Every three years, the Federal Reserve sponsors the Survey of Consumer Finances (SCF), which collects information on the financial state of U.S. households. The survey is one of the nation’s primary sources of information on the financial condition of different types of households. Here are a few interesting observations gleaned from the most recent surveys conducted in 2013 and 2016, with the latter comparing changes during that timeframe.

Income

The typical household’s median family income rose 10% between 2013 and 2016, from $48,100 to $52,700. During that same period, mean income (the average) increased 14%, from $89,900 to $102,700. Families at the top of the income distribution saw larger gains in income between 2013 and 2016 than other families, consistent with widening income inequality.

Across age groups, median and mean incomes show a life-cycle pattern, rising to a peak in the middle age groups and then declining for groups that are older and increasingly more likely to be retired. Income also shows a strong positive association with education; in particular, incomes for families headed by a person who has a college degree tend to be substantially higher than for those with lower levels of schooling.

Incomes of white non-Hispanic families are substantially higher than those of nonwhite (black or African-American non-Hispanic, Hispanic, or Latino, and other or multiple race) families. Income is also higher for homeowners and for families living in urban areas than for other families, and income is systematically higher for groups with greater net worth.

Wealth

Families near the bottom of the income and wealth distribution experienced large gains in mean and median net worth following large declines between 2010 and 2013. Families without a college education and nonwhite and Hispanic families experienced larger proportional increases in net worth than other types of families, although more-educated families and white non-Hispanic families continue to have higher wealth than other families.

Overall, median and mean inflation-adjusted net worth — the difference between a family’s gross assets and liabilities — rose between 2013 and 2016. Overall, the median net worth of all families rose 16% to $97,300, and mean net worth rose 26% to $692,100. Much of the increase in wealth was driven by the increased prices of homes and investments such as stocks and other securities.

The same patterns of inequality in the distribution of wealth across all families are also evident within race/ethnicity groups: For each of the race/ethnicity groups, the mean is substantially higher than the median, reflecting the concentration of wealth at the top of the wealth distribution. White families had the highest level of both median and mean family wealth: $171,000 and $933,700, respectively. Black families’ median and mean net worth was less than 15% that of white families, at $17,600 and $138,200, respectively. Hispanic families’ median and mean net worth was $20,700 and $191,200, respectively.

A few other interesting facts

Homeownership rates decreased between 2013 and 2016 to 63.7%, continuing a decline from their peak of 69.1% in 2004. For families that own a home, mean net housing values (value of a home minus outstanding mortgages) rose.

Retirement plan participation and retirement account asset values rose for families across the income distribution, with the largest proportional increases occurring among families in the bottom half of the income distribution.

Overall, many measures of debt and debt obligations indicate that debt has fallen, while education debt increased substantially between 2013 and 2016.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

The Tax Cut and Jobs Act substantially increased the standard deduction amounts for 2018 to 2025. It also eliminated or restricted many itemized deductions for those years. You can generally choose to take the standard deduction or to itemize deductions. As a result of the changes, far fewer taxpayers will be able to reduce their taxes by itemizing deductions.

Standard deduction

The standard deduction amounts are substantially increased in 2018 (and adjusted for inflation in future years).

2017 2018
Single $6,350 $12,000
Head of household $9,350 $18,000
Married filing jointly $12,700 $24,000
Married filing separately $6,350 $12,000

The additional standard deduction amount for the blind or aged (age 65 or older) in 2018 is $1,600 (up from $1,550 in 2017) for single/head of household or $1,300 (up from $1,250 in 2017) for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer.

Itemized deductions

Many itemized deductions have been eliminated or restricted. The overall limitation on itemized deductions based on the amount of adjusted gross income (AGI) was eliminated. Here are some specific changes.

Medical expenses: The AGI threshold for deducting unreimbursed medical expenses was reduced from 10% to 7.5% for 2017 and 2018, after which it returns to 10%. This same threshold applies for alternative minimum tax purposes.

State and local taxes: Individuals are able to claim an itemized deduction of up to only $10,000 ($5,000 for married filing separately) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income taxes). Previously, there were no dollar limits.

