetime withholding totaled $152,068. In today’s dollars, it means Bill paid $260,163 to Social Security.

This withholding qualifies Bill to receive $24,180 a year, just under half of his former salary. When he dies, only if Bill has a surviving spouse whose earning record was smaller than his will this benefit survive him.

Many have said that Social Security is perfectly suitable option for a real retirement account. But the real way to test is what would have happened had Bill been allowed to keep his Social Security benefit and invest it in a private IRA account.

I got some help and computed this hypothetical return in an age-appropriate portfolio between the S&P 500 Stock Index and the US Aggregate Bond Index. With only a monthly contribution of his Social Security withholding, by age 66, Bill’s portfolio would have grown to $1,431,487.

With a safe withdrawal rate at age 66 of 4.43%, this IRA would give Bill an income of $63,415 per year rising with inflation. On average this withdrawal rate would be sustainable until Bill’s 101st birthday. But at his average life expectancy at age 84, he would leave an estate that would still be over a million dollars in today’s dollars.

Social Security offers Bill only $24,180 a year, half of his former salary. In contrast, (according to my simple math) his IRA account would allow him to retire with $1.4 million, and a 27% raise, as well as leaving a legacy for his heirs. (Mild disclaimer here — these are based on average returns, and it does not constitute a “guarantee”.)

According to my calculations, it seems pretty clear that workers under age 60 should tilt heavily toward stock investments. Even if Bill had blindly invested in 40% bonds, his portfolio would still have grown to $1,186,472 — a yearly income of $52,561, rising with inflation.

Social Security should be seen as an option of last resort for today’s workers. The unfortunate fact is that every 46-year investment horizon since Social Security was made law would have produced better returns had the withdrawals been invested privately. Even the Social Security withdrawals of average workers would produce millionaires if they were allowed to be saved and invested in private accounts.

That’s why I recommend my clients and their friends to view Social Security as a tax, and not as a savings or retirement account. That way, we are able to not rely on it solely for our future lifestyle options, and can receive whatever benefit might remain in the future as a “bonus”.

Even if peeling off a few hundred dollars per month (hopefully more!) might seem like a stretch at this point in your career, it is worth it to ensure that you don’t have to subsist under a massive pay cut after your prime working years have completed.

Even now (as I write, and as you receive this), you can still make a tax-savings decision for your 2013 return by opening an IRA (or, even better, a Roth IRA). Contributions made before April 15th will count as a deduction for your 2013 return.

The best part is that your future self will thank you!

And don’t forget to send your Sacramento (or beyond) friends our way! We’re quite busy, of course, but always make room for referrals from trusted sources…


David MacMillan
(916) 438-6964

The Reverse Mortgage Regulations Landscape Has Changed for Senior Sacramento Homeowners

The Reverse Mortgage Regulations Landscape Has Changed for Senior Sacramento Homeowners

We’ve been welcoming some happy (and former) TurboTax customers into our Sacramento tax preparation headquarters this past week … a few of whom were frustrated by the delay in the software’s release of instructions for Form 8960 — which is the new 3.8% tax on net investment income. We have ways to work through that tax for our clients … but apparently, the software has been getting hammered by its users for the delay.

(Just a sampling of some of the frustration out there: )

But that’s just one of the problems with trusting in a software for your taxes, and I’d rather not belabor the point I already made last week.

And the IRS hasn’t been helping much either. From continuous news reports of employee fraud (like this recent one: ), to the familiar refrain of poor customer service ( … well, let’s just say that it’s never been more clear how important it is to have an experienced hand in your corner. (Ahem.)

But this week, I’m going to take a break on my software- and IRS-bashing, and inform my Sacramento tax clients and friends about an important shift in the financial regulations for seniors. If this doesn’t apply to you or someone you love (as it will for many), then please pass it on to someone whom you know could benefit by being aware of it! Here’s what I’m referring to…

The Reverse Mortgage Regulations Landscape Has Changed for Senior Sacramento Homeowners
“When you learn, teach; when you get, give.” -Maya Angelou

Many Sacramento homeowners understandably want to remain in their homes as they age because they want to remain independent and because they have spent many years making their home everything they wanted it to be. Reverse mortgages have assisted many senior homeowners over the years to stay in their homes when their financial position changed.

A reverse mortgage is a loan for people age 62 or older. It provides money from the equity in your home through a line of credit, monthly payments or a lump sum. It does not require repayment of the loan until you move, sell the property, or pass away, and the homeowner is still responsible for property taxes and insurance.

Now, reverse mortgages were initially developed as a tool to assist individuals to remain in their homes and communities as they grow older, by allowing homeowners to tap their equity without selling their homes. All that said, however, the rules about reverse mortgages recently changed, making them harder to obtain.

And, of course, harder to sell. But that doesn’t stop the advertisements!

