Steven A. Branson, Esq. - Financial Strategies

Our firm has been working with FINRA since November to qualify as a Broker Dealer. As that process is completed, you will see changes to this web site. The new status will allow us to provide more services to clients with respect to their financial needs.

Euro: Some advisors now think that the play of the Euro against the dollar is over. Here is a quote from MorningStar on the activity of one fund:

Some managers think that the euro and pound may be significantly overvalued versus the United States dollar. As a result, a number decided to hedge assets denominated in those currencies.

Bond Funds: The discount you see in closed end bond funds may entice you to buy, but be cautious and do your homework. If the bonds are discounted because of poor credit ratings, the discount may be fair. On the other hand, if they are discounted or “over-sold” from market fears, then you may have a buying opportunity. With the shake up now in bond credit rating companies, your investment needs to be guided by good research.

Congress just passed an economic rescue package that includes tax rebates to individuals. The rebates of $600 to $1,200 depend on filing status, dependents and Adjusted Gross Income. For those that are eligible, the only way to receive the rebate is to file your tax return.

The phase out begins at AGI of $75,000 for single taxpayers and $150,000 for married taxpayers filing jointly.

A recent USA Today article in the question and answer format is helpful for general questions:
USA Today on tax rebate

For more, there have been many good articles, such as in the February 15th NY Times. If you need to know more, contact us please.

Mortgage rates have come down recently. If your mortgage rate is 6% or above, you can probably reduce your mortgage rate by .5%, which is worth over $200 per month on a 30 year mortgage of $500,000. If the closing costs total $2,200, then you break even in less than 11 months. Let us know if you want to explore this in greater detail.

The sub-prime mess is not over. The companies that insure municipal bonds are in trouble themselves. If they cannot cover the bonds that they insure, the ratings on the bonds drop from AAA to B or lower, changing the value of these bonds. That could shake the financial markets yet again. If you hold insured municipal bonds, you will want to review your holdings to see if any of the companies insuring those bonds are at risk. Let us know if you need our input on the review.

Congress is expected to restore expired tax breaks, dating them back to January 1, 2008. They include the R&D tax credit, tax-free IRA distributions to a charity and the deductions for sales tax, college tuition and teachers’ class supplies. Also, Congress will need to act on the AMT because the higher AMT exemptions of 2007 are not in place for 2008.
RETIREMENT CONTRIBUTIONS
The IRA and Roth limit rises to $5,000, up by $1,000; taxpayers born in 1958 or earlier can add an extra $1,000. (The 401(k) or 403(b) contribution caps stay at $15,500, or $20,500 for individuals born before 1959.)
The ceiling on SIMPLEs remains $10,500, adding $2,500 if you are age 50 or older in 2008. The ceiling for defined-contribution plans is $46,000 in 2008, a $1,000 increase for Keoghs and profit sharing plans.
DEDUCTION PHASE-OUT
The phase-out of itemized deductions for 2008 is changed: if your AGI exceeds $159,950, itemizations are trimmed by 1% of the excess, not 2% as in prior years (you still never lose more than 80% of your itemized deductions).
ADOPTION
The adoption tax credit goes up to $11,650, but the break phases out for filers with AGIs between $174,730 and $214,730.
ESTATE AND GIFT TAX
The estate tax exemption remains $2 million in 2008 then goes to $3.5 million after 2008. The top tax rate remains at 45%. The lifetime gift tax exemption is still $1 million and the annual gift tax exclusion remains at $12,000.

Congress changed the AMT exemption slightly. For individuals, the exemption increases to $44,350 in 2007 from $42,500 in 2006, and for married couples, the exemption climbs to $66,250 from $62,550. This change will mean that some 25 million filers will
avoid the AMT on their 2007 income, up from 4 million who paid it on 2006 income.

Enacted in 1969 to prevent very wealthy investors from using deductions and tax shelters to avoid paying income tax, the AMT has hit a growing number of middle-class tax payers because the 1969 law was not indexed to inflation. Paying the AMT means you lose deductions like high medical expenses and state and local taxes and credits for dependents.

Now there are services allowing you to send e-mail messages after your death. For some who have more on-line relationships than in person, this is a way to notify their correspondence of their passing.

More importantly for estate planning, these from the grave services offer a personal way to provide instructions and advice to the fiduciaries in your will and trust. Where a will or trust give technical/legal structure, such an e-mail replaces a memorandum that you could sent, stating your wishes from schooling to baby sitters to foods to college preferences and so on. If you want to explore this more as an “add on” to your estate plan, let us know.

Beware of the “kiddie” tax age limit for 2007, up from 14 to 18. Also, in 2008, some children about to sell investments for college will be taxed at their parents rate so planning in 2008 can save taxes.