Home mortgage interest: Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt. For mortgage debt incurred before December 16, 2017, the prior $1,000,000 ($500,000 for married filing separately) limit will continue to apply. A deduction is no longer allowed for interest on home equity indebtedness. Home equity used to substantially improve your home is not treated as home equity indebtedness and can still qualify for the interest deduction.

Charitable gifts: The top percentage limit for deducting charitable contributions is increased from 50% of AGI to 60% of AGI for certain cash gifts.

Casualty and theft losses: The deduction for personal casualty and theft losses is eliminated, except for casualty losses attributable to a federally declared disaster.

Miscellaneous itemized deductions: Previously deductible miscellaneous expenses subject to the 2% floor, including tax preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Alternative minimum tax (AMT)

The standard deduction is not available for AMT purposes. Nor is the itemized deduction for state and local taxes available for AMT purposes. If you are subject to the alternative minimum tax, it may be useful to itemize deductions even if itemized deductions are less than the standard deduction amount.

Year-end tax planning

Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

With the substantially higher standard deduction amounts and the changes to itemized deductions, it may be especially useful to bunch itemized deductions in certain years; for example, when they would exceed the standard deduction. Thus, while this might seem counterintuitive from a nontax perspective, it may be useful to make charitable gifts in years in which you have high medical expenses or casualty losses.

In this environment, qualified charitable distributions (QCDs) may be even more useful as a way to make charitable gifts without itemizing deductions. QCDs are distributions made directly from an IRA to a qualified charity. Such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA. Individuals age 70½ and older can make up to $100,000 in QCDs per year.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

If you’re thinking about working as long as possible to increase your retirement savings, you may be wondering whether you can receive Social Security retirement benefits while you’re still employed. The answer is yes. But depending on your age, earnings from work may affect the amount of your Social Security benefit.

If you’re younger than full retirement age and make more than the annual earnings limit ($17,040 in 2018), part of your benefits will be withheld, reducing the amount you receive from Social Security. If you’re under full retirement age for the entire year, $1 is deducted from your benefit for every $2 you earn above the annual limit.

In the year you reach full retirement age, $1 is deducted from your benefit for every $3 you earn above a different limit ($45,360 in 2018).

Starting with the month you reach full retirement age, your benefit won’t be reduced, no matter how much you earn.

Earnings that count toward these limits are wages from a job or net earnings from self-employment. Pensions, annuities, investment income, interest, and veterans or other government benefits do not count. Employee contributions to a pension or a retirement plan do count if the amount is included in your gross wages.

The Social Security Administration (SSA) may begin to withhold the required amount, up to your whole monthly benefit, as soon as it determines you are on track to surpass the annual limit. However, even if your benefits are reduced, you’ll receive a higher monthly benefit at full retirement age, because the SSA will recalculate your benefit and give you credit for any earnings withheld earlier. So the effect that working has on your benefits is only temporary, and your earnings may actually increase your benefit later.

These are just the basics, and other rules may apply. The Retirement Earnings Test Calculator, available at the Social Security website, ssa.gov, can help you estimate how earnings before full retirement age might affect your benefit.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

Tax filing season is here again. If you haven’t done so already, you’ll want to start pulling things together — that includes getting your hands on a copy of your 2016 tax return and gathering W-2s, 1099s, and deduction records. You’ll need these records whether you’re preparing your own return or paying someone else to prepare your tax return for you.

Don’t procrastinate

The filing deadline for most individuals is Tuesday, April 17, 2018. That’s because April 15 falls on a Sunday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 16. Unlike in some years, there’s no extra time for residents of Massachusetts or Maine to file because Patriots’ Day (a holiday in those two states) falls on April 16 — the same day that Emancipation Day is being celebrated.

Filing for an extension

If you don’t think you’re going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 15, 2018) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions.

Filing for an automatic extension does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Special rules apply if you’re living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension (to June 15, 2018) without filing Form 4868, though interest will be owed on any taxes due that are paid after April 17. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?

One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there’s no way that you can pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you’ll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).

Expecting a refund?

