Update on Roth conversions – to do or not to do?

In deciding whether to convert your traditional IRA to a Roth, there are many factors to weigh. At present, uncertainty about potential income tax reform makes the decision even more difficult: you are making a decision on what provides greater tax advantages, conversion or not, without confidence in the future tax impact.
Nonetheless, converting makes good tax sense if you expect your future marginal tax rate in retirement to be the same or greater than the rate on the conversion. However, if you expect your tax rate in retirement to be lower, then you will pay more taxes on conversion than you will in retirement.
There are other reasons to consider converting now:

First, converting an IRA or other plan to a Roth account means that the assets are no longer subject to the Required Minimum Distribution (“RMD”) requirement reached at age 70½, thus allowing you to retain assets as long you wish. At death, your heirs must start withdrawing from the account, but the withdrawals will be income tax-free.
Second, if you believe your IRA assets will grow significantly over time then it is advantageous to convert. If you convert now, you will have a lower conversion rate (less of the total will have been subject to income taxes). This calculation applies whether your current IRA assets are depressed or have yet to appreciate.

There is a reason not to convert now:

If you’re single and the conversion puts your AGI over $200,000 (or you’re married and the conversion puts your AGI above $250,000), then the 3.8% Medicare surtax on unearned income may be triggered. However, you can avoid this (and other unintended consequences) by doing partial conversions over multiple years.

What if you err? If you convert and then your account value falls, you have until October 15th of the following year to undo the conversion, thus revering the income taxes paid.

Planning: If you’re considering a conversion, give us a call and we can help you make the right decision for you!

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Finances and need for planning for Millennials

For many, when they hear the term millennial, they conjure up the image of an underemployed, tech-savvy twenty-something living in his parents’ basement. Many unfavorable stereotypes have been given to them, such as: entitled, lazy, and delusional.
In fact, millennials face many more financial challenges than previous generations. The average student loan debt of a 2012 college graduate is $29,400, while finding a decent paying job is difficult at best.
Just because you do not have great wealth, that does not mean you do not need sound financial planning and advice. No matter what your resources are, good financial planning and education are essential to long-term financial stability.
Unfortunately, millennials have not gotten this message. A study in the June issue of Kiplinger’s Finance Magazine found that only 40% of millennials have a retirement account and only 25% are willing to take investment risks in setting up a savings account. Many lack fundamental financial literacy, with little understanding of basic concepts like mortgage financing or inflation. More than 50% of millennials have used costly services, such as payday advances and pawnshops to obtain loans.
The good news is that there are many apps and online services available to help users plan and budget.
Spending and budgets: The Mint app tracks a user’s spending and income and provides an up-to-date snapshot of their current finances. There are also many budgeting websites, such as www.LearnVest.com and www.Mvelopes.com, which categorize expenditures and set target spending limits.
Saving and banking: There are apps available to help users save money and avoid ATM fees. SavedPlus.com, for example, automatically sweeps money from your checking account into your savings account every time you make a purchase. The MasterCard Nearby app allows you to search for nearby ATMs and filter your search based on criteria such as fees and 24-hr availability.
While there are many online resources available, none we found are comprehensive, and none actually provide the needed planning advice. Meeting with a trusted financial planner is always recommended.
As you read this, did think of your friends, your children, or your children’s friends, that is, does this apply to them? We hope to be addressing this with a dedicated site so all feedback is welcome.

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Update on the impact of the 3.8% Medicare surtax

Experimented with some returns on our tax software, here is an example of the impact of the surcharge, from forms 8959 and 8960, on the taxes due.

For a client with high W-2 income, as well as interest and dividend income, shifting $100,000 of income from dividends to W-2 income decreased the surcharge by $3,630 (the taxes remained unchanged).

In contrast, shifting $100,000 of salary to dividends increases the surcharge by $3,601 as does shifting $100,000 of salary to capital gains.

The message so far is: when there is substantial earned income, minimizing investment income is worth over 3% for the amount you move. That means that, all other factors being equal, an investment that had no interest, dividend or capital gains distributions will have a better after-tax return than one that does.

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Selling your car? You may be entitled to a refund on your car warranty

You found a buyer for your car and you have worked out all the details: purchase price, exchange of title, cancellation of your insurance, but have you thought about the warranties you may have on your car? If the car you are selling has an extended warranty, service agreement, guaranteed auto protection or tire coverage and these warranties have not been transferred to the buyer, you could be entitled to a refund for the remainder of the warranty.

Call your provider, with your VIN handy, and request a refund. Refunds are processed in about 30 days.

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Planning for the inevitable – online end-of-life services

What would happen if today were your last day? How would your survivors know how to administer your estate? Even if you have a will, would the personal representative or executor of your will know where to find your life insurance policy, estate documents, and the passwords to your accounts? There are many ways you can plan for this inevitable event and provide your survivors with the support they need to carry out your wishes.

In recent years, new websites have been created for end-of-life planning and documents storage like www.AfterSteps.com and www.principledheart.com. These websites provide a one-stop solution where you can store all your end-of-life documents, from wills and trusts to instructions for basic matters like cancelling your cellphone plan, or to lists storing all you passwords. These websites also organize your asset information and communicate relevant information to your beneficiaries at death.

Of course, whenever you store sensitive information online, you have to be able to trust that the service provider will keep your information secure. Generally, these websites provide bank-level security and encryption services, but as you well know, even the most “secure” websites can be vulnerable. You have to weigh the convenience these websites provide against the risk of having your account compromised.

