Categories for Blog
July 9, 2012 8:26 am
Published by dylan
Tax planning isn’t just for the end of the year. This is especially true in 2012, a year in which a national election could affect tax policies, and when several key tax breaks are slated to expire. What should you do in this situation? Here are five midyear tax-planning moves that may improve your financial picture:
1. Harvest tax losses.
If you’ve realized capital gains from securities sales this year, you can use any capital losses before the close of the year to offset those gains, plus up to $3,000 of ordinary income. If now is a favorable time from an investment perspective to sell certain securities, don’t wait until year-end to take action.
2. Realize capital gains.
Conversely, any capital gains you recognize now can help you take advantage of earlier losses, making your profits effectively tax-free up to the amount of your losses. Furthermore, the maximum tax rate on long-term capital gain (for securities held longer than a year) in 2012 is only 15% (0% for lower-income investors). The top rate is set to jump to 20% (10% for lower-income investors) in 2013, barring legislative changes.
3. Invest in dividend-paying stocks.
Like the current break on long-term capital gains, a favorable tax provision for “qualified dividends” (paid out by most domestic corporations) is scheduled to expire at the end of the year. Currently, the maximum tax rate for dividend profits also is only 15% (0% for lower-income investors). Beginning in 2013, however, dividends will be taxed at ordinary rates that could reach as high as 39.6% (up from the current top tax rate of 35%). If you invest in stocks now that will pay dividends at year-end, you could reap tax benefits.
4. Dodge the “wash sale” rule.
Under this rule, you can’t deduct a loss from the sale of securities if you acquire “substantially identical” securities within 30 days of the sale transaction. To avoid tax problems, wait at least 31 days before you buy back the same or similar securities. Alternatively, you could “double up,” acquiring the new securities now and waiting at least 31 days before selling the original shares.
5. Contribute to your retirement plan.
It’s easy for employees to contribute to a 401(k) plan during the year through regular payroll deductions. If you’re self-employed, you might set up a comparable plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP). Caution: Although you have until the 2012 tax-return due date (plus extensions), to get a SEP started, the deadline for setting up a SIMPLE for 2012 is October 1.
Of course, tax laws are ever evolving and you might have to make wholesale changes in your game plan after the election. We’ll keep you up to date on new developments.
July 9, 2012 8:12 am
Published by dylan
Everyone’s financial situation is different, but people at various stages of life often share similar concerns. Here’s a question from a client we encountered under such circumstances:
“I am in my 60s and recently retired from my full-time job. Over the years, I’ve opened several traditional IRAs and a Roth IRA. Also, I have a ‘rollover IRA’ with funds from a 401(k) at a previous job. Should I consolidate all of these IRAs into one for tax purposes, or should I just leave things the way they are?”
While there is no real tax benefit one way or the other, there is a trap to watch out for if you do consolidate. Combining the assets of your traditional IRAs into a single IRA could provide a few advantages, however.
For starters, it may be more flexible and cost-efficient to have just one IRA, as well as relieving you of considerable clutter if you’re still receiving paper statements from all of your IRA custodians. Also, if one IRA has provided better investment returns than the other or offers other advantages, it might make sense to shift more funds to the IRA with those advantages. (Of course, past performance is no guarantee of future results.) And you may find it easier to coordinate your plans for retirement, and focus on your main objectives, with a consolidated IRA.
Moreover, consolidating accounts might help you avoid a complication that can arise when you start taking “required minimum distributions” (RMDs) from your traditional IRAs. The law mandates that you begin taking RMDs no later than Apri1 1 of the year following the year in which you turn age 70½. These withdrawals from your account, the amount of which is based on life expectancy tables, must continue annually for the rest of your life. If you have several IRAs, you’ll have to choose the source of your annual RMD. It can come from one or multiple IRAs. But no matter how you arrange the distribution, the IRS treats it for tax purposes as coming from all of your IRAs on a “pro-rata” basis.
