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Cypen & Cypen
NEWSLETTER
for
September 5, 2019

Stephen H. Cypen, Esq., Editor

1. SELF-EMPLOYMENT AND SOCIAL SECURITY:
Many people enjoy the independence of owning and operating their own small business. If you’re a small business owner, you know that you have additional financial responsibilities when reporting your taxes. A part of this is paying into Social Security. Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, adds a matching contribution, then sends those taxes to the Internal Revenue Service (IRS) and reports the wages to Social Security. Self-employed people must do all these actions and pay their taxes directly to the IRS. You’re self-employed if you operate a trade, business or profession, either by yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on Schedule SE, in addition to the other tax forms you must file. You must have worked and paid Social Security taxes for a certain length of time to get Social Security benefits. The amount of time you need to work depends on your date of birth, but no one needs more than 10 years of work (40 credits). In 2019, if your net earnings are $5,440 or more, you earn the yearly maximum of four credits -- one credit for each $1,360 of earnings during the year. If your net earnings are less than $5,440, you still may earn credit by using an optional method described below. We use all your earnings covered by Social Security to figure your Social Security benefit, so, report all earnings up to the maximum, as required by law. Family members may operate a business together. For example, a husband and a wife may be partners or run a joint venture. If you operate a business together as partners, you should each report your share of the business profits as net earnings on separate self-employment returns (Schedule SE), even if you file a joint income tax return. The partners must decide the amount of net earnings each should report (for example 50 percent and 50 percent). You can read more about being self-employed and how that affects your Social Security benefits including optional methods of reporting. Mike Korbey, Deputy Commissioner for Communications, Social Security Administration, August 29, 2019.
 
2. FAILURE TO CASH A DISTRIBUTION CHECK FROM A QUALIFIED RETIREMENT PLAN: 
Revenue Ruling 2019-19 provide that an individual receives a distribution check from a qualified plan and does not to cash the check.  The revenue ruling concludes that the individual’s failure to cash the check does not permit the individual to exclude the amount of the designated distribution from gross income under § 402(a) and does not alter the employer’s withholding obligations under § 3405 or Form 1099-R reporting obligations under § 6047(d). Revenue Ruling 2019-19 will be in IRB 2019-36, dated September 3, 2019. Issue Number RR-2019-19, IRS Guide Wire, August 14, 2019
 
3. HERE’S WHAT TAXPAYERS SHOULD KNOW ABOUT MAKING 2019 ESTIMATED TAX PAYMENTS:
Small business owners, self-employed people, and some wage earners should look into whether they should make estimated tax payments this year. Doing so can help them avoid an unexpected tax bill and possibly a penalty when they file next year. Everyone must pay tax as they earn income. Taxpayers who earn a paycheck usually have their employer withhold tax from their checks. This helps cover taxes the employee owes. On the other hand, some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.
 
Here’s some information about estimated tax payments:

  • Taxpayers generally must make estimated tax payments if they expect to owe $1,000 or more when they file their 2019 tax return.
  • Whether or not they expect to owe next year, taxpayers may have to pay estimated tax for 2019 if their tax was more than zero in 2018.
  • Wage earners who also have business income can often avoid having to pay estimated tax. They can do so by asking their employer to withhold more tax from their paychecks. The IRS urges anyone in this situation to do a Paycheck Checkupusing the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4 to their employer.
  • Aside from business owners and self-employed individuals, people who need to make estimated payments also includes sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
  • Estimated tax requirements are different for farmers and fishermen.
  • Corporations generally must make these payments if they expect to owe $500 or more on their 2019 tax return.
  • Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
  • The final two deadlines for paying 2019 estimated payments are Sept. 16, 2019 and Jan. 15, 2020.
  • Taxpayers can check out these forms for details on how to figure their payments:
  • Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
  • Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.
  • For tax year 2019, the penalty generally applies to anyone who pays less than 90 percent of the tax reported on their 2019 tax return.

More information:
Form 1040 Instructions
Form 1120 Instructions
Issue Number: Tax Reform Tax Tip 2019-109, IRS Tax Tips, August 13, 2019.
 