If an online solution does not work for you, you can always choose a more traditional route. There are resources available, such as the “What if…” workbook that can help you formulate your plan. Alternatively, you can compile a binder with all of your instructions, passwords and estate documents and store your binder in a secure location, either in paper form or as an encrypted document (and be certain to communicate that location).

Whatever you choose, it is important to discuss with your estate planner to determine the best solution is for you. In the end, you want a choice that provides peace of mind for you and clarity for your survivors.

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Some interesting statistics on risk of an IRS audit, from The Kiplinger Tax Letter, 1-17-14

“IRS is struggling on the enforcement front. 2013’s individual audit rate fell to 0.96%… one out of every 104 filed returns. It’s the first time in seven years that this key statistic dipped below 1%. And we expect this figure to sink even lower for 2014 as the agency’s resources continue to shrink. The number of enforcement personnel has decreased to its lowest level in years, partly due to budget cuts and reassigning agents to work identity theft cases.”

The Tax Letter breaks down to .88% for below $200,000 of income, 2.7% for above that level but below $1 million, and 10.85% for over $1 million of income (down from 12.14%)

The Tax Letter indicates certain red flags (some text omitted)
“Claiming 100% business use of a vehicle. They know that it’s extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.
“Deducting business meals, travel and entertainment on Schedule C.
Big deductions here are always ripe for audit. A large write-off will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation requirements.
“Writing off a hobby loss. Chances of losing the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the activity sounds like a hobby…dog breeding, car racing and such…IRS’ antennas go up higher.
“Failing to report a foreign bank account. The agency is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success in getting foreign banks to disclose account owner information. This is a top IRS priority. Keeping mum about the accounts can lead to harsh fines.
“Taking higher-than-average deductions. IRS may pull a return for review if the deductions shown are disproportionately large compared with reported income. But folks who have proper documentation shouldn’t be afraid to claim the write-offs.”

The last phrase is the key: if you have a proper reporting position with full documentation, then the risk of any adverse determination is drastically reduced (but you have the time lost responding if the IRS does raise a question).

Let me know if this raises questions for you.

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Tax Planning 2013 and 2014 – Moves to Make Now to Reduce Your Taxes

This year, when projecting your potential taxes, you have to factor in all the changes for 2013 and 2014, which is a bit daunting.(1) That is:

You have the usual “defer income/accelerate deductions but watch out for the AMT” plan (see below).
But then you also have the new 3.8% surtax, with rules that do not play well with the others!
Add the expiring items from 2013 into the mix, and sorting out the steps to take may not be easy.

With that in mind, this newsletter post is broken down into a decision tree, to see whether you can or should act, and more detail on the rules effecting how you act. If any of this is not clear, just ask questions, please.

Can you act?
Look through the list below to see if there are any items in your 2013 and 2014 finances that you can change in any way – moving from one year to the other, or delaying further.
Determine what impact each of these has and then the impact of all of them in concert:

This includes the alternative minimum tax (“AMT”), which is the 28% flat rate as opposed to the marginal rate of up to 39.6%.
If your deductions bring the regular tax down too low, the AMT kicks in, so that the deductions are wasted and need to be moved to another year, if possible, or income for that year
increased to “pull you out of the AMT.”

This is why preparing tax projections for both years is the best way to determine how to act. Decide which moves have the best results in which years, so that the total tax paid in the two years is minimized. Yes, not easy!

What do you act on?
3.8% Medicare surtax – this affects all income for 2014 and beyond, but only to the extent of the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (“AGI”) over the threshold, which is $250,000 ($200,000 for single taxpayers).

Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income but excludes pensions and IRA distributions.
N.B. – the 3.8% surtax must be covered with your withholdings and estimated payments.

Wages – can you defer or accelerate between years or even convert income into deferred income, such as stock options, or income to be received at retirement?
Can you convert compensation into tax-free fringes?

Schedule A itemized deductions – can you shift income and deductions for the maximum benefit, given the income-based deduction thresholds?

Caps: Medical – only the amount above 7.5% in 2013 and 10% in 2014 (unless you are over age 65) is allowed on Schedule A.

Miscellaneous – only the amount above 2% is allowed on Schedule A.

Reductions – certain itemized deductions are phased out once your AGI exceeds $300,000 for married filing jointly ($250,000 for singles), so that your itemized deductions are reduced by 3%, on up to 80% of the deduction, for the excess of your AGI above $300,000 ($250,000 for single filers).
N.B. – many of the deductions affected by the phase-out are the ones not allowed in the AMT calculation
Investment interest is not subject to reduction on Schedule A.
Sales tax deduction – this expires in 2013.

Schedule C income and expenses – can you defer or accelerate between years so that the net income falls in the best year?

Investment income – can you shift interest, dividends, and capital gains?
The tax rate on capital gains is as low as 0% in 2013, with a cap at 15%. However, that cap goes up to 20% in 2014 for AGI over $450,000 ($400, 000 for single filers).

You will want to net losses against gains, with up to $3,000 of excess loss over gains being allowed to shelter other income and losses you do not use carry to the next year. (2)
N.B. – purchasing mutual funds late in the year can lead to dividend and capital gains distributions where the mutual fund price changes but your investment does not, such that you have no economic gain for the distribution on which you pay taxes – you are effectively pre-paying taxes because you did not purchase after the declared distribution date.

Investment income also includes passive income and losses (rental property, limited partnerships and LLCs).

If you can re-characterize any activities as material participation rather than passive by grouping together to meet the material participation rules, you have a one-time election to regroup (watch for final regulations on when and how you elect – in 2013 or only 2014).
N.B. – Gains include the sale of a primary residence (above the $250,000 per owner shelter).