Let’s say you have four IRAs with a combined value of $500,000, and this year you withdraw $20,000 from one of them. The applicable percentage is 4% ($20,000 divided by $500,000), so it’s calculated as if you had withdrawn 4% of the balance in each IRA. Consolidating your IRAs would eliminate any confusion.
Finally, be aware that you can’t commingle the funds in traditional and Roth IRAs. This is the trap we alluded to earlier. Because Roths have an edge over traditional IRAs—qualified Roth distributions are tax-free and you don’t have to take lifetime mandatory distributions—you wouldn’t want to put them together anyway. Should you consolidate all of your Roth IRAs? Many of the same considerations that apply to combining traditional IRAs also are applicable to Roths.
July 9, 2012 7:54 am
Published by dylan
Will your family members know how to handle a life-threatening illness or injury involving a loved one? A “living will” can point them in the right direction.
Simply put, a living will is a legal document that establishes guidelines for prolonging or ending medical treatment. It’s important to have a living will created for yourself, and for relatives such as your spouse and parents, to inform health-care providers in case of a medical emergency or terminal illness.
A living will indicates the types of medical treatments you want or do not want applied in the event you suffer a terminal illness or fall into a permanent vegetative state. The living will doesn’t become effective unless you’re incapacitated. Typically, a physician must certify that you have a terminal illness or that you’re permanently unconscious.
To cover situations in which someone is incapacitated and can’t speak, yet the condition isn’t so dire that the living will becomes effective, you can execute a health-care power of attorney or health care proxy.
The requirements for living wills vary from state to state. Have an attorney who is experienced in these matters prepare the living will based on applicable laws. The best approach is to coordinate your living will with your regular will, any trusts or powers of attorney you may have, and other estate-planning documents.
July 2, 2012 9:05 am
Published by dylan
People who find themselves owning complex investment vehicles often leave the driving to the professionals. And that’s perfectly acceptable, but even “passengers” should have a basic understanding of how a particular investment works—especially when it’s your hard-earned money on the line.
Consider a retiree who’s looking into purchasing an annuity. Is it an investment product, an insurance product, or both? Will the annuity continue to pay income to heirs if the owner dies? Is the principal protected in case of a severe economic downturn? Surprisingly, many investors—including owners of annuities—are stumped by these basic questions.
Other commonly used terms often befuddle investors. Do you know the difference between an “annual effective yield” and an “average annual yield”? How about an “annual percentage yield”? It’s important to distinguish among different types of yield so you can make valid comparisons of investments.
Do you consider yourself an investment expert? Here are a few simple questions—with the answers below—to see how you measure up.
1. An insurance company generally begins payments under an annuity when:
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The accumulation phase begins.
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The accumulation phase ends.
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The annuity owner dies.
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The annuity owner retires.
2. Payments under a variable annuity are based on:
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Fluctuations in the current interest rate.
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Fluctuations in the current inflation rate.
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Performance of underlying stocks.
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Performance of the Standard & Poor’s (S&P) 500 index.
3. An annual effective yield is described best as:
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The annual return before interest is compounded.
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The annual return after interest is compounded.
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The annual return before inflation.
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The annual return after inflation.
4. The average annual yield often is used to:
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Compare the past performance of mutual funds.
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Distinguish Treasury bills from Treasury notes.
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Factor in the tax-free element of municipal bonds.
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Account for a guaranteed minimum-income benefit.
5. When you buy Treasury bills at auction, the rate is:
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Based on the current interest rate for loans.
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Based on the S&P 500.
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Equal to par.
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Discounted from face value.
6. A “private activity bond” is best described as:
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A corporate bond eligible for capital-gain treatment.
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A corporate bond exempt from income tax.
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A municipal bond that is completely taxable.
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A municipal bond that can trigger alternative minimum tax (AMT) problems.
7. An exchange-traded fund (ETF):
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Trades like stocks.
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Trades like mutual funds.
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Involves trades between major stock exchanges.
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Involves trades between different currencies.