In August of 2013, the President signed HR 2167 — “The Reverse Mortgage Stabilization Act of 2013” ( ) — giving the Federal Housing Administration (FHA) the authority to make necessary changes to the reverse mortgage program. According to the United States Department of Housing and Urban Development (HUD), the changes “reduce their risk and make the program easier for seniors to use responsibly.” For the homeowner, the changes will make it harder to qualify for a reverse mortgage, but will provide additional protections.

Until now, getting a reverse mortgage loan required no credit history and no minimum income requirement. Due to problems with homeowners failing to maintain their property tax and home insurance payments, starting on January 13, 2014, the FHA began requiring lenders to verify that homeowners have the ability to pay their taxes and insurance and that their credit history demonstrates a commitment to paying obligations.

To qualify for a reverse mortgage, lenders now must analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as credit history. They also look closely at how much money is left over after paying typical living expenses.

In my opinion, these changes are welcome and needed. Too many seniors have been sucked into financial arrangements that were NOT in their best interest.

Now, if a lender determines that you would not be able to keep up with property taxes and hazard insurance payments, they are now authorized to set aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside is based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal.

If a lender determines that you have sufficient income left over, then you don’t have to worry about having any funds set aside to pay for future tax and insurance payments.

These changes, along with the reduced benefits adopted in September of 2013 (see a helpful NYT article here: ), mean that many seniors will not qualify for a reverse mortgage to make their homes affordable.

Why the new rules?
Some seniors who obtained reverse mortgages with rather harsh terms found that they were unable to either live off the loan for long, or to pay it back entirely. The FHA’s changes to its reverse mortgage program sets out to encourage homeowners to tap their home’s equity slowly and steadily. Again, this is a good thing, in my opinion.

“What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” said Peter H. Bell, president of the National Reverse Mortgage Lenders Association. “The changes are intended to put the program back on track and encourage people to take what they need and no more.”

Reverse mortgages can sometimes interfere with other programs. Keeping money in a reverse mortgage line of credit, in most states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource — which it would be as long as the recipient is living in the home and receiving home-based Medicaid services.

However, transferring money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a “countable resource” and that would make the person lose his or her Medicaid eligibility.

This important distinction between countable resources and exempt assets is not a simple black and white issue — if you or your loved one is facing the possible need for long-term care, you should have a conversation with a professional who can help you to handle such matters properly.

And once again, allow me to remind you that though we are VERY busy right now, we always have time for you. Give us a call at (916) 438-6964 , and let’s get your tax return started right now…


David MacMillan
(916) 438-6964

Turbo-Charged Audits and Mistakes — Eliminated By David MacMillan

Turbo-Charged Audits and Mistakes — Eliminated By David MacMillan

Watching the Olympics the past couple weeks from Sacramento tax preparation headquarters (well, not while we’re preparing your taxes, of course!), and on the heels of the Super Bowl, we’ve been treated to some pretty great commercials lately, haven’t we? Some of the spots for the Olympics were downright inspiring.

But, of course, we all know that they are made with the express purpose to cause us to purchase. Either through creating dissatisfaction with our current lot, provoking envy/greed/jealousy/desire or by associating a brand with some really nice feelings.

Now, I’m certainly not one to rail against marketing per se. In a sense, this blogpost on my Team David MacMillan site is marketing (of a sort).

But sometimes that marketing can lead Sacramento-area consumers down a path which isn’t in their best interests. And though my writing this could easily be seen as self-serving, that doesn’t keep it from being true. Here’s what I’m referring to:

Trying to prepare your taxes correctly (and completely) on your own.

I should say that I don’t like to crow about other people’s mistakes — especially other, local Sacramento tax professionals.

In fact, in our line of work, much of what we get to do is to *fix* or alleviate those mistakes, at least when it comes to their tax implications. This year (of all years) carries so many changes that tax software users who fall prey to screaming offers and seductive easy-buttons from the “cheap” options are more exposed to wallet-sucking mistakes, or even an audit.

Do you remember when even the former Treasury Secretary, Tim Geithner, testified about tax irregularities in his own personal returns? Do you remember what DIDN’T help him find those irregularities?

Turbo Tax. (Link to a brief clip of his testimony before the Senate: )

And he’s not alone here in Sacramento. But there’s a good way to fix that problem…

… and a BIG incentive to do so, by the way, at the end of my Note.
Turbo-Charged Audits and Mistakes — Eliminated By David MacMillan
“Talent is a gift that brings with it an obligation to serve the world, and not ourselves, for it is not of our making.” -Jose Marti

You may have heard me say it before, but it’s true: Did you know that we Sacramento-area tax accountants sometimes joke to one another about how good these online software programs (TaxSlayer, TurboTax, TaxACT, FreeFile, etc.) are for our business? Firstly, they are not as “easy to use” as claimed, and secondly … they cost you an arm and a leg.