Can you use an installment sale to spread out a large gain or, if feasible, a like-kind exchange to defer the gain? (3)

Roth conversions – can you convert an IRA to a Roth IRA, so that future distributions are not subject to tax? Be sure to pay the tax with funds outside of the IRA so that the conversion has maximum benefit.

Stock options – can you exercise a non-qualified option (“NQ”), which is treated as ordinary income, or instead an ISOs, which can be investment income? Disqualifying an ISO converts it into a NQ, so that you have control over the type and timing of the income.

Required minimum distributions (“RMD”) If you turned age 70½ in 2013, you can take a distribution in 2013 instead of next year to decrease your 2014 income – but the IRA distribution is not subject to the surtax so this would be done for the Schedule A phase outs (see below).

The direct distribution from an IRA to a charity expires in 2013, where donating up to $100,000 (per person) of your RMD lowers your AGI for purposes of determining taxes.

AMT – there is same help with the AMT as the “patch” became permanent with ATRA.

Gifting – can you shift assets by gifting within the $14,000 per year/per person annual gift tax exclusion, or even by filing a gift tax return to use some of your unified credit now, so that income is in the lower tax bracket of new owner?

Inherited IRA – be sure to divide an inherited IRA among beneficiaries to get the maximum life expectancy for RMD calculations for each

If you made it this far, I hope you have a good idea of your 2013-2014 tax plan, or else a set of questions to ask so we can help devise one for you! Please contact us.

(1) These changes are resulting from the continued impact of The American Taxpayer Relief Act of 2012 (“ATRA 2012”).
(2) N.B. – If you sell to recognize a loss, and want to hold the stock again, be aware of the wash sale rule which bars recognition of the loss if you re-purchase substantially the same security within 30 days – which applies to different accounts you own, including repurchasing in your IRA. An example of what works: a bond swap with the same issuer, where the maturity or interest rate is different, is a way to recognize a loss without being affected by the rule.
(3) An installment sale that spreads gain over several years; a like-kind exchanges involve investment property, which means you can swap, rent and later convert to residential.

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Massachusetts enacts the Massachusetts Uniform Probate Code (“MUPC”) Many other states have or will do the same

(While the following applies to Massachusetts, there are many other states that have recently made the same changes)
Massachusetts adopted the “MUPC” on March 31, 2012. It affects almost every aspect of the law of wills and the administration of estates including changes outlined below:
• Personal Representative: The law does away with classifications of executors, temporary executors, administrators, special administrators and the like by adopting the one-size-fits-all title of “personal representative.” The personal representative acts for people with a will (“testate”) or people without (“intestate”).
• Descendants: Any portion of the estate which passes to the decedent’s descendants will pass under a new system of distribution called “per capita at each generation.” Under this rule, living children inherit equally. If a child pre-deceases the parents, and has living children, the shares of all deceased children are combined and divided equally among all the surviving children.
• Effect of Divorce on the Estate Plan: The impact of divorce is broadened from partially revoking wills and unfunded revocable trusts to expressly apply to non-probate transfers, such as life insurance policies and trusts, whether funded or unfunded, in the case where an individual has the sole power to make certain changes to at the time of the divorce or annulment. The new law also operates to revoke bequests to relatives of the ex-spouse, as well as appointments of such relatives of executor or trustee under certain situations.
• Effect of Marriage on Will: Where marriage used to automatically revokes a prior will, the MUPC does not provide for such automatic revocation. Instead, the will survives, and any legacy to descendants of the decedent (who are not descendants of the new spouse) is preserved. If any part of the estate is left to persons other than such descendants, the new spouse would receive his or her intestate share under law, to be satisfied from the assets left to such other persons (and from any bequests made to the surviving spouse, if any, in the premarital will). The testator’s choice of personal representative and guardian of minor children is also preserved. Note that this rule can be avoided by updating the will after marriage.
Because of these changes to the MUPC, it is important that your estate planning documents are up to date. If you have not updated your estate plan recently, be sure to do so as soon as possible.

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Mention: “A New Approach to Media Monitoring”

For many of our clients, it is important to stay informed of what others are saying about you, your business, or your industry online. Mention, a new company founded in 2012, provides an alternative to Google Alerts and may be a valuable resource in the pursuit of online media monitoring.

While Google Alerts only alerts you if new articles, webpages or blog posts make it into the top ten Google News results, the top twenty Google Web Search results or top ten Google Blog Search results for your query, Mention is capable of producing many more results, picking up content on social media sites including Twitter, Facebook, personal blogs etc.

Mention offers four price points delivering varying amounts of mentions and tools to monitor them; ranging from their free option producing 250 mentions, to their Enterprise program producing 50,000 mentions.

Interested in giving it a try? Sign up for their free trial that allows you to program two alerts. Each alert can contain up to 5 keywords. Make your keywords or phrases as specific as you can to garner the best results. You can be alerted in real-time or receive daily or weekly email notifications depending on our preferences.

When Mention locates your keyword or phrase, it will post them to an online dashboard chronologically with a link to the original content. You can also filter the mentions by source, language, or time period.

For more information visit https://en.mention.net/.

