Year-End Tax and Investment Decisions for Sears Holdings Employees

According to a recent article published by Kiplinger in December 2022, it's important for retirees and soon-to-be retirees to consider the impact of year-end tax and investment decisions on their Social Security benefits. For example, if retirees have substantial taxable income in a given year, it can result in higher taxes on their Social Security benefits. On the other hand, by making strategic investment decisions before year-end, retirees can reduce their taxable income and potentially avoid higher taxes on their Social Security benefits. This information is particularly relevant to our target audience of Sears Holdings workers looking to retire and existing retirees who may be looking for ways to optimize their retirement income.

What Are Year-End Investment Decisions?

Numerous Sears Holdings customers have concerns concerning tax planning and end-of-year investment decisions. Tax planning may enable you to control the timing and manner in which you report your income and claim your deductions and credits, whereas year-end investment decisions may result in substantial tax savings. The fundamental year-end planning strategy that we would like to share with our Sears Holdings clients revolves around timing — timing your income so that it is taxed at a lower rate, and timing your deductible expenses so that they can be claimed in years when you are in a higher tax bracket. In terms of investment planning, investing in capital assets may increase your ability to time the recognition of a portion of your income and enable you to take advantage of potentially lower-than-normal income tax rates. You have the option to determine when the income or loss from a variety of investment assets is recognized. In most cases, you decide when to sell your capital assets, but Sears Holdings clients should be aware that shifting prospective capital gain income to other taxpayers through gifting may be an appropriate strategy in certain circumstances.

How Do You Use The Capital Gains Tax To Lower Your Taxes?

Our Sears Holdings clients frequently inquire about capital gains tax deductions. Capital gains and losses are taxed in a unique manner. Currently, the maximum long-term capital gains tax rate (for most asset categories) is 20%, while the maximum ordinary income tax rate is 37% — a difference of 17%. It is essential for our Sears Holdings customers to remember that converting ordinary income to long-term capital gain income may result in a reduction of your federal income tax liability.

Tip: Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. The actual process of calculating the tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income.

Additionally, the 3.8% net investment income tax applies to some or all of your net investment income (including capital gains) if your modified adjusted gross income exceeds $200,000 for single or head of household filers, $250,000 for married taxpayers filing jointly, or $125,000 for married taxpayers filing separately.

Timing Your Capital Gain Recognition

If our Sears Holdings clients time the sale of their capital assets judiciously, they may be able to reduce their federal income tax liability. If it's late in the year and you want to sell a capital asset, you can wait until January to do so (assuming you have a calendar tax year) so that you realize your capital gain or loss the following year. This strategy is particularly advantageous for our Sears Holdings clients who are in a higher marginal tax bracket this year and anticipate being in a lower bracket next year. Capital gain income increases your adjusted gross income (AGI), so timing can also be crucial. Depending on your AGI, the quantity and availability of certain tax benefits may vary. For example, the itemized deduction for medical expenses is only available if medical expenses exceed 7.5% of adjusted gross income.

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Plan Your Year-End Capital Gain And Loss Status

We also advise our Sears Holdings clients to schedule the recognition of capital losses. Any Sears Holdings client who anticipates a capital gain this year should evaluate their portfolio for potential capital losses that could be used to offset the gain. If you are an Sears Holdings client with capital loss carryforwards, you should evaluate your portfolio for capital gain opportunities that can be utilized with these carryforwards. In general, net capital losses are deductible dollar-for-dollar against net capital gains. Annually, excess losses may be used to offset up to $3,000 ($1,500 for married individuals submitting separate tax returns) of ordinary income. In excess of the limit, losses can be carried forward indefinitely.

The following strategies may be appropriate:

Sell a property with a capital gain before the end of the year if your capital losses for the year exceed the sum of your capital gains plus $3,000 ($1,500 for married taxpayers submitting separate returns).
For our Sears Holdings clients whose annual gains exceed their losses, we should advise them to sell properties with built-in losses to mitigate their excess gains.
If your other allowable deductions for the year exceed your income, you should avoid incurring further capital losses as much as possible.
If you've owned an investment for close to a year and wish to sell it, you should wait (if feasible). If you hold an asset for over a year before selling it, you can take advantage of the reduced long-term capital gains rates.

How Do You Select Investments To Control Income?