Answers: 1-b; 2-c; 3-b; 4-a; 5-d; 6-d; 7-a
April 17, 2012 1:14 pm
Published by dylan
The European continent is an ocean away from the United States, but Europe’s debt crisis may hit close to home for U.S. investors.
Your investment portfolio almost certainly contains some exposure to Europe. You could own European companies through investments in international funds, or you may be invested indirectly through multinational corporations that do business in Europe. Moreover, if the European debt crisis worsens, that could lead to increased volatility in U.S. and global investment markets.
You’re also affected because Europe’s economy directly affects the U.S. economy through bank lending, trade, and other economic connections. Europe is the largest U.S. trading partner, accounting for 20% of U.S. exports. At the same time, U.S. banks hold a lot of European debt, and worries about Europe’s economic health have already dampened business investment and hiring in America.
Some analysts believe the credit crisis in Europe has been contained and that further impact on world markets should be minimal. Others continue to warn that Europe’s problems are likely to send the global economy into another recession this year.
Either way, it’s vital for investors to take into account events in Europe and position their portfolios accordingly. We are watching the debt crisis very closely and we can help you take a proactive stance.
April 17, 2012 12:16 pm
Published by dylan
The 401(k) plan continues to be, by far, the most popular company-sponsored retirement plan in the land. And it’s no wonder. This unique retirement-saving vehicle offers tax advantages to employees and can also be a valuable tool for employers looking to recruit and retain top talent.
The basic premise is simple: You arrange to have a portion of your pre-tax salary deposited in a separate account. Frequently, an employer will agree to match each dollar that plan participants contribute, up to a specified percentage of compensation. For example, if you earn $100,000 and put $10,000 a year into your 401(k), your company, providing a 3% match, would kick in another $3,000 annually.
There’s no current tax on investment earnings within the account, though you also don’t get to claim a deduction for losses. Distributions from the account, usually during retirement, are taxed at ordinary income rates. If you change jobs or retire, you normally can choose among keeping the money in your old company’s plan, shifting it to a new 401(k), or rolling over some or all of the account to an IRA.
That’s the short story. But there are numerous other legal limits and restrictions to contend with. One of the biggest is the annual limit on how much salary you can defer, a number that rises based on an inflation index. Furthermore, the plan must satisfy strict, complex nondiscrimination requirements.
How well do you know the current rules? See how you fare on this brief quiz.
1) The maximum amount an employed 45-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
2) The maximum amount an employed 55-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
3) The maximum amount a retired 65-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
4) The minimum number of employees required to establish a 401(k) plan is:
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1.
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10.
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25.
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100.
5) If you aren’t a company’s owner, you must begin taking distributions from its 401(k) plan:
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At age 59½.
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At age 70½.
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When you retire.
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At age 70½ or your retirement date, whichever comes later.
6) A rollover from a 401(k) plan to an IRA is subject to a 20% withholding tax unless:
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You complete the rollover within 60 days.
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You arrange a trustee-to-trustee transfer.
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You retire before the end of the tax year.
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You are under age 59½.
7) If you receive a $10,000 “hardship distribution” from a 401(k) in 2012 and you’re in the 25% tax bracket, your income tax liability is:
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Zero.
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$1,000.
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$2,500.
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$3,500.
Answers: 1-b; 2-d; 3-a; 4-a; 5-d; 6-b; 7-c
April 11, 2012 1:23 pm
Published by dylan
The new JOBS Act—the Jumpstart Our Business Startups Act of 2012—is designed to promote growth among small businesses. Under the law, entrepreneurs will be able to raise cash without jumping through the usual hoops for the Securities & Exchange Commission (SEC). Here are the key provisions.
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A privately owned company with revenue of less than $1 billion can sell up to $50 million in shares through an initial public offering (IPO) without registering with the SEC. Also, companies in this category are exempt from having to commission independent audits of their internal controls for up to five years.
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Small companies may have as many as 2,000 shareholders (up from 500) or 500 unaccredited investors without registering with the SEC. An accredited investor is defined as someone who has a net worth of more than $1 million (not counting a primary residence), earnings of at least $300,000 ($200,000 for single filers) for the past two years, or is a general partner, director, or executive officer of the company issuing the IPO.