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Tax Law Changes Coming, including raised capital gains and dividend tax rates

This month, President Obama released his proposed FY 2014 budget which contains new taxes, limits on deductions, and other changes intended to meet the goal of raising more than $580 billion in revenue.
The most significant of these is the termination of capital gains breaks and qualified dividend treatment, causing them both to be taxed as ordinary income. The Kiplinger Tax Letter suggests taking capital gains before 2015 to lock in the lower rate. However, as always, do not let a tax strategy override a good investment plan.
Here is a summary of other changes that may affect you:
The 28% Limitation:
• Affects married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000.
• Limits the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%.
• Applies to all itemized deduction including charitable contributions, mortgage interest, employer provided health insurance, interest income on state and local bonds, foreign excluded income, tax-exempt interest, retirement contributions and certain above-the-line deductions.
The “Buffet Rule”
• Households with income over $1 million pay at least 30% of their income (after charitable donations) in tax.
• Implements a “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million.
Estate, gift, and generation-skipping transfer (GST) Tax
• Reintroduce rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained.
• This change would take effect in 2018.
• Top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
The Kiplinger Tax Letter anticipates the changes being acted on as early as 2014. On April 23, 2013, Max Baucus (D-MT), the head of the Senate Finance Committee, announced he would retire from the U.S. Senate at the end of his term in 2015. In The Kiplinger Tax Latter, Vol. 88, No. 9, Kiplinger predicts that “he’ll push to make revamping the tax code his legacy.”
You may feel as though you are done with taxes and do not need address them for another year. Resist that urge and schedule a meeting with us so we can review the potential impact of proposed tax changes on your portfolio and investments. We can also discuss the best strategies for saving money on your 2013 and 2014 tax returns.

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Planning ideas for the impact of tax law changes in 2013

The only way that the American Taxpayer Relief Act of 2012 provides relief to high income taxpayers is by ending uncertainty. The wait is over and we now know what we can for tax planning; guessing based on the last news from Washington is over.
So, what planning can you do? Start with reviewing all the changes below. Then consider how they apply to you and what you can affect to bear less of a tax burden in this or future years – see the “action” items below in each section.
Payroll
Social Security: The payroll tax holiday ended so that the Social Security tax rates have returned to 6.2% (up from 4.2%) for 2013 wages up to the taxable wage limit of $113,700.
Action: not much to do on this one, because it ends a set maximum each year, unlike the Medicare tax below.
Health insurance funding via additional Medicare tax: The Patient Protection and Affordable Care Act adds a .9% tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. This raises the rate from 1.45%, will rise to 2.35%. However, employers must withhold the Additional Medicare Tax from all workers, regardless of marital status, from wages exceeding $200,000.
Action: bunch income in one year (defer/accelerate if you can get below the range – see rates below).
New Ordinary Income Tax Rate:
For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with adjusted gross income (AGI) above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
Action: bunch income into one year (defer/accelerate if you can get below the range – especially if you coordinate earned income with net realized gains). The goal is to shift income (and deductions, as discussed below) from one year to another so that the total tax for both years is less. This is easier for self-employed or owners of private companies, as they can shift income within reasonable limits. Also, with large portfolios, there is some ability to put net gains in one year rather than another. As stated below, you can move all dividend and taxable interest paying investments into qualified plans, keeping your asset allocation but lessening the tax burden.
New Long-Term Gains and Dividends Tax Rate:
The tax rates on long-term capital gains and dividends are the same as last year for most taxpayers. However, the rate goes to 20% (up from 15%) for singles with AGI above $400,000, married joint-filing couples with income above $450,000, heads of households with AGI above $425,000, and married individuals who file separate returns with AGI above $225,000. When you add in the new 3.8% Medicare surtax, you get a combined rate of 23.8% on long-term gains and dividends.
Action: Once again, shift net gains into one year and put dividend paying investments in qualified plans.
Stealth rate increases:
Personal and Dependent Exemption Deduction Phase-Out: The 2009 phase-out rule for personal and dependent exemption deductions has been restored, so your personal and dependent exemption write-offs are reduced if not even completely eliminated. This phase-out starts at the following AGI thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
Itemized Deduction Phase-Out: As above, the 2009 phase-out rule for itemized deductions has been restored, so you can potentially lose up to 80% of your write-offs for mortgage interest, state and local income and property taxes, and charitable contributions if your AGI exceeds the applicable threshold: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, or $150,000 for married individuals who file separate returns. The itemized deductions are reduced by 3% of the amount by which your AGI exceeds the threshold, up to a maximum of 80% of the total affected deductions.
Medical Expenses: The floor above which medical expenses can be deducted goes from 7.5% to 10%.
Action: for each of these, try to move deductions into one year, and bunch income to another, so that the total tax for both years is less.
Alternative Minimum Tax Help
The AMT “patch”, which prevented millions having this add-on tax, has higher exemptions and allows various personal tax credits. The new law makes the patch permanent, starting with 2012. The change will keep about 30 million households out of the AMT.
Action: you can identify which AMT items affect you and bunch them into one year, to save taxes on another.

Gift and Estate Tax Rules Made Permanent
For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million (adjusted annually for inflation, making it $5,250,000 for 2013) and a 40% maximum tax rate (up from last year’s 35% rate). Also, you can still leave your unused estate and gift tax exemption to your surviving spouse (the “portable exemption”).
Action: review your assets to see if you can gift any now, even if in a trust for future ownership change, and also check to see if any such gifts help on state estate taxes. You may want to consider a second-to-die policy in an irrevocable trust, if your assets will exceed the credits after gifts.