The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, since last year’s tax filing season, the IRS has been required to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the child tax credit until at least February 15.1

Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return.

1 IRS.gov (IR-2017-181, IRS Encourages Taxpayers to Check Their Withholding; Checking Now Helps Avoid Surprises at Tax Time, October 30, 2017)
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

Beginning January 1, 2018, the government introduced a new military retirement system that blends a defined benefit annuity with a defined contribution plan through the Thrift Savings Plan. If you enlist on or after January 1, 2018, you’re automatically enrolled in the new Blended Retirement System (BRS). If you are an active servicemember with fewer than 12 years of service as of December 31, 2017, or a National Guard and Reserve servicemember in a paid status who has accrued fewer than 4,320 retirement points as of December 31, 2017, you may opt-in to the BRS, or you can remain in the legacy retirement system. The opt-in window for BRS is from January 1, 2018, to December 31, 2018. If you remain in the legacy retirement system, your retirement benefits will not change.

Why did the military adopt the BRS?

According to the Department of Defense (DoD), 81% of servicemembers who join the military separate with no government retirement benefit. Under the BRS, about 85% of servicemembers will receive a government retirement benefit if they serve at least two years, even if they don’t qualify for full retirement benefits.

Deciding whether to opt-in to the BRS

The DoD provides a BRS Comparison Calculator that allows you to compare estimated benefits under both the legacy retirement system and the BRS. If you do opt-in to the BRS, you will need to complete the mandatory BRS Opt-In Course on Joint Knowledge online or your service branch’s Learning Management System (if available) and affirmatively opt-in to BRS anytime from January 1, 2018, to December 31, 2018.

Key components of the BRS

Thrift savings plan (TSP). The BRS includes a TSP component. The TSP is a defined contribution retirement savings and investment plan that offers the same types of savings and tax benefits many private corporations offer their employees under 401(k) or similar plans. As a plan participant, you are automatically set up to contribute 3% of your basic pay to your TSP account, unless you opt for a different contribution percentage, or you elect not to contribute any part of your pay. After 60 days of service, the government automatically contributes an amount equal to 1% of your basic pay each month into your TSP retirement account. After two years of service, the government will match servicemember contributions up to an additional 4% (in addition to the 1% automatic government contribution). If you are a servicemember who opts-in to the BRS, the automatic 1% contribution and matching contributions begin the first pay period after opting in — there is no waiting period.

Annuity retirement payment. Under the BRS, the government is contributing money to your TSP, so the annuity payment available after 20 years of service isn’t as much as it is under the legacy retirement system. The formula for calculating retired pay uses a 2.0% multiplier for each year of service (2.5% under the legacy system), so the annuity payment under the BRS drops to 40%.

Continuation pay. As a way to encourage continued uniformed service, the BRS includes a continuation pay provision. Continuation pay is a direct cash payout, like a bonus. It is payable between eight and 12 years of completed service. Most servicemembers will be eligible for continuation pay, but the timing and the amount are determined by your service. As an active component servicemember (including Active Guard Reserve or Full Time Support) enrolled in the BRS, you will be eligible for a cash incentive of 2.5 to 13 times your regular monthly basic pay. If you are a reserve component member, you’ll be eligible for 0.5 to 6 times your monthly basic pay (as if serving on active duty). Each service branch will publish guidance related to continuation pay rates. If you accept the payment but do not complete your obligated service time, you may be required to repay a portion or all of the continuation payment.

Lump sum advance payment. You may choose to receive a portion of your retirement annuity in a lump sum. Ninety days prior to retirement, you may elect to receive either 25% or 50% of the discounted present value of your future retirement annuity payments. The discount rate for the lump sum is determined annually and announced by the DoD on June 1. The percentage is calculated from the date of retirement from the military to Social Security full retirement age, which is between 66 or 67, depending on your date of birth (for most, it will be age 67). This lump sum election is paid out no later than 60 days after retirement in exchange for reduced monthly retirement annuity payments. Monthly retired pay returns to the full amount when you reach your Social Security full retirement age. The lump sum payment is subject to ordinary income taxes, and you may elect to receive the lump sum in up to four equal annual installments.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018