4. HOW YOU CAN HELP SOCIAL SECURITY PROTECT OTHERS:
Scams have become an unfortunate part of doing business online or via phone. Many people have received a call or voicemail from someone warning them that their Social Security number or benefits are suspended due to suspicious activity. It’s an alarming scam and one we must help people identify so that they do not become the next victim. We, at Social Security, are serious about protecting the information entrusted to us. In the past year, we’ve posted a series of blogs about how our beneficiaries can protect their information from scammers and what to do when they receive a call from someone pretending to be us. We are teaming up with other government agencies and organizations to help spread these tips. Most recently, we worked with the Federal Trade Commission and the Consumer Financial Protection Bureau to create a new fraud prevention placemat to help you avoid Social Security scams. We’ve also worked with the Administration for Community Living and the Office of the Inspector General to develop and publish educational resources to help the public spot these schemes and avoid becoming victims themselves. The resources include a video, factsheets, and materials on how we can protect the elderly from fraud. These resources are free and easily shareable. You can find the video about how you can help Social Security protect your information on our website. You can download the factsheet Protecting Your Information by visiting the Office of the Inspector General’s website. You can also check out the National Center on Elder Abuse for materials about preventing the financial exploitation of our older citizens. We believe that knowing how to tell the difference between a scam and a genuine call from Social Security is important. You can help us protect the people you serve. These are some things to remember:

  • Don’t answer calls from numbers you don’t recognize.
  • Never give out personal information such as your account numbers, passwords, Social Security number, mother’s maiden name, or other identifying information if a call seems suspicious.
  • Government employees will not threaten to take away benefits or ask for money or personal information to protect your Social Security card or benefits.
  • If you receive a call from someone asking for your Social Security number, bank account number, or credit card information, don’t engage this caller. Instead, hang up and report that information to the Office of Inspector General via their online fraud-reporting form. You should also report these calls to the Federal Trade Commission.

Scammers are hard at work every day. Together, we can help safeguard the American public. Please help us spread the word. Darlynda Bogle, Assistant Deputy Commissioner, Social Security Administration, August 8, 2019.
 
5. KENTUCKY FINALLY PASSES A PENSION REFORM:
With Kentucky’s pension reform bill passing in the Senate, Gov. Matt Bevin’s afternoon signature marked a long-delayed victory in his bid to overhaul at least one of the state’s public retirement programs. The measure (called HB 1) affects quasi-governmental agencies, such as health services. That leaves four other pension plans, all in financial distress, left to be dealt with. “While we have much work yet to do in addressing our $60 billion public pension crisis, HB 1 represents a positive step forward,” the governor said, referring to the rest of the troubled system. The top chamber’s 27-11 vote brought Bevin a win in a state where wobbly public pensions are a hot political issue. The governor called the session after lawmakers again failed to pass an overhaul aimed at shoring up the state’s underfunded quasi-government pension program. The bill passed in the state House. The quasis are one of the five pension plans under the umbrella of the Kentucky Retirement System. Last year, Bevin futilely battled to revamp the teachers’ plan, which is 39.3% funded as of its most recent annual report. The quasis’ plan is in an even more dire situation--it is just 12.9% funded. The new law will affect workers in health departments, regional universities, and domestic violence shelters, among others. It shunts new workers into a 401(k)-style plan, allows any of the 118 member organizations to leave the state pension system, and permits these agencies to stop making contributions to the program for a year. If the agencies opt to leave the pension fund, they will have to pay their unfunded liabilities to beneficiaries in either a lump-sum payment or in installments. Supporters of Bevin’s overhaul says it is a step in the right direction, while opponents argue it bars workers from receiving their full benefits, lets the agencies mistreat them, and freezes the accrued benefits of some members. A similar bill affecting the quasis had passed earlier this year, but Bevin vetoed it by saying the legislation was poorly drafted. If Bevin’s Republican administration is looking to make further reforms, it will have to wait until the next regular session, but only if he is re-elected in November. He faces Attorney General Andy Beshear, the Democratic nominee, who derailed previous attempts to revamp pensions, contending they were too hard on beneficiaries. Chris Butera, Chief Investment Officer, July 25, 2019.
 
