New individual income tax return data for 2013 is out from the Internal Revenue Service (IRS), and it provides numerous entries that may interest insurance and financial professionals. The overall picture shows an economy in recovery mode that year. Below are just a few selected findings from Section 1 of the summer 2015 report.
Individual retirement accounts: In 2013, there were only slightly more people (1 percent) reporting taxable distributions from their IRAs than in the previous year. But the amount of those distributions was down by 7.4 percent, to $213.6 billion. (Numbers are rounded.)
By 2013, markets were already rising, so it’s likely that many IRA owners decided to keep their money growing inside the IRA rather than pull it out.
In addition, the oldest baby boomers were just turning age 68 then, so IRA owners in the older boomer group had not yet reached the point (age 70.5) where they must start taking required minimum distributions (RMDs) from their IRAs. When the RMDs on boomer-owned IRAs start kicking in next year and thereafter, the taxable distributions will likely go up. This opens a reason for advisors to introduce post-RMD planning to more clients.
Social Security benefits. The amount of total benefits (i.e., not included in total income) rose by more than 5 percent in the 2013 returns, to $553.5 billion, according to the report. But as for the amount of taxable Social Security benefits, they were less than half that, just $243.3 billion.
The lower figure on the taxable benefits may be expected since people often stop working, or reduce work hours, once they go on Social Security. That way, their total income is often not high enough to hit the point that would trigger Social Security benefit taxation.
But here’s an interesting wrinkle: Returns reporting taxable Social Security benefits rose by 4 percent in 2013. That’s a higher percentage increase than for the total number of returns reporting Social Security benefits (2 percent).
In addition, the amount of taxable Social Security benefits was up by nearly 9 percent. Again, this percentage was higher than the increase reported for total benefit amount (5 percent, as already indicated).
These numbers may signal that a greater number of older people received some kind of taxable income, perhaps even from paid work, than previously. This income may have been sufficient, in some cases, to trigger a tax on their Social Security benefits.
If that’s the case — and several recent surveys do indicate that more older Americans are indeed gainfully employed (and want to be) than in earlier generations — this opens up retirement planning opportunities for advisors. This would not just be for Social Security maximization, but also for strategies to counterbalance the impact of the taxes that some will be paying on their Social Security. Cash value life insurance is definitely a candidate for this.
There are other possible reasons for the increase shown in taxable benefits, too. For instance, there could be some RMD activity in the 70-plus age group. The “what’s-what” on that will take some time for advisor and client to uncover. But chances are pretty good that those who are paying taxes on their Social Security will be interested in hearing what the advisor has to say.
Early withdrawal: One thing seems certain, and that is that early withdrawal from savings is probably not a factor in those taxation figures. The amount the report shows in this category is a relative pittance — just $124 million — and that’s down by 52 percent from the year earlier. The number of returns showing these penalty taxes is down too, by 10 percent to nearly 691,000.
Gambling: Gambling earnings probably don’t explain it, either. According to the report, these earnings showed up on 1.9 million returns (as “other income less loss”), down by 0.4 percent from the previous year. Granted, the gambling amount reported was up a bit — by 2.5 percent, to nearly $30 billion. But it’s really hard to see lots of grannies and grandpas ramping up enough earnings from gambling to trigger an overall increase in taxable Social Security benefits.
The entries go on and on, for pages. They include areas like unemployment compensation (down in number of returns and amount), health savings account deductions (up on both measures), and even qualified plug-in electric vehicle credits (up on both measures). The report is fun to go through, and provides a good glimpse of relative financial health.
Live with the lag
It bears repeating that the figures relate to taxes in 2013. Some industry professionals say they’d prefer to see more recent tax data — in this case, more recent than 2013. But in view of the massive volume of information that IRS has to collect, everyone has to live with the lag.
The data still has relevance in helping spot trends, though.
The big picture view of 2013 is that U.S. taxpayers filed almost 147.4 million individual returns in that year. That’s an increase of 2.4 million, or 1.7 percent, from 2012.
Adjusted gross income (AGI) fell by $6.5 billion, or 0.1 percent. Taxable income decreased too, although by just 0.1 percent. Despite the two decreases, total tax liability actually increased by 4.8 percent. The increase was due to new tax rates in 2013, a new net investment income tax, and additional Medicare taxes, the IRS said.
Overall, salary and wages were up nearly 3 percent from the previous year, IRS said. The total came to more than nearly $6.5 trillion. That’s on 122.2 million returns, 2 percent more than in 2012.
All four sections of the Summer 2015 Statistics of Income report (Publication 1304) are available at the IRS website. The findings are based on a sample drawn from the 147.4 million total returns.
IRS has also released a report on High-Income Tax Returns for 2012. Advisors in the high net worth market might find some of the data to be useful, again keeping in mind the time lag, which in this case goes back to 2012.
More than 5 million individual income tax returns with an income of $200,000 or more were filed in 2012, according to Justin Bryan, the IRS economist who wrote the high income report. That accounts for almost 4 percent of all returns for the year, he said.
In addition, the total number of returns with incomes of $200,000 or more increased by almost 12 percent compared to the total number of returns at that income level for 2011.
By comparison, in 2009, when the nation was in the throes of the Great Recession, individual returns in this category numbered just under 4 million, according to a table in Byran’s report. These 2009 returns accounted for under 3 percent of all returns that year. And in 2002, when the nation was reeling from the aftermath of the first recession of the century, individual returns in this category numbered just roughly 2.4 million, and represented not quite 2 percent of all returns.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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