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On-line Scams – some to look out for to protect your finances

Our society today has growing appetite for social media and most of us use it for legitimate purposes: connecting with our friends, pursuing our hobbies or building our businesses. Unfortunately, part of the population has a more insidious use for social media: they want to scam you. Thankfully, a little vigilance can go a long way in protecting you from these cybercriminals. Here is one list you can use, from Norton Antivirus, showing the top five social media scams:
1. Hidden URLs – Those shortened URLs are convenient, but they may be links to websites you don’t want to visit, or worse, they could install malware on your computer.
2. Phishing Requests – When you get an invitation to click on a link to see a picture of yourself at some wild party, think twice. Once you click, you’re taken to a fake Twitter or Facebook login page where you enter you user name and password. Doing this gives the cyber-criminals complete control of your account.
3. Hidden Charges – Be wary of those on-line quizzes that offer to tell you interesting information about yourself like which 1960s sitcom star you resemble. If the quiz asks you for personal information, such as your phone number, stop. If you continue, you many end up subscribing to some service that charges a recurring monthly fee.
4. Cash Grabs – It’s great to make new friends, but maybe not by “friending” strangers on Facebook. That person you just friended on Facebook may soon be asking you for money. You can avoid this situation by limiting your social media connections to people you know personally.
5. Chain Letters – Sure, you want to be sure that Microsoft will donate the millions it promised to some worthy charity if you keep the on-line chain letter going. However, such “chain letter” e-mails are a way for scammers to access your friends to connect with them later.
Sites that are popular with users are popular with criminals, too. Be vigilant, keep your anti-virus and anti-malware software up to date and think twice before clicking on a suspicious link!

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Passive vs. Active Portfolio Management

Choosing whether an active or passive strategy is right for your portfolio is an important and challenging decision and the answer may depend in the areas of the market in which you are investing. In more “efficient” markets, passive is traditionally preferred, but it is believed that active managers are able to outperform in areas like international-small cap stocks.
Morningstar recently took a look at all the mutual funds from its international small/mid-cap categories and found that these categories have many underperforming funds. In a review of Morningstar’s international small-cap growth, value and blend categories, analysts concluded investors would have less than a 50% chance of picking an outperforming fund. As Abby Woodham pointed out in her 6/20/14 article “Passive vs. Active: Debating International Small Caps,” points out, “The average results are mediocre, but when we look at the list of funds that receive a Morningstar Analyst Rating, actively managed funds begin to look more attractive.”
While the funds on her list have provid significant alpha recently, they can be relatively expensive and their outperformance may waiver. And that leads to the challenge: even if active funds add value, they may not be consistent over time and, if you fail to catch them when this happens, your returns will lag passive funds. If you are concerned that the outperformance will not continue, but you want international small-cap value, an alternative may be a passively managed ETF.

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The real problem facing retirement plans? Not saving enough

Recently, two debates have been brewing over 401(k) plans. Specifically, are they too expensive and should we cap the amount Americans can accumulate in the total balance of their defined benefit and defined contribution plans as well as IRAs. Is that really where the debate should be?
A recent PBS.org retirement study revealed some alarming statistics about Americans’ retirement savings habits. Specifically 30% of workers have $0.00 in retirement savings and 40% are currently not saving anything for retirement. Even factoring in Social Security, the average savings shortfall of a U.S. household will be $250,000 at retirement.
For many, if they are contributing to their retirement plans, they are contributing too little. The current belief that contributing just enough to maximize an employer’s contribution will fund your retirement is irresponsible. Only a small number of Americans will amass $1million in their retirement plans by the time they retire. According to Don Phillips in his recent Morningstar article, Fighting the Wrong War, “At a 4% withdrawal rate, $1 million in savings will provide just $40,000 a year.”
While the cost of the plans and amount we can accumulate in our retirement plans can be interesting debates, they don’t address the real issue. Will we, as future retirees, be able to fund our own retirement?