6. LATEST CHICAGO PENSION FUND REPORTS LAY OUT FRAIL CONDITIONS:
Warnings about the weak health and liquidity risks of Chicago’s pension system abound in the funds’ 2018 financial reports. The net pension liabilities of the four city pension funds grew to a collective $30.1 billion in 2018 from $28 billion in 2017. The funds all recorded negative investment earnings after double-digit returns in 2017. The city has increased contributions to all four funds in recent years as it ramps up to an actuarially based contribution next year for its police and fire funds and in 2022 for the municipal employees' and laborers’ funds based on a schedule to reach a 90% funded ratio beginning in 2055 from their current levels that range from a low of 16.57% to a high of 40.6%. Those higher payments adopted under former Mayor Rahm Emanuel’s state-approved revamp rescued the laborers' and municipal funds from looming insolvency while easing and pushing off a state mandate to reach a 90% funded ratio in 30 years for the police and fire funds. The new schedules don’t begin to make a dent in unfunded ratios for years, leaving the funds at risk in an economic downturn that hits investments hard, several funds warn. “The risk of insolvency for MEABF has increased due to the 2018 investment return performance combined with fixed-dollar contributions through 2022, which do not change when the fund experiences unfavorable investment performance,” the Municipal Employees' Annuity and Benefit Fund warns in bold print in its 2018 actuarial report. “We strongly recommend an actuarial funding method that targets 100% funding where payments at least cover interest on the unfunded actuarial liability and a portion of the principal balance,” the report urges. “If the fund becomes insolvent, the employer will be required to make contributions on a ‘pay as you go’ basis, which means the employer would have to pay all benefits as they become due.” A separate warning -- also presented in bold type -- lays out the challenges of managing annuity payments and investments with such a weak funded status at 25%. “The investment return assumption is based on the fund being invested according to the target asset allocation in the investment policy statement. To the extent that the liquidation of assets to pay benefit payments and expenses requires a shift in investment allocation to more liquid, lower return asset classes, a lower discount rate will likely be required in the future,” the municipal fund’s report says. A lower discount rate, which is a factor in calculating the unfunded liabilities, would drive the net pension liabilities up. Mayor Lori Lightfoot and her finance team know well the situation they’ve inherited. “It is no secret that our city faces extraordinary financial challenges, driven by a legacy of pension liabilities, mounting personnel contract increases, and growing debt service obligations -- all of which have been long in the making. While these costs loom large for next year and beyond, our administration will be looking at how city government functions to develop a sustainable road-map for the future,” Lightfoot said in a letter earlier this month introducing the city’s 2018 comprehensive annual financial report. The city’s report includes the CAFRs for all four funds and all but the police fund have posted 2018 actuarial valuation reports on their respective websites. The most urgent demand facing the city is the need to cover rising contributions. The phase-in period is covered by higher property taxes, a 9-1-1 surcharge, and a water-sewer fee but the city must find another $283 million next year when the actuarial contribution requirement hits for police and fire and another $310 million when the municipal and laborers’ requirement hits. All four continue to require higher annual contributions but at a more modest level. The 2018 contribution of $1.18 billion grew to $1.3 billion this year. It then rises to $1.67 billion next year, $1.78 billion in 2021, $2.13 billion in 2022 and $2.18 billion in 2023. The path Lightfoot will take is unclear and her chief financial officer, Jennie Huang Bennett, said this month it’s too early to rule in or out any fiscal maneuvers to balance the city’s books and cover rising contributions as the city continues eyeing expense cuts and management efficiencies before raising taxes. Lightfoot recently pitched the idea of a merger involving other local governments or a state pension takeover but Gov. J.B. Pritzker threw cold water on that idea, saying the state’s barely investment grade rating couldn’t afford such a move. The idea of tinkering with the funding schedule has been circulated, but any such move given the weak funded status could draw rating downgrades. Chicago’s stable rating outlook for its BBB-plus rating reflects “progress in