Other changes
Action: see if any apply, then shift income and deductions so you benefit from them.
American Opportunity Higher Education Tax Credit Extended: The American Opportunity credit, providing up to $2,500 for up to four years of undergraduate education, was extended through 2017.
Higher Education Tuition Deduction Extended: While this deduction was set to expire at the end of 2011, the new law restores it for 2012 and 2013, allowing for as much as $4,000 or $2,000 for higher-income folks.
Option to Deduct State and Local Sales Taxes Extended*: This option also expired in 2011 but is restored for 2012 and 2013, giving taxpayers with little or no state income taxes the option to claim an itemized deduction for state and local sales taxes.
Charitable Donations from IRAs Extended: This option also expired in 2011 but is restored for 2012 and 2013, allowing IRA owners who had reach age 70½ to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions.
For 2012, you can still act if you do so this month – it will be treated as a December 2012 transaction.
$250 Deduction for K-12 Educators’ Expenses Extended: Yet another deduction that expired in 2011 is restored for 2012 and 2013, allowing teachers and other K-12 educators a $250 “above the line deduction” for school-related expenses that they paid.
$500 Energy-Efficient Home Improvement Credit Extended: Finally, another credit that expired in 2011 is restored for 2012 and 2013, allowing taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.

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The financial world today – adjusting expectations and planning rules

Has investing changed in the last few years? A recent Morningstar post began with this statement:

BlackRock’s Larry Fink says be 100% in equities. PIMCO’s Bill Gross claims equities are dead. Vanguard’s Jack Bogle preaches stay the course with a balanced portfolio. To read the headlines, it seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar. [from Should I Stay or Should I Go? - Don Phillips, 10/11/2012]

His point is that neither extreme, 100% stocks or 100% bonds, is rational. Instead, we have to realize that returns will be less for now and yet still invest well.

Expect less: Interest rates are at all-time lows, making fixed income returns meager, and equity investments may depend directly or indirectly on renewed growth and employment, which is not rebounding significantly any time soon regardless of who our next President is.
Diversify more: The correlation among asset classes is closer than before, making diversification more challenging. As Feifei Li said in a recent Morningstar post, it is not a question of having all your eggs in one basket but of having too many eggs. This would mean adding market-neutral, commodities, and real estate, to a portfolio of just stocks, bonds and cash. Among other ideas, writing calls could even be a good strategy to create income so that you have a positive return in an otherwise flat market.
Cut back withdrawals: Where we used to say, as a rough rule, a 4% rate of distribution would allow the portfolio to grow to face future inflation, while any higher withdrawal rate would eat into principal quickly. Today, the rule may be a 3% rate, or we may need to use other ways to analyze the proper rate of withdrawal, such as the Withdrawal Efficiency Rate from a recent Morningstar post [see below]
Tax planning: As we indicated in a recent post, taxes will have more impact so tax planning to achieve even a 3% rate of return is essential. With the changes coming in 2013, good planning could add to your returns over time. See Year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now

References:
Should I Stay or Should I Go? – Don Phillips, 10/11/2012
It seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar.Eggs Are Not Enough: The Truth About Diversification – By Feifei Li | Posted: 10-22-12
Eggs Are Not Enough: The Truth About Diversification – By Feifei Li | Posted: 10-22-12
Diversification means not putting all your eggs in one basket. But do you own too many eggs?
Retirement-Withdrawal Strategies Quantified – David Blanchett, CFA, 10/19/2012
According to a new Morningstar metric, the best approach incorporates portfolio value and life expectancy.

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2012 year-end tax planning – 2012 vs. 2013 tax strategies requiring action now

The goal for tax planning, as always, is to minimize the total that you pay for 2012 and 2013. However, this year is tricky. Here is why:
First, if your 2013 income is expected to be over $250,000 ($200,000 for singles), you cannot just accelerate write-offs from 2013 into 2012 and defer income to 2013 because your taxes will be higher in 2013. There is a new 3.8% tax that works like this, for example: recognizing a capital gain in 2012 avoids that tax in 2013 and also reduces your 2013 adjusted gross income, which may keep it below the threshold for imposing that tax next year. (See below for more details on the new tax.)
Second, regardless of who becomes President, Congress is likely to reduce the amount or value of itemized deductions. Thus, you may want to accelerate what you can into 2012.
Third, as always, combine your tax planning with your investment strategies, such as tax loss harvesting and rebalancing (see explanations at the end).
Last, there are other issues to review for 2012, including converting your Roth IRA; gifting to children and grandchildren for estate planning purposes (to use the $5 million unified credit); and funding college for children or grandchildren.
However, if you will owe the alternative minimum tax (AMT), you may have to revise your strategy. Many write-offs must be added back when you calculate the AMT liability, including sales taxes, state income taxes, property taxes, some medical and most miscellaneous deductions. Large gains can also trigger the tax if they cost you some of your AMT exemption.
The best tool for planning is to do a projection for both 2012 and 2013, then see what items you can affect to reduce the total tax for both years.
Assuming you will not have an AMT problem in either year, then in 2012 you could:
• Take a bonus this year to save the 0.9% for a high-income earner;
• Sell investment assets to save the 3.8% tax next year so the gain or income is in 2012 (e.g., sales of appreciated property or business interests, Roth IRA conversions, potential acceleration of bonuses or wages);
• Defer some itemized deductions to 2013 (but, be wary of the possibility that these will be capped in 2013 and can affect your AMT for either year);
• Accelerate income from your business or partnership, depending on whether it is an active or passive business; and
• Convert Roth IRAs in 2012 as noted above.
Then in 2013 and future years, you could:
• Purchase tax-exempt bonds;
• Review your asset allocation to see if you can increase your exposure to growth assets, or add to tax-exempt investments, rather than income producing assets. Also, place equities with high dividends and taxable bonds with high interest rates into retirement accounts;
• Bunch discretionary income into the same year whenever possible so that some years the MAGI stays under the threshold;
• While we do not recommend tax-deferred annuities, they can help save tax now to pay taxes in the future when the payments are withdrawn. (These are not recommended due to high fees, illiquidity and often poor performance);
• Add real estate investments where the income is sheltered by depreciation;
• Convert IRA assets to a Roth. Even though the future distributions from both traditional and Roth IRAs are not treated as net investment income, the Roth will not increase the threshold income; and
• Reduce AGI by “above-the-line” deductions, such as deductible contributions to IRAs and qualified plans, and health savings accounts and the possible return of the teach supplies deduction.
Note, however, Congress has not finalized the 2012 rules. Some expected steps are:
• An increase in the AMT exemption to $78,750 ($50,600 for singles), raising it from 2012 rather than dropping back to 2001 rates;
• Teacher $250 supplies deduction on page 1 of 1040, as mentioned above; and
• IRA $100,000 tax free gifts to charities.
Here are the details on the 2013 tax increases, enacted to help fund health care:
• A new 3.8% Medicare tax on the “net investment income,” including dividends, interest, and capital gains, of individuals with income above the thresholds ($250,000 if married and $200,000 if single);
• 0.9% increase (from 1.45% to 2.35%) in the employee portion of the Hospital Insurance Tax on wages above the same thresholds;
• Increase in the top two ordinary income tax rates (33% to 36% and 35% to 39.6%);
• Increase in the capital gains rate (15% to 20%);
• Increase in the tax rate on qualified dividends (15% to a top marginal rate of 39.6%).
• Reinstatement of personal exemption phase-outs and limits on itemized deductions for high-income taxpayers (effectively increasing tax rates by 1.2%).
• Reinstatement of higher federal estate and gift tax rates and lower exemption amounts.
If these changes take effect, the maximum individual tax rates in 2013 could be as high as follows:

2012 vs. 2013

Wages: 36.45 vs. 43.15%
Capital gains: 15 vs. 20%
Qualified dividends: 15 vs. 46.6%
Other passive income: 35 vs. 46.6%
Estate taxes: 35 vs. 55%

*Includes 1.45% employee portion of existing Hospital Insurance Tax.**Estate and gift tax exemption also drops from $5.12 million to $1 million, if Congress does not act soon.
Explanations:
Tax-loss harvesting:

Review your investments to find stocks, mutual funds or bonds that have gone down so that selling now will create a loss. This loss shelters realized gains and up to $3,000 of other income.

N.B. – If you replace the stock, mutual fund or bond, wait 30 days or use similar, but not identical, item. Otherwise, the “wash sale” rules eliminate realization of the loss.
Rebalancing:

review your asset allocation to see if any portion is over or under-weighted. Then sell and buy to bring the allocation back in line. However, if you sell and re-buy now, before a dividend is declared, you will receive a 1099 for a taxable dividend in the new fund for investment returns in which you did not participate.

Thanks to the Kiplinger’s Tax Newsletter, Sapers & Wallack and others for ideas and information.

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Penelope Trunk has my attention because she speaks the truth, bluntly with no fear of what others may think or the comments that will follow

Here is a recent example, her tactics for a post-feminist generation:

1. Marry rich and spend your husband’s money to fund your own startup so you have a part-time job after you have kids. The poster-girl for this is Fred Wilson’s wife who is now an investor. But tons of VCs I know have told me about “my wife’s new app” and almost everyone I know in this position does not want to be called out for it. But it’s all over the place.
2. Go back to school when you have young kids to get a PhD. Not because you’ll do anything with it, but because you’ve been a high-achieving intellectual your whole life and the lack of an endgame for raising kids is disconcerting. So you create a goal for yourself that is manageable while you have kids and you meet it. This also serves to present you with a wide array of fascinating conversations with smart people, which is totally lacking in the world of small kids all day long.
3. Have kids very early. When you’re 25. Really. I think it will work. Women who do that are in a great position to ramp up their career during their 40s, when their kids are gone. Having kids early avoids the difficult pattern of building a career, scaling back a career, and building all over again. Having kids early means you only ramp up once.
4. Quit and stay at a big job. This is when you don’t leave your big job physically, but you do it in your sleep. Literally. You cut back on your hours without getting permission, which you can do because you were working 14 hour days before the baby. You do not initiate new projects, you refuse almost all travel, and you don’t ask for a raise. You see how long you can stay in the high-level job and spend time with your baby and not get fired. Eventually, people will either write you off as dead corporate wood and leave you alone at work, or they will fire you. Either way, it’s a good way to see if you can hold on to the rung you climbed up to and still take care of your kids as much as you want to. Look around the office. You’ll see tons of women doing quit and stay. They’re waiting until their kids get older and then they’ll switch jobs and ramp up and go back to climbing the ladder.

Here’s anoter comment by Penelope:
It’s hard to tell the truth because if you are trying to do the high-powered job and the kids, you will kill your career by admitting that it’s impossible.

It’s tucked into the article, among a lot of other calls to action. But she says, if you want to have a huge career, have kids when you are 25 so your kids will be grown when you are 45, because there will still be time to have a huge career.

So, what do you think? Well, at least it should make you think!
I would be interested in your reactions: steven@sab-esq.com

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The news may be too much, but there are financial matters to review, if you just set aside time

Many people react to the bombardment of news on the economy, the European debt issues, the presidential campaign and legislative gridlock by wanting to shut it all off! That is understandable, but not often the best solution

It is one matter to just not open investment statements; it is a wholly different matter to postpone addressing financial issues

So, while you may not want to review rebalancing of your investments to match your long-term allocation or hear about the dismal returns on bonds, there is more that you can still address

We have suggested a list at: finance health day your own financial planning focus

It is like a “mental health day” but for your personal finances.
After you look at the list, let me know what you think, what you decide to do,
and if we can help you or anyone you know accomplish what is needed now. Thank you,

Steven

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Web-Based Financial Planning Tools for College Students and others

In advising a senior going to study abroad, I learned that he did not know how to obtain his own credit card, how to set up banking before and during his trip and how to manage the entire process. This was a surprise, as some many web sites seem loaded with information.