You might think they’re cheap. And on the surface, you might be right (though, in the last few years, a $1 Billion class action lawsuit was filed in the federal court in Philadelphia alleging gross misstatement of fees and deceptive standards of the federal “FreeFile” program … so even on the surface, it wasn’t always cheap). But I’m not even talking about the money for the service itself.

Using those programs can end up leaving hundreds, or even thousands of your dollars in the coffers of Uncle Sam … even if you follow all of their instructions to a tee. I see it all the time — frustrated Sacramento-area tax preparation clients bringing in their prior year’s tax return, astonished at all the “hidden money” my staff and I are able to find for them.

Even worse…

Choosing the wrong method, or forms, in filing your taxes can place you directly in the crosshairs for an audit.

Even if you don’t owe a ton of back taxes, you still don’t want your record to show some IRS agent that there has been a discrepancy of some kind in the past, so that red flags begin to fly, and then more bureaucratic people start looking through all of your past tax filings and current income holdings … basically taking your social security number, and poking around in your private life.

(And if you think they won’t do this, read a little online about the increased “enforcement” measures the IRS has been taking the last few years.)

They can do a lot of things you won’t want them to do. However, if you keep a clean slate (no IRS correspondence with you, related to filing your taxes incorrectly), the opportunities for them to mess with your personal stuff will be limited.

Here’s another reason why this is so important … now more than ever. New government regulations in 2013-4 (including the much-delayed ACA regulations), delays in Congressional action, and issues with refund “loans” from the big chains are creating a mess in the tax industry… and the “Big Brand Names” (you know who I’m talking about) do NOT want you to think much about it. In fact, they’re doing all they can this year to hold on to their business, and trust me — it is not always good for you.

Yes, it can be seductive to “go it alone” … to trust a piece of software to point out possible deductions. To trust your work to poorly-trained preparers in a big box office. To protect against your chances of audits through online chatroom support or hourly employees.

But it can be a big trap.

Just ask Tim Geithner.

And once again, allow me to remind you that though we are VERY busy right now, we always have time for you. Give us a call at (916) 438-6964 , and let’s get your tax return started right now…


David MacMillan
(916) 438-6964

Sacramento Tax Preparer Shows How To Protect Your Marriage Through Wise Stewardship

Sacramento Tax Preparer Shows How To Protect Your Marriage Through Wise Stewardship

Scattershooting around the Sacramento tax preparation world (taking note of the IRS’s recent “suggestion” to NOT call their phone support — which is fine for you, because you have *this* number: (916) 438-6964), I still come back to the big question of the week: how did Valentine’s go?

Some say it’s a “Hallmark Holiday”, but well — some spouses think otherwise, right? Well, if you blew it , I’ve heard that it’s NEVER too late. So make this week count, my friend.

Now this past weekend’s festivities aren’t the only experience I have with the language of love. You see, we here at Team David MacMillan meet with married couples from the Sacramento region (and beyond) almost every week in the course of preparing taxes and handling other such matters. It’s part of what we do — and, as we do so, we get sort of a crash course in marital communication.

Before you get worried — know that we don’t pass judgment on anybody’s marriage! Everyone has their own, unique relational dynamic. And every marriage works a little bit differently — it’s part of what makes it a wonderful institution.

And, after all, nobody has ever accused this Sacramento tax professional of being a “love doctor”.

That said, however, I’ve noticed that *finances* can be a major sticking point in a good marriage.

But there are some simple steps you can take (five, by my count), which will ensure that you don’t ever fall into the trap of letting a good marriage be spoiled by money miscommunication.

Read on, and send your feedback. And, of course, if you need help with any of this, or if you have any pressing tax issues or questions, email me, or call us at (916) 438-6964 . We *love* serving YOU!

Sacramento Tax Preparer Shows How To Protect Your Marriage Through Wise Stewardship
“Pretend that every single person you meet has a sign around his or her neck that says, Make Me Feel Important. Not only will you succeed in sales, you will succeed in life.” – Mary Kay Ash

Far too many marriages fall apart. And, sadly, one of the most often-cited reasons for that being the case is financial angst.

We’ve seen enough beautiful marriages around here in our Sacramento tax preparation offices, that I believe that I can put together a few commonalities of how finances are handled in some of the best of relationships — be they marriage, or otherwise…

Start saving when young. Every seven years you delay starting a savings plan cuts in half your ultimate net worth in retirement. Chances are that you know someone who’s getting married this year so send them a copy of this article. It may be more valuable than any check you write.

Budgeting together. Couples that share church activities or philanthropic causes do better financially because their common vision allows them to work together instead of pulling in different directions. They do well while doing good.

So, the more chances you have to do something which helps you to clarify your shared vision, the better the marriage team. Even the simple process of creating and adjusting a family budget provides a forum for discussion of what is really important to the family.