You may choose investments likely to generate ordinary income, such as interest, or income subject to reduced tax rates (certain qualified dividends or long-term capital gains). You can also choose investments with a high probability of producing ordinary or capital losses. You can determine when your investment income is taxed, keeping in mind that income distributions are generally not taxed until they are received (assuming you use the cash method of accounting). By understanding the tax laws, our Sears Holdings customers can reduce their taxes.

What about Shifting Income?

Through gifts, it may be possible to transfer prospective capital gains to other taxpayers. For Sears Holdings clients in a higher tax bracket, transferring appreciated assets to relatives in a lower tax bracket may be advantageous.

Conclusion

Just as a marathon requires consistent training and preparation over time, retirement requires a long-term plan that includes saving and investing wisely. Both require setting goals, building endurance, and staying on track to achieve those goals. Just as runners need to stay focused and motivated to cross the finish line, retirees need to stay focused on their financial goals and make adjustments along the way to ensure a successful retirement.

How does the Sears Holdings Pension Plan differentiate between normal retirement, early retirement, and late retirement options for Kmart participants? In what ways do these options influence the retirement planning process for employees of Sears Holdings, and what specific considerations should Kmart employees be aware of when choosing one of these retirement paths, particularly in relation to their vested status?

Differentiation of Retirement Options: The Sears Holdings Pension Plan offers distinct options for normal, early, and late retirement. Normal retirement is available at age 65 or after five years of plan participation, whichever is later. Early retirement can be taken from age 55 but before 65, provided the employee is vested, with benefits subject to actuarial reduction unless certain conditions are met (like having at least 90 points, which is a sum of age and years of credited service). Late retirement pertains to any retirement after the normal retirement age, with pensions recalculated to reflect the delay in benefit commencement.

Considering the frozen status of the Sears Holdings Pension Plan, how does this impact the benefits eligibility for Kmart employees, and what implications does it have for their retirement savings strategies? In what ways should current employees factor in this frozen status when evaluating their overall retirement readiness and potential alternatives outside of the company plan?

Impact of Frozen Status: The freezing of the Sears Holdings Pension Plan on January 31, 1996, means that there have been no new accruals of benefits or participants since that date. For Kmart employees, this impacts their benefits eligibility by capping the pension benefits at levels earned up to the freeze date. Employees need to consider this stagnation in benefits when planning for retirement, potentially seeking additional retirement savings avenues to bridge any shortfall.

What are the essential calculations involved in determining the retirement benefits under the Sears Holdings Pension Plan for Kmart employees? Specifically, how do the Career Average Pay and Final Average Pay formulas come into play, and what factors should employees consider when estimating their future retirement payouts?

Essential Calculations for Retirement Benefits: Pension benefits for Kmart employees under the Sears Holdings Pension Plan are calculated using either the Career Average Pay or the Final Average Pay formulas. These calculations take into account an employee's years of credited service and compensation up to the freeze date. Factors like estimated Social Security benefits and specific formulas (such as a deduction based on Social Security benefits under the Final Average Pay formula) play crucial roles in determining the final pension payout.

How can Sears Holdings employees best navigate the process of applying for benefits under the Pension Plan? What specific steps should participants take to ensure their applications are processed correctly, and what important deadlines should they be aware of to avoid any negative consequences on their retirement benefits?

Navigating the Benefits Application Process: To apply for pension benefits, employees must submit a formal application, ideally 30 to 90 days before the intended commencement date. It is crucial to ensure all personal information, including marital status and spouse details, is up-to-date to avoid delays or inaccuracies in benefit processing. Missing application deadlines can lead to postponed benefit payments or unwanted default options.

In what situations can Kmart employees expect to receive a Deferred Vested Pension, and how is the calculation for this pension affected by their previous employment and vesting service? Employees should be aware of the important factors influencing their eligibility and the steps necessary to maintain their retirement benefits after leaving the company.

Eligibility and Calculation for Deferred Vested Pension: A Deferred Vested Pension is available to employees who leave the company after becoming vested but prior to qualifying for retirement. The calculation mirrors that of a normal retirement pension, with possible early commencement reductions. Understanding the timing of benefit commencement and the potential reductions for early start is vital for planning.

How does the Sears Holdings Pension Plan address tax considerations for employees receiving both monthly payments and lump sum payments upon retirement? What tax implications should Kmart participants be aware of, particularly in relation to IRS rules for distributions and potential penalties for early withdrawal?