However, the bank sites tell you some but not all of what you need to do. Similarly, college sites may mention ATMs without connecting to Handbooks may suggest Parents may have no clear understanding of

No single place gives you a complete road map, let alone telling you how to connect all the resources to get your answer, so you have to turn the web into your own tools.

The first step is contacting the overseas college for local banks, currency exchanges and connecting to close by ATMs and banks. The next step is getting your own credit card or a additional cars on your parent’s account. Then you get to finding a US bank into which your parents can deposit or from which they can wire so you have funds in you bank at college.

The key is to link all the information that is on the web to create a plan for your study abroad, using the web sites to answer and obtain all you need

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Whole Life is not a great “Investment Alternative” – it is best used for the death beneift when age becomes a factor

Whole Life is a poor “investment alternative.” Consdider what an insurance company may say, annotated with our comments:

1) Tax Deferred
Does not make up for fees and poorer returns. The mortality fees alone can bring the total fees up over 2%, which compares poorly to a stock index bought via an ETF, were the fees are below .1%
2) Attractive returns compared to bank alternatives
Yes, to a bank, but NOT to your own portfolio of stocks or funds
3) More than initial deposit guaranteed in early years
Only at first and at some cost
4) Strong dividend history
Dividends are only a part of the return on investments – whole life is far worse than a good variable life policy let alone stocks purchased directly or via mutual funds, over time
5) Death benefit (DB) income tax free
Always true of life insurance because it is subject to estate taxes
6) Returns very high if DB paid in early years
“so what?” This is intended to be a long-term purchase
7) Beneficiary can be changed easily without having to redo wills and trusts
Meaning that proper estate planning is not being done
8) Annuitization of other assets easier to do, which can lead to higher retirement income
“Easier” means you pay them to do it instead of doing it yourself, which means shifting the allocation of your own portfolio depending on cash needs

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Penelope has great insights on time management – she is blunt and has a unique perspective

Have you ever encountered, let alone subscribed to, the blog by Penelope Trunk? Her insights often force you to think, because she is blunt, considers many issues most do not, and has a unique perspective.

Take her ideas on the idea of time management, weight loss or whatever from Time management tips that’ll work for your life

She quickly points out that most recommended methods fail because they do not consider your family and others around you:
Here’s a way to experiment in your life without ruining other peoples’ lives: fifteen-minute increments. You can do that while you’re waiting for dinner. You can do it while you take a shower. You can do it in between meetings. You’d be blown away by what you can get done in this world in fifteen minutes a day. If fifteen minutes of yoga works then it’s easier to make time for a class each week. It’s much more difficult to carve out time for that class before your body is used to feeling good after yoga and wanting it more.

Fifteen minutes a day of writing a novel can get you halfway done. And after that it’s a lot easier to set aside an hour to write.

But take a step back and consider this:Most of the time management advice that’s out there sucks. It’s all written by men who write about time management while their wives are at home taking care of their kids, or by men who don’t have anything to do except write about time management. We need time management advice for people who have a real life.

And why she says that a single “to do” list is not realistic:Time management becomes less about lists and schedules and more about emotions and perceptions. In this case, the best time management advice would be that the kid just wants you to be watching during the times when he’s on the field, so stand right behind him on the bench so you can see when he stands up to play. And the launch team just wants to know that you’re available 24/7 in case anything goes wrong, so answer all emails and phone calls immediately except when the kid is on the field.
And
I have found that sometimes I feel good having an empty inbox. But other times I feel good having it full and messy because it means I paid attention to other stuff that day.

She concludes with managing time by the week or month, not by the hour, because too much will happen to throw you off track…
What do you think? Let me know
Steven

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Strategies for college students on incurring and managing loans for their tuition and other expenses

I do not usually quote one article, but this contains many ideas fitting for the whole range of college students approaching, going to or fresh out of college who need to consider all options on incurring and manage loans for their tuition and other expenses.

Educating Students on How to Handle Debt
College finance expert Jeffrey Hanson says many don’t understand the impact college loans will have on their futures.
Morningstar, 05/25/2012