stabilizing its pension funds and placing them on a path to actuarial funding as well as its narrowing budget gap and steps to more structurally align its budget,” S&P Global Ratings lead Chicago analyst Carol Spain said in a recent report that warned of a potential downgrade if “the city backslides on its progress toward structural alignment on full actuarial pension funding.” The city’s GO bonds are rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency and junk-level Ba1 by Moody’s Investors Service. All assign a stable outlook. The municipal employees' fund saw a market return of negative 4.9% last year, according to the results prepared by Segal Consulting. It assumes a 7% positive return. The actuarially funded ratio dropped to 25% from 27.4% a year earlier. The net pension liability rose to $12.89 billion from $11.7 billion a year earlier. “The increase in the NPL is primarily due to the lower than expected market value investment return,” the report says. The city’s 2019 contribution of $421 million is far short of an actuarially determined contribution the fund estimates at $1.12 billion. “Each year there is a contribution deficiency leads to an increased deficiency in all future years,” warns the report. The phase-in period calls for contributions of $344 million, $421 million, $499 million, and $576 million leading up to an ARC in 2022 with the target of a 90% funded ratio in 2057. The Laborers' & Retirement Board Employees' Annuity & Benefit Fund of Chicago saw a negative 6.36% return on assets in 2018. It assumes a 7.25% rate of return. The actuarial funded ratio fell to 40.6% from 48.2% a year earlier. The net pension liability rose to $1.6 billion from $1.36 billion in 2017. The city’s phase-in to a 2022 actuarial contribution for payments of $48 million, $60 million, $72 million, and $84 million in the years leading up to 2022. The 2019 contribution of $60 million compares to the $148 million that would be actuarially based. “While the new statutory funding policy is an improvement over the prior funding policy, it does not comply with generally accepted actuarial standards for the funding of retirement plans, and therefore we recommend strengthening the policy,” says the report from Gabriel, Roeder, Smith & Co. The Policemen’s Annuity and Benefit Fund of Chicago saw a loss on investments of 5.36% last year. It assumed a 7.25% rate of return for 2018. The funded ratio held steady at 23.8% from 23.7% in 2017. The net pension liability also held steady at $10.4 billion compared to $10.3 billion in 2017. The phase-in cycle called for statutorily set contributions of $464 million, $500 million and $557 million in the last three years and $579 million this year. It rises to $737 million next year when the actuarially based contribution hits with modest increases then projected between $20 million and $30 million in future years, according to the comprehensive annual financial report for 2018 prepared by Mitchell & Titus LLP. The separate actuarial valuation that has not yet posted was prepared by Gabriel, Roeder, Smith & Co. The Firemen's Annuity and Benefit Fund saw a negative 5.2% return in 2018, when it assumed a positive 7.5% return. Its funded ratio fell to 16.57% from 19.6% and the net pension liability rose to $5.2 billion from $4.6 billion in 2017. The city’s statutory ramp called for contributions over the last three years of $208 million, $227 million, $235 million and $245 million this year, leading up to an estimated ARC contribution of $371 million next year. The $245 million contribution this year falls short of an actuarial contribution of $442 million. “The funding policy…significantly defers contributions” from a previous state mandate for all public safety funds across Illinois, the report warns. The unfunded liability is projected to continue to rise until 2027 when expected ARC payments will begin to bring down the tab down. “We continue to recommend that the plan sponsor seriously consider making additional contributions to ensure that there are sufficient assets available in the fund in all years to pay for promised benefits,” reads the report. “This is a severely underfunded plan. The funded ratio is only 16.8%” using market value of assets and it’s “not projected to even reach 50% funded for another 26 years,” warns the valuation report prepared by Gabriel, Roeder, Smith & Co. The report further warns that if payments are not timely the fund “may not have enough liquidity to continue making all the required benefit payments without changing its investment portfolio to one comprised of a larger percentage of short-term investments.” In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss. Before investing, consider the funds' investment objectives, risks, charges, and expenses. Yvette Shields, Fidelity, July 16, 2019.
 