Tax Implications of Pension Receipt: Pension payments, whether monthly or lump sum, are subject to federal taxes. Monthly benefits are taxed as ordinary income, while lump sums might be eligible for special tax treatments or rollover options to defer taxes. It’s important for Kmart employees to consider these implications and possibly consult with a tax advisor to optimize tax liability.

What are the rights and protections afforded to Kmart participants under the Employee Retirement Income Security Act (ERISA) as they navigate their retirement benefits with the Sears Holdings Pension Plan? How can employees leverage these rights to ensure they are receiving all the benefits to which they are entitled?

ERISA Rights and Protections: Under ERISA, Kmart employees are entitled to certain rights including the ability to appeal denied benefits, access to plan information, and assurances of fair and equitable treatment of their benefits. Leveraging these protections ensures that employees receive all due benefits.

What steps should Kmart employees take to update their personal information to ensure they continue receiving their benefits without interruption, especially in the context of missing participants or uncashed checks? What resources and contacts at Sears Holdings are available to assist with these updates?

Updating Personal Information: Maintaining accurate personal information with the pension plan is crucial for uninterrupted benefit payments. Employees should promptly update changes such as address, marital status, or beneficiaries to prevent issues with benefit distributions or lost checks.

How does the process of transferring between affiliated employers impact pension benefits for Kmart employees under the Sears Holdings Pension Plan? What considerations should be taken into account concerning Credited Service and Vesting Service during such transfers, and how can employees ensure they do not lose any entitled benefits?

Impact of Transfers Between Affiliated Employers: Transferring between Sears Holdings’ affiliated employers can affect pension benefits differently depending on whether the employer participates in the pension plan. It's essential to understand how such transfers impact credited and vesting service accruals.

For Kmart employees seeking more information about their benefits under the Sears Holdings Pension Plan, what is the best way to contact company representatives? How can they effectively communicate their questions or concerns to ensure they receive accurate and timely information regarding their retirement benefits?

Contacting Plan Representatives: Kmart employees seeking clarity on their pension benefits should contact the Sears Holdings Pension Service Center. Effective communication, including prepared questions and necessary documentation, will aid in obtaining accurate and comprehensive information.

With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.

Sears Holdings Corporation's pension plans were taken over by the Pension Benefit Guaranty Corporation (PBGC) following the company's bankruptcy. The two defined benefit pension plans have been frozen since 2005, meaning no new benefit accruals are added. The plans are underfunded by approximately $1.4 billion, with PBGC assuming responsibility to ensure pension payments continue. These plans cover about 90,000 participants who worked for Sears, Roebuck and Co., and Kmart Corporation. Despite the underfunding, PBGC is expected to cover the vast majority of pension benefits owed under these plans. Participants can manage their benefits and verify information through PBGC's online platform or service center.

Bankruptcy and Store Closures: Sears Holdings emerged from bankruptcy with significant store closures, reducing from nearly 700 stores to less than 25. The company has been liquidating its remaining assets and recently announced more store closures in 2024. The focus is on resolving bankruptcy-related issues and managing the liquidation process effectively (Sources: The Layoff, Yahoo Finance).

Sears Holdings offered both RSUs and stock options before its bankruptcy. RSUs vested over time, providing shares, while stock options allowed employees to buy shares at a fixed price.

Sears Holdings, now part of Transformco, has faced numerous challenges in recent years, impacting its ability to provide comprehensive employee healthcare benefits. The strategic transformations initiated since 2017 aimed to improve operational performance and liquidity, which included measures such as obtaining additional loan proceeds and real estate sales. However, the company's financial struggles and store closures have also led to significant changes in employee benefits, including healthcare. As part of its efforts to stabilize and restructure, Sears has focused on reducing outstanding debt and pension obligations, contributing almost $4 billion to its pension plan since 2005 due to prolonged low interest rates. In 2023, Transformco continued to navigate its financial challenges, which have influenced its healthcare benefits offerings. The company has aimed to maintain basic healthcare coverage for its employees despite ongoing restructuring efforts. This includes providing access to medical, dental, and vision plans, although the specifics of these benefits and any enhancements over the past years have been less prominently highlighted compared to the broader financial strategies and operational changes. The focus on financial stability and cost reduction remains critical for Transformco as it seeks to ensure the viability of its employee benefits programs amid economic uncertainties.