Recent government estimates tab the nation’s student debt load at more than $1 trillion, and many students and their families face tough choices in determining how to pay for college without mortgaging their financial futures. Jeffrey Hanson is a former director of borrower education services at Access Group, a nonprofit student loan provider, and also has served as director of financial aid at Northwestern University. Today he travels the country speaking to college students about financial literacy and debt management. He recently answered our questions about the financial picture for today’s college students and what it means for their futures.
What is the single most common misconception you encounter when speaking with college students about their finances? Perhaps the biggest misconception I see with students relates to what they think they “need” while in school. Having access to the latest technology, staying “connected” to the virtual world, having more personal space, and keeping up with the latest trends in fashion, exercise, food, and entertainment/recreation seem to be a part of what some, if not many, students expect from their college experience. But this all comes at a price. And if they are paying for it with financial aid, they are likely paying more than they can afford as a student.
“Living like a student” used to mean being thrifty and cheap–living with roommates, eating macaroni and cheese, walking to school rather than driving, and so on. Now students tend to have higher (and therefore, more expensive) lifestyle expectations while in school, and this is contributing to the rising cost of their education. As such, they need to be encouraged to be more discriminating when it comes to differentiating between what they need while living as a student versus what they want. It should be remembered that success in school comes from how well you perform academically and whether or not you get the job you want once you graduate. It is not based on how well you live, what you wear, what you drive, or any other factor related to how much you are spending while in school.
In addition, students tend to lack an adequate understanding and knowledge of their own finances and the impact that student loan debt will have on their future. It is important that they fully realize what it will mean to them to repay the student loans they borrow while in school. Although they likely do have at least a cursory understanding that they must repay all that they borrow, it is unclear if they fully understand that in borrowing loans to pay for school they really are living off their future income. As such, borrowing as little as possible to attend the school they have chosen is very important to achieving long-term financial well-being. It also requires that they take an active role in managing their own finances. Relying on parents or other family members to take care of their finances and the financial aid they might be using to pay for their education causes them to be ill-prepared for the financial realities they will face once they graduate.
We’ve seen a remarkable rise in the cost of higher education during the past decade or so. Where do you see the trend going from here, and what advice do you have for students and parents trying to prepare for this future cost? I think that families should anticipate costs will continue to increase, though the rate of increase hopefully will abate somewhat as institutions attempt to further contain expenses and seek alternative sources of revenue. As such, paying for a post-secondary education will continue to require that families save as much as possible to pay those costs. Students and families will increasingly need to rely on the financial aid that is available, and that will require that they understand how and when to apply for assistance. The U.S. Department of Education provides information, tools, and resources for students and families. Another important source of information is the school(s) the student is considering attending. Each school’s website should contain detailed information about the financial aid that is available, how to apply for it, and when application materials need to be submitted. In addition, the admissions and financial aid staff at each school are important resources when it comes to helping families navigate the financial aid process. Also, families should research scholarship and grant opportunities from private organizations, civic groups, and other sources. What trends are you seeing with regard to financial aid? More students need financial assistance to help defray the cost of higher education, and increasingly that aid comes in the form of student loans. Grant funding both at the federal and state level is not keeping pace with rising costs in tuition and other expenses, and families seem to be less able to help cover the costs.
Student indebtedness is increasing as grant and scholarship funding have failed to keep pace with rising educational costs. As such, borrowers likely will need to rely more heavily on the Income-Based Repayment plan [which caps required monthly loan payments based on the borrower's income and family size] to repay their federal student loans. In addition, more borrowers might ultimately qualify for some form of loan forgiveness either through the forgiveness available in the IBR plan or because they work for 10 years in a qualifying public-service position and become eligible to apply for forgiveness of their remaining Federal Direct Student Loan balance as part of the Public Service Loan Forgiveness program. In either case, this will represent an increased cost to the federal government over time as it forgives the remaining loan balances.
Many students are graduating with tens of thousands of dollars of debt. What strategies do you recommend to help them get out from under it? Do you suggest paying loans off as quickly as possible? Waiting in order to build up savings? Students need to educate themselves on the terms and conditions of their loans so that they can take advantage of the flexibility inherent in the federal student loan programs. That flexibility includes the availability of five different repayment plans on Federal Stafford, Federal Grad PLUS, and Federal Consolidation Loans (the federal loans most students rely upon to finance their education). Those plans include the Income-Based Repayment, or IBR, plan that bases the monthly payment on the borrower’s household adjusted gross income, household size, and the federal poverty guidelines published by the U.S. Department of Health and Human Services. More information about each of the payment plans is available at the Department of Education’s student loan website. For more about the IBR plan, borrowers can check out this website which was created by the Project on Student Debt to educate borrowers about this program.
The following factors should be considered when choosing a repayment plan and in deciding how quickly to pay off student loans:
• How much can you afford to pay each month based on your budget (income, expenses, and so on)? This may restrict your choice and limit your viable repayment options.
• What are your financial goals in both the short and long term, and how can you leverage the repayment of your student loans to help you more quickly achieve those goals? In essence, you need to evaluate the opportunity cost of paying down your student loans more quickly versus using a portion of the funds for investment-related expenditures such as saving for the down payment on the purchase of a home, investing for retirement, saving for your children’s education, and so on.
• Do you have other consumer debt such as credit card debt that has a higher interest rate than your federal student loans? If so, paying less on your student loans so that you can more quickly pay off that higher rate consumer debt would save you total interest expense.
• Do you have funds saved for emergencies? You should have at least six months worth of your average monthly expenses saved in case you experience financial hardship such as loss of a job or a reduction in your income.
Students need to realize that federal student loans are probably the most flexible form of personal credit they will ever possess. As such, they should evaluate all their options when repaying that debt and leverage the flexibility that is inherent in the federal loan programs so they can achieve the goal of repaying their loans as well as the other financial goals they have set for themselves.
What long-term effects do you think these heavy debt loads will have on the current generation of college students? Do you think they will ultimately be more comfortable living with debt than previous generations or more averse to it? The long-term effects likely will include the following:
• Borrowers will be taking longer to repay their student loans.
• Borrowers may need to delay certain financial actions such as purchasing a home, investing sufficient amounts for retirement, and paying for their children’s education.
• Borrowers might be forced to make career decisions that are based more on debt and other financial considerations than on work they enjoy.
• Borrowers might have to work more years than anticipated before they can afford to retire.
Students likely will have to become more comfortable having educational debt in the future. It will be a reality that most will have to face if they want to fulfill their educational goals.

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sometimes, you just need a different focus to recharge

This gallery contains 13 photos.

Tweet caught on “film” before escaping under a rock what is he saying? how did it grow like this? lily… amazing colors power of the ocean some photos I took recently…

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