7. ANNUITIES IN 401(K)S WON’T SOLVE THE RETIREMENT CRISIS. HERE’S WHY:
Proposed U.S. legislation would make it easier for employers to offer annuities in 401(k) retirement plans that provide retirees fixed payments for as long as they live. Does it make investing sense? First things first: The bill, known as the Secure Act, passed in the House of Representatives in May and is now awaiting a vote in the Senate. But since it has bipartisan backing and is the biggest retirement legislation to gain traction in more than a decade, it’s widely expected to be approved. The annuity portion is just one of the measures in the bill aimed at boosting retirement savings. Annuities currently are allowed in 401(k) plans, but they’re uncommon. Less than 10% of 401(k) plans offer an annuity option, according to a survey by the Plan Sponsor Council of America. Americans held $8.2 trillion in employer-sponsored defined contribution retirement plans as of March 31, according to the Investment Company Institute. Of that amount, $5.7 trillion was in 401(k) plans. Employers have shied away from including annuities in retirement plans over liability issues--participants might sue if an insurance company in the plan goes belly up or fails to pay claims. The legislation gives employers a “safe harbor’’ that limits their liability. An immediate annuity turns a lump sum into a stream of payments right away, while deferred annuities pay in the future. The advantage of annuities is that they offer investors guaranteed retirement income not exposed to market fluctuations or vulnerable to poor investment choices. The 401(k)s are the most popular employee savings vehicles. The rap on annuities is that, yes, while some are low cost, others come with high commissions and high fees that eat into the benefits. Micah Hauptman, a financial services counsel at the Consumer Federation of America, a nonprofit consumer advocate, says the legislation’s language is too broad and may allow for the inclusion of high-cost annuities. “The provision doesn’t apply to a narrow segment of annuities,’’ he says. “It applies to all annuities. Some are consumer friendly, but there are other types that are complex with high costs and are not in the consumer’s best interest.’’ The association, along with the Center for Economic Justice, sent a letter to the Senate seeking to change some of the language. It includes recommendations to revise the definition to include only “simple fixed annuities’’ and not variable and fixed-indexed annuities that are focused on accumulation, and adding a requirement for employers to review insurers’ financial strength ratings. Fidelity Investments, which manages $2.1 trillion in defined contribution plans and offers annuities outside 401(k) plans, supports passage of the bill. “It’s common-sense retirement reform,’’ says David Gray, head of retirement products and solutions in the Workplace Investing division, who works with plan sponsors. But he says he doesn’t see companies rushing to offer annuities in 401(k)s. “There’s still a lot to evaluate, including the selection of the provider and the type of products,’’ he says. “They still have the fiduciary duty to determine a reasonable fee.’’ Gray says Fidelity focuses on helping retirees develop personalized retirement income plans, including figuring out how much of their retirement savings they should consider turning into guaranteed income and helping them compare options. Scott Hanson, a Certified Financial Planner and co-founder of Allworth Financial, says the annuity option offers “little value. Investors have a gazillion options. You can go to Vanguard and buy a low-cost annuity.’’ “I don’t think it will have much of an impact’’ with plan participants, Hanson says, adding that the provision is beneficial for employers since it adds a layer of protection for them. “People like the concept of the immediate annuity, but the baby boomers who are retiring don’t like giving up control of their principal,’’ he says. John Voltaggio, a managing director at Northern Trust Wealth Management, which has $294.2 billion in assets under management, argues that individual retirement accounts and 401(k)s are already tax deferred, so it’s better to buy an annuity in a taxable account. Annuities in 401(k)s only trigger a tax when the money is withdrawn from the 401(k). “Generally speaking, I don’t recommend that clients hold annuities in their 401(k)s,’’ said Voltaggio. “I understand that people don’t want to make investment decisions and be subject to the investment results of the broad market, and they want to feel comfortable for their lifetimes. But an annuity in a 401(k) is not an ideal investment option for anyone.’’ Voltaggio’s clients, who have an average of $50 million in assets, have more options than the employees the legislation is targeting. He says he prefers target-date funds, which adjust asset allocation over time and become more conservative as investors move closer to their retirement date. “They help people stay disciplined and reallocate over time based on their age,’’ he says. “On their own, they’ll buy and sell at the wrong time. This is on autopilot.’’ The provision in the bill that’s on the radar of these advisors is the change to the “stretch IRA.’’ Currently, beneficiaries who inherit tax-advantaged retirement accounts can withdraw from it over their own lifetimes and stretch out tax payments. The new legislation would reduce the time limit to a decade in which the money must be withdrawn and taxes paid. Surviving spouses and minor children are exempt. “You’ll get less growth and have to pay the taxes much earlier,’’ Hanson says. “Right now, let’s wait and see if this passes in its current form. If it does, some will need to look at their entire estate plan. That’s going to be the case for many.’’ Voltaggio says his clients spend a lot of time deciding whether to leave an IRA to their children or give it to charity. Under the current law, beneficiaries could continue to stretch it out, creating “multiple generations of income-tax deferral,’’ he says. “If it becomes law, we’ll re-evaluate,’’ he says. “IRAs will be less attractive to leave to their children, and that’s the asset that will go to charity.’’ Mary Romano, Barron’s, June 28, 2019.

8. DID YOU KNOW BENJAMIN FRANKLIN SAID THIS?:
In this world nothing can be said to be certain, except death and taxes.
 
9. PONDERISMS:
How much deeper would the ocean be, if SPONGES didn’t grow in it?
 
10. INSPIRATIONAL QUOTES:
The best preparation for tomorrow is doing your best today. - H. Jackson Brown, Jr.

11. TODAY IN HISTORY:
On this day in 1666, Great Fire of London ends, leaving 13,200 houses destroyed and 8 dead.

12.  REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

Copyright, 1996-2019, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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