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Nov/Dec 2000
Vol. 3, No. 9, pp. 65-66,

money matters: personal

Don't let errors deflate your pension

Also: Some early tax-deduction tipsOpening Art

Do you enjoy garage sales or auctions? If so, then chances are that part of your enjoyment is knowing the retail price of an item and buying it for less. Although most Americans know prices for everyday items, many are unaware of the value of something much more vital to their futures: their pensions.

Pension calculations are complicated and subject to inadvertent error. The Pension Benefit Guaranty Corp. (PBGC) audits pension plans terminated at the option of the employer as part of its standard termination audit program. PBGC data from 1986 to 1995 show that pension miscalculations increased from 2.8% to more than 8% of those surveyed. About a third of the miscalculations caused participants to be underpaid by $1000 or more.

The following are a few common causes of pension miscalculations:

  • Approximately 80% of errors involve the use of incorrect interest rate tables.
  • If a pension’s value is based on salary, then employers may erroneously include or fail to include bonuses or overtime in their calculations.
  • Eligibility rules requiring at least 1000 hours of work per year may incorrectly be interpreted to exclude part-time employees. (Part-timers may be eligible for a pro rata part of the full-time benefit.)
  • An outdated or incorrect vesting schedule may be used.
  • Records can be lost because a company moves or changes its name.
  • A “break in service” could reduce or wipe out a pension.
  • A company may switch pension plans, and the old plan might not be included.

A confusing situation may develop for retirees who continue to work past age 65. If a retiree returns to work for the same employer after he or she officially retires, the company may limit the total number of years of service that count toward benefit accruals. Other difficulties arise for those who may have breaks in service. For example, employees may have gone into and out of the workforce when balancing family and work needs, which often can add to the difficulty in calculating pension benefits.

In response to these and other situations, Congress considered legislation last year to create a pension counseling program and hotline to educate Americans about their pension benefits. The bill, the Pension Assistance and Counseling Act, aimed to create a network of regional organizations to answer questions about pensions. The 1999 Congress adjourned after the bill was referred to committees in both houses, and it has languished in committee ever since, with Congress now adjourned for 2000. In the meantime, if you are concerned that your pension benefits may be miscalculated, then the following steps may help you:

  • If you are retired, ask the pension administrator at your former employer to recalculate your pension. If your benefits seem incorrect, ask for a copy of the formula and worksheet for calculating the pension, which you will need to further pursue your inquiry.
  • If you are currently working and will receive pension benefits when you retire, make sure the information on your personal benefit statement is correct—including your Social Security number, your date of birth, and the date you started with the company. Also, be sure to save your pay stubs.
  • For advocacy and counseling, request a list of federally funded pension counseling centers from the Pension Rights Center in Washington, DC, at 202-296-3776.
  • For brochures on your legal rights, call the U.S. Department of Labor’s Pension and Welfare Benefits Administration at 800-998-7542. They can refer you to a regional Department of Labor office and a pension benefit advisor.
  • For information on federal pension benefits, contact your congressional representatives or the U.S. Senate Special Committee on Aging. The committee can be reached by phone at 202-224-5464 or via the Internet at
  • You also may contact the PBGC at 202-326-4000. The PBGC can help you if a plan terminates or fails financially, but the organization does not check the accuracy of pension checks.

Your pension, Social Security, and retirement investments and savings are the “three-legged stool” of retirement income. It is important to make sure that you receive the pension benefits you are owed.

Some early tax-deduction tips
Tax filing may seem a long way off, but it doesn’t hurt to plan ahead with strategies such as the following.

Offset capital gains with losses. Recent market swings may have caused some of your investments to fare better than others. If so, it may make sense to offset gains from some holdings with losses from others. After first doing that, if your capital losses are larger than capital gains, then you can deduct excess losses against up to $3000 of other income for married couples filing jointly, or $1500 for individual taxpayers. Any losses remaining after those deductions can be carried over and used in future years.

Give appreciated assets to family or charity. Shifting stock or other appreciated assets to your children age 14 or older who are in lower tax brackets than you is another option. Then, as assets are sold, the tax due on the capital gain is based on the child’s tax rate instead of yours. Keep in mind that gift taxes may apply to gifts of more than $10,000 per person per year. You also can donate to charities stock or stock funds that you’ve held for more than one year with hefty unrealized gains. This allows you to not only avoid the capital gains tax but also receive a charitable deduction at the appreciated value. Your deduction may not exceed 30% of your adjusted gross income; however, you may carry over the disallowed portion of the deduction for up to five years.

Take advantage of education and child tax credits. You may qualify for one or more valuable tax credits offered to help taxpayers with the costs of education and child rearing. The credits, which reduce your tax bill dollar for dollar, include: <

  • The Hope Scholarship Credit—up to $1500 for qualified expenses for any family member in his or her first or second year of college or other postsecondary school. To qualify, students must be enrolled for at least half of a full-time course load for at least one academic period during the calendar year that the credit is claimed.
  • The Lifetime Learning Credit—20% of up to $5000 in qualified expenses for any family member enrolled in any course at an eligible institution regardless of the amount of coursework taken. The Lifetime Learning credit applies to expenses paid after June 30, 1998. Both the Lifetime and Hope credits phase out at incomes of $80,000–100,000 for couples filing jointly and $40,000–50,000 for single filers.
  • The Child Tax Credit—$500 per child under age 17. It begins to phase out at incomes of $110,000 for couples filing jointly, $75,000 for single filers, and $55,000 for married couples filing separately.

Deduct interest for educational loans. Eligible taxpayers can deduct up to $1500 in student loan interest (this amount increases to $2500 in 2001)—even if they don’t itemize deductions on their tax returns. The deduction is limited to interest paid during the first 60 months in which such payments are required.

Adapted from Today’s Chemist at Work, August 1999, p body


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