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Be wary of these scams – IRS and investments

It seems that we hear of a new internet or phone scam on a weekly basis. These scam artists are getting bolder and more sophisticated with each new endeavor. So, we wanted to alert you to a few new ones where the scammers are pretending to be IRS agents and financial planners.

Taxpayer Scams
This past year, the IRS issued a strong warning to consumers against an aggressive telephone scam. The scammers call taxpayers to inform them they owe outstanding taxes and demand payment over the phone. To lend to their credibility, the scammers will have the last four digits of the taxpayer’s social security number. If the taxpayer refuses to make a payment, the caller threatens the taxpayer with jail time, loss of driver’s license and, in some cases, deportation. When the taxpayer refuses to provide this information, the scammers call back pretending to be a local police officer.
If you receive one of these calls, the IRS requests that you take these steps:
• “If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
• If you know you do not owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.”
The IRS wants you to know that they never initiate contact with taxpayers via email to request personal or financial information. They also never ask for PINs, passwords or similar confidential access information for credit cards, banks for other accounts. If you receive an email claiming to be from the IRS, you should forward it to phishing@irs.gov.

Investor Scams
The Financial Industry Regulatory Authority (“FINRA”) recently published a warning to registered representatives about three different scams where registered representatives may be subject to “Firm Identity Theft”.
The first scheme involves scammers fraudulently using the identity of legitimate registered representatives and brokerage firms to con investors out of their money by building websites that mirror legitimate websites of broker-dealers and registered representatives. The scammers claim they are registered with FINRA and SIPC. Victims who fall for this tactic are tricked into making payments or investments through the site. The scam artists collect the money and then disappear.
The second one puts a new twist on an old tactic by perusing international investors with and “advance fee scheme” or “mirror fraud.” Again, scammers use the identity of a legitimate broker-dealer and contact investors with an attractive offer. Examples of these offers include lifting a stock restriction or purchasing investors’ shares for an amount significantly above their market value. In return, the investor is asked to pay certain fees and expenses in advance. Once the investor has paid the fees, the fake broker-dealer steals the money and disappears.
The last scheme involves fraudulent checks. The scammer, using the stolen identity of a registered broker-dealer, contacts a customer is an attractive offer, like offering to overpay for an item on Craigslist. When the scammer sends the check, it’s for a much larger amount than the agreed-upon price. The scammer then requests the seller to mail the difference back to the scammer. In an effort to convince the customer of the stolen identity, the fraudster will use the broker-dealer’s true address as the return address on the mail sent to the customer. Believing they are dealing with a real broker-dealer, the customer is persuaded to send money. But, when the seller cashes the original check, it bounces.

Protecting yourself from these scams requires vigilance. If someone contacts you with and offer that’s too good to be true, it likely is!

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Millennials Solving their Own Unemployment Problems

Recent employment numbers released by the US Labor Department provided good news for many in the American workforce, but not for Millennials. While the overall unemployment rate held steady at 6.7%, Millennials rate remained high: the rate for 20 to 24 year-olds was 12.2% and 14.5% for 16 to 24 year-olds.
This generation, bearing so many unflattering nicknames – the “boomerang generation” or the “selfie generation” – are blamed for their own inability to enter the workforce. But is it fair to blame them when they are facing economic challenges unknown by generations before them?
First, Millennials are not unemployed or underemployed by choice. Those most stricken by the effects of the recession are, according to Tim Donovan of Salon, “young, undereducated, poor and all too often, minorities.”
Second, for those who are employed, these Millennials carry unprecedented levels of student debt incurred to get the education. The entered the workforce during the worst recession since the Great Depression.
Third, this generation, more than any other before, will have to create its own employment. There are no government programs in the pipeline out to save them. As Walter Russell Mead of American Interest states, “The turmoil of the new information and service economy means that Millennials will have to be their own job creators if they want to work.”
Fortunately, Millennials seem to up to the challenge. According to the US Chamber of Commerce, Millennials launched 160,000 startups each month in 2011 and 29% of all entrepreneurs were 20-34 years old. These start-ups not only provide solutions to Millennials’ unemployment problem, but also help support the economic recovery.

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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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