Realize that a budget brings freedom — not constraint. Couples without a budget can, and often do, fight over every dollar spent. But Sacramento couples who have worked together on a budget are already in agreement on the big picture. Once the difficult decisions are made, the specific purchases in each category are much less critical.

Here’s one way this works (among many): Having decided how much money the family can afford to spend on clothes for him and for her, it doesn’t matter as much if he prefers lots of inexpensive clothes and she prefers a few nice pieces, or vice versa. A budget allows discretion and freedom to prevail within the context of cooperation and teamwork.

Pay your family first! Even if it hurts, at first, saving equals paying yourself. And don’t worry in the beginning overly much about where you’re placing your savings — only after you’ve saved several times your annual salary does the rate of appreciation become more important than the actual rate of savings. The main thing, early on, is to do it!

Because money makes money. And the money that money makes, makes even more money.

Limit the amount you spend unless you both agree. One big mistake can undo months of frugality and sacrifice. So it’s a good idea, that for big purchases, you require both members of the team to agree. Honoring each other in this way helps avoid resentment and disgust.

Have a small slush fund. Both members of a marriage should have a slice of the budget which is completely at their discretion. So long as their spending stays within this thin slice of the budget pie, they can be completely frivolous. Maybe it’s only 0.5% of your total budget, but it’ll provide a place to put purchases which otherwise might cause marital strife.

If one member collects ceramic pink pigs and the other signed collectible hockey cards they can both enjoy their frivolous expenditures without jeopardizing budget items that are more important to the family.

Couples that learn to live proportionately maintain their balance, whether they are rich or poor. No matter the circumstances, they include some fun, some gifting, and some investing as a reflection of their shared family values.

And it starts with having the conversation. So do it!

And once again, allow me to remind you that though we are VERY busy right now preparing taxes for Sacramento couples and taxpayers, we always have time for you. Give us a call at (916) 438-6964 , and let’s get your tax return started right now…


David MacMillan
(916) 438-6964

David MacMillan Suggests: Take A Test Drive Of Your Retirement Plans

David MacMillan Suggests: Take A Test Drive Of Your Retirement Plans

Now that the Super Bowl is over, and the football season is finished, we here in Sacramento tax preparer land can now finally get back to looking forward to football season.

And, of course, the commercials! (Which this year seemed a little … “ok” — though I think I will have dreams of that Doberhuaha for a while.)

Anyway, you may have heard that tax season has officially “begun”. Well, when we here at Team David MacMillan sit down with a Sacramento tax preparation client during tax season, we are picking through history — we are helping you sort through your 2013, and make sure that the numbers match … AND, of course, that YOU are able to take advantage of every possible legal and ethical method to hold on to your hard-earned dollars (or sometimes receive a nice bump in your supply from a refundable tax credit).

But we also like to spend time future-casting.

That means that we get to be ones who dream with you — ones (beside you and your spouse) who focus not just on accurately recording “history” for our Sacramento tax preparation clients but also about the real-world implications for what life will look like down the line.

When we do this, it makes me wonder if Sacramento financial counselors do the same thing with retirement?

In fact, I know that some of them do.

But, on the chance that your particular financial planner only pays attention to the numbers, and doesn’t help you evaluate some of the other components of your retirement situation, here’s a few ideas for some practical things you can do.

Would you add anything to this list? I’d be interested in your comments…

David MacMillan Suggests: Take A Test Drive Of Your Retirement Plans
“It doesn’t matter where you are, you are nowhere compared to where you can go.” -Bob Proctor

Sacramento people over 40 shouldn’t just plan for retirement, they should rehearse for it.  Because retirement can last 20 to 30 years, it’s more important than ever that “pre-retirees” (those who plan to retire in five to seven years) practice how they want to live without work as the organizational focus of their lives:

Try out different retirement lifestyles
For example, many people dream of selling the family home in the Sacramento area and traveling in an RV or going abroad. Practice this by renting a camper and going on the road for a long vacation. You may discover that travel is exhausting or boring to you.

The same holds true for relocation dreams. Rent a home where you think you may want to retire to see if it really is where you’d like to move. The weather may not suit you, or the community may not be your cup of tea. Work out these details before you commit to an expensive change.

Live with your spouse 24 hours a day
Most couples spend much of their early years working and, thus, spending much of their time apart. It may take some time to get used to the other person’s schedule, habits, and routines.

Practice living on that retirement budget.
Most retirees’ income is significantly less than their preretirement income. Add up all the Social Security benefits, pension income, and 401(k) and IRA savings to calculate what you can realistically expect to live on each month. Then live on that amount for a month to determine what changes, if any, you need to make to your plans.

I hope this all helps! To your family’s financial and emotional peace…


David MacMillan
(916) 438-6964

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