While tax returns in the 10% or 15% brackets get a break on long-term capital gains, paying 0% in 2008 (the rate was 5% before), children will not receive much benefit because of the rules described above.

We have seen environmentally oriented mutual funds pop up since the oil scare of the 1970s. However, investor interest was not sustained and some funds dried up. More recently, the conviction that alternative forms of energy will be necessary to meet global demand in coming decades has lead to responses by regulatory, corporate, consulting and other groups. Investors see that thinking green will be more than a passing fad.

“Going Green” and Risks of “Investing Green”

The term has different meanings to different people and, unfortunately, to different managers and mutual funds. You need to be careful (1) that the fund invests in a way that you consider “green” and (2) that, in so doing, it has the potential to do well over time (i.e., its environmental goals do not frustrate its investment goals). The funds may be large cap, for global impact, or smaller cap, for more localized impact. The managers may not have experience with the new technologies. Furthermore, regulations are changing, which could have an impact on the companies in which the funds invest. Furthermore, large or small cap, the fund may not be well diversified because there are few companies that meet their investment criteria. So, you need to be careful in your selection.

As we said below, you may be better off to recycle, purchase conscientiously, invest well, and contribute to causes that will have a global impact rather than hoping for “making green from going green”.

For Gift Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $780,800 and the Applicable Exclusion Amount is $2,000,000.

Going green – as we advise on socially conscious funds, investing “green” may not be the best solution; investing well and contributing charitably or politically to “green” causes may have a better impact on both your personal wealth and the environment

That being said, the attention surrounding Al Gore’s documentary, “An Inconvenient Truth,” and his new Nobel Prize, has resulted in a growing number of mutual funds and ETFs claiming to have green credentials. However, identifying the strongest investment options among this growing fund and ETF niche is a challenge as you may be surprised that not all green funds fit your needs.

There are some funds, and some stocks, that do well and others that do not. We are reviewing these to see what works well for investing.

A related comment comes from some mortgage work we do, as seen on the Marblehead Savings Bank webpage:

If all U.S. households received and paid their bills electronically, the country would:

Save 16.5 million trees each year, or the amount of lumber needed for 216,054 typical single family homes;
Reduce toxic air pollution by 3.9 billion tons of carbon dioxide equivalents, akin to taking 355,015 cars off the road; and
Reduce by 1.6 billion pounds the solid waste generated in a year, equal to 56,000 fully loaded garbage trucks.

At our firm, we are doing what we can: filing tax returns electronically and saving files as PDFs rather than printing them.

[See also our comments posted later.]

As with each year, you will want to push income into 2008 while using the remainder of 2007 to make charitable contributions, pay home mortgages, and pay miscellaneous deductions, such as investment fees or a retainer for legal services (i.e., the deduction that is allowed in 2007 saves total taxes between 2007 and 2008). To begin your planning, you will want (a) to coordinate tax planning with the review of your investments for tax loss harvesting or repositioning (see below) and (b) to review the alternative minimum tax (“AMT” – See below). When you pay the AMT, you lose the value of your deductions. Therefore, you need to reverse the general rule from above. To find out what steps to take, you need to create a projection for both 2007 and 2008 to minimize total taxes paid. Here are actions you should consider now to put income and deductions in the proper year for optimal impact:

• Take income out and push deductions into the year subject to the highest tax rate.
• To move income, defer salary and bonus not yet earned or delay collection of self-employed receivables. You can also buy treasuries or CDs to shift interest income into 2008.
• To move deductions, pay the balance of your state taxes or pay sales taxes on car purchases, pre-pay mortgage interest and real estate taxes, make charitable donations, pay job-related moving expenses or other non-reimbursed business expenses, and pay alimony by December 31. Note that gifts of autos to charities are limited to the amount for which the car was sold.

Come back for more updates.

We are reviewing likely changes to the tax laws, some to be enacted after the IRS sent its 2008 forms to print. We will post ideas on addressing year-end tax planning soon.

Congress will be addressing the estate tax law. There was talk of a $5 million unified credit and a rate reduction. However, the likely outcome is a freeze to the 2009 unified credit of $3.5 million, keeping the current rate. You should continue to make gifts and even consider using a family limited partnership or qualified personal residence trust. Also, make sure that your trust and other estate documents are up to date for changes in both state and federal laws.

Congress has changed the rules on taxing children for income over $1,700 at the parent’s rate. The age threshold over which the child pays tax at his or her own rate was raised to 18. More recently, Congress further increased this threshold beginning in 2008 to age 19 or, if the child is not supplying more than half of his or her support, age 24. Therefore, if you have custodial accounts, you may want to sell now to incur gains in 2007 instead of 2008 or, if the child will not need the money for some time, rolling the funds into a 529 plan.
See Our section on Tax and Investment Planning for Your Children.