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The new law allows “crowdfunding” to attract cash from large pools of small investors. Investments are limited to the lesser of $10,000 or 10% of the income of an investor.
Consult with a professional if you’re interested in issuing an IPO or acquiring shares of one.
April 11, 2012 12:14 pm
Published by dylan
Now that the “payroll tax holiday” has been extended through the rest of 2012, can we expect other significant tax legislation from Congress? Not before the national elections.
Although our nation’s lawmakers may still act to keep several other expiring tax provisions, it seems unlikely Republicans and Democrats will reach consensus on the best tax policy for the country before November. Once voters have been heard, Congress will probably get down to business.
Their task is daunting. Several key tax law breaks are scheduled to be scaled back in 2013 if there’s no congressional action.
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The two top tax brackets for ordinary income in 2012 are 33% and 35%. Absent new legislation, the two top rates in 2013 will rise to 36% and 39.6%, respectively.
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Currently, the maximum tax rate on long-term capital gains and qualified dividends is 15%. These “Bush tax cuts” are set to expire after 2012 when the capital gains rate will jump to 20% and dividends will be taxed at ordinary income rates.
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For 2012, the maximum estate tax exclusion is $5.12 million, and a surviving spouse may take advantage of any leftover exclusion of the spouse who died. But that “portability” is scheduled to end next year, and the exclusion will revert to $1 million.
We still could see wholesale changes in these tax rules...but not until later in the year.
April 11, 2012 11:06 am
Published by dylan
An improving jobs picture sent consumer confidence up for six straight months through February, as Americans gained hope the economy is improving. Even people who said their own finances remained in poor shape felt more hopeful about the overall economy.
The University of Michigan’s Consumer Sentiment Index rose to 75.3 in February, up from a 31-year low of 54.9 in August 2011. That followed news that America’s unemployment rate had fallen to 8.3% in January. It had been at 9.1% in August, down from a 2009 high of 10%.
Consumer sentiment rose despite the fact that more households said their income had dropped from the previous month, and a majority said they did not think their income would grow during the next year.
Most economists are backing up this consumer optimism. A survey by the National Association for Business Economics in late February showed economists expect unemployment to remain at 8.3% this year. That’s a significant improvement from their November forecast of 8.9%.
The economists also predict job growth will accelerate next year and the jobless rate will fall to 7.8%. They forecast the U.S. economy will grow 2.4% this year, up from 2011, when economists believe the economy grew 1.6%.
The improving outlook among consumers and economists bodes well for 2012, as stock markets tend to rise on positive sentiment.
March 26, 2012 12:28 pm
Published by dylan
Do you need to update your life insurance protection? You may be surprised to learn that your existing policies are no longer sufficient to meet your needs.
If you’re like many people, you probably took care of your life insurance years ago. You bought as much coverage as you felt you needed, and then you stashed the contract in a drawer or safe somewhere and pretty much forgot about it. But it would be unusual if your family financial situation hadn’t changed significantly since then. For example, you might now have too little insurance if you’ve added another child or two to your brood. But it could also work the other way. If your children have left the family nest or you’ve retired, you may be able to cut the amount of your coverage.
Now is as good a time as any to dust off that old policy and review it. You may find it doesn’t reflect one or several major life events you’ve experienced since you acquired the coverage. Those might include:
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You have married, divorced, or separated;
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There has been a birth, death, disability, marriage, or divorce involving someone else in your family;
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One or more of your children has completed college or graduate school;
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You bought or sold your principal residence, a vacation home, or investment real estate;
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You switched jobs, started your own business, or retired; or
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There has been a big shift in your financial or business circumstances.
Other family changes could also have an impact. For instance, you may have taken on the care of an elderly or disabled relative, thus adding to your financial commitments and increasing the amount of replacement income that would be needed if you died. Meanwhile, if you’ve paid off your mortgage, you may be able to reduce your coverage.
When you review your policy, examine it as if you were buying life insurance for the first time. It’s your projections for the future that are the crucial factors—not the way things were a few years earlier. And don’t forget to review all of your life insurance policies, including any group coverage you get through your employer (or your spouse’s employer), taking into account recent estate tax law changes.
The amount of coverage you need is likely to drop as you get older, and you may eventually decide you can do without life insurance, though it could also play a role in your estate plan. Also, consider the return you may receive on cash value, especially with whole life policies. What’s certain is that your financial situation will continue to evolve, so it makes sense to make an insurance review a regular event—if you mark it on your calendar each year, you won't forget to conduct this important checkup.
March 21, 2012 11:57 am
Published by dylan
You probably already understand the importance of having life insurance. The proceeds from a life policy can help cover your family’s current expenses and may provide a cushion for the future if you die prematurely. But another kind of coverage—disability income (DI) insurance—is often ignored or neglected. And that’s a mistake, because DI insurance can be even more vital than life insurance in maintaining a family’s financial well-being. A new white paper from the Council for Disability Awareness, an independent nonprofit group, provides these six startling facts.
1. More than one in four of today’s 20-year-olds will become disabled before they retire. (Source: Social Security Administration, Fact Sheet, March 18, 2011)
2. Some 8.5 million disabled U.S. wage earners were receiving Social Security Disability Insurance (SSDI) benefits at the end of September 2011. (Source: Social Security Administration, Office of Disability and Income Security Programs)
3. Ninety percent of new long-term disability claims are the result of an illness, not an accident, and fewer than 5% of claims are work-related. (Source: 2011 Council for Disability Awareness Long-Term Disability Claims Study)
4. The average long-term disability claim lasts 31.2 months. (Source: 2010 GenRe Disability Fact Book)
5. New applications for Social Security Disability Insurance (SSDI) benefits increased 27% from 2008 to 2010. (Source: Social Security Administration, Office of Disability and Income Security Programs)
6. About 100 million workers lack private disability income insurance. (Source: Social Security Administration, Fact Sheet, March 18, 2011)
If you don’t have DI insurance, either through a policy from your employer or one you’ve bought on your own, you can choose from among a wide array of products whose costs and benefits vary widely. Here are several factors you’ll need to take into account.
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How a policy defines “disability” is crucial. The best policies pay benefits if you can’t work in your chosen profession, and they don’t consider the nature of an injury.
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DI insurance policies generally require a waiting period before paying benefits, and a shorter waiting period normally translates into higher premiums.
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Typically, a policy will state how long and under what circumstances it will pay disability income benefits. It could, for example, provide benefits only until you qualify to receive Social Security retirement benefits.
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If you opt for a noncancellable policy, the insurer can’t drop you off its rolls if your health declines.
Finally, don’t be seduced by the low costs of a fly-by-night operation. You’ll be better off opting for an experienced company with a good reputation.
March 21, 2012 9:40 am
Published by dylan
The cost of an extended nursing home stay can be frightening. In some parts of the country, annual expenses may run to $100,000 or even more. At that rate, it doesn’t take long for a lifetime’s savings to be depleted. That’s why most long-term care ends up on the tab of Medicaid, the joint federal-state health plan for the poor. But your family will qualify for help only after you’ve exhausted most of your assets.
Advance planning can help you avoid dire financial consequences. For instance, you could purchase a long-term care insurance (LTCI) policy for yourself or a relative to defray some or all of the nursing home costs. That can help preserve family funds and put off panic sales of investments. Still, premiums for LTCI are based on several factors, including the health of the person who’s being insured, and can be pricey. And the older you are when you get this insurance, the more you’ll pay.
What do you know about long-term care insurance? This brief quiz can test your knowledge.
1) Benefits under an LTCI policy will begin to be paid:
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Once the insured becomes ill or disabled.
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Once the insured applies for benefits.
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When the policy’s lifetime amount is fully paid up.
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After a waiting period has been satisfied.
2) Which of the following does NOT affect premium cost?
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The age of the insured
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The value of the insured’s retirement assets