With all the fall out from the sub-prime mortgage mess, many portfolio managers are scrambling. Here is what Morningstar had to say in Morningstar Analysis 8-27-07:

In his letter, dated Aug. 16, Nygren wrote: “The Oakmark Select Fund’s performance since the end of the second quarter has been dreadful. Not only has the market declined significantly, but our Fund has fared meaningfully worse.”
Part of this underperformance, he states, is due to the fund’s longstanding position in Washington Mutual WM (nearly 14% of assets), which has suffered significant declines this year due to the fallout from subprime mortgage trouble. Nevertheless, Nygren argues that “Washington Mutual has taken on less risk in their loan portfolio than their peers have, as demonstrated by the strong credit ratings of their borrowers (FICO scores) and their lower loan-to-value ratios. Further, as a bank, Washington Mutual has much longer term funding than do pure mortgage originators. (and in the end) this difficult period should end up enhancing Washington Mutual’s long-term earnings potential.”
Nygren wrote that even if his analysis of this company’s holdings is wrong, he and his team remain committed to their long-term, value-oriented investment style. He also said in an interview that he bought more shares of the fund during its travails.

In contrast, some fund shops recently have shown terrible shareholder communication.
The point of this? Honesty is great. But the key is for managers to stick to their proven, long-term investment styles, resisting a short-term reaction that could end up losing over time. You may want to check your managers for “style drift” during this market volatility.

There are several changes in the tax law that may affect you. Let us know if you have any questions.

Education - Congress will try to streamline tax credits and deductions relating to education expenses. The Hope Credit (up to $1,650), the lifetime learning credit (up to $2,000) and the above the line deduction (up to $4,000) would be replaced with a credit worth up to $3,000 per year, with a $12,000 per student life time cap. The phase out for this credit would also be higher than for the current credits, so more families could avail themselves of it.

“Kiddie” tax reprieve – Congress has allowed families with children born before 1990 until December 31st to sell assets to be taxed at 5% instead of 15%. After that date, the rules on taxing children income over $1,700 at the parents’ rate will apply.
See Our section on Tax and Investment Planning for Your Children.

Out-of-State Municipal Bonds - The Supreme Court will review a Kentucky court decision that it is unconstitutional for that state to tax interest on the bonds from other states while exempting from income tax Kentucky bonds. If you had out-of-state municipal interest taxed on your state income tax returns, you may want to file amendments to protect your ability to get a refund if the Supreme Court upholds this decision.

Investment Property and Use of $250,000 Gain Shelter - The IRS recently clarified the rules for the sale of principal residence that had been a rental property. The tax law allows a taxpayer to exclude up to $250,000.00 of gain ($500,000.00 if married and filing jointly) from the sale or exchange of a principal residence, so long as the taxpayer lived in the property for two out of the last five years. Under the new rules, a replacement property held for investment and then converted into a principal residence will still be eligible for this exclusion, if the two out of the last five years test is met AND the replacement property was owned by the taxpayer for at least five years. This would mean that taxpayers could potentially exclude almost all capital gains tax which would otherwise be due on investment property.

As we review portfolios for clients, and update our own mutual fund model, we find that allocations are out of alignment due to the fact that the growth in stock prices has pushed, for example, mid cap stocks into large cap stocks. This means that the mid cap fund you hold is now and large cap fund, so that you are over-weighted in large cap and under-weighted in mid cap.

This summer would be a good time to review your allocation, taking into account the drift do to capitalization changes but also addressing the decline of the dollar internationally, inflation fears, etc.

Here are some more updates regarding the new tax law:

• There is an adjusted gross income limit for being able to use the new AMT credit (see the December 12 New Tax Law below – the text was updated)
• If you want to use your actual bills to get more than the standard long distance credit, your bills would have to be over $50 per month for the 41 month period ending in August 1, 2006. You would need to use your records and complete form 8913 (the write in the form number on the credit box on the second page of your 1040).
• You can get the standard long distance credit even if you would otherwise not file taxes by using form 1040EZ-T.
• For children under age 18, they will need to consider making estimated payments this year, now that they pay taxes at their parents’ rate.
• For cash charitable contributions, you will need a receipt to be able to take the deduction for 2007 on.
• You can use the Required Minimum Distributions to make gifts from an IRA to a charity.
• The IRS does not send emails so any that you get purporting to be from the IRS are phishing and should be reported.

In Massachusetts, non-filers can still get the “circuit breaker” credit for home ownership.

2006 Tax Forms: Certain tax write-offs set to expire were restored AFTER the 1040 and related forms were sent to print. Therefore, be very careful in completing your tax returns so that you do not miss items such as the state sales tax as described below. Also, do not forget the IRS credit for the long distance tax. See Links for access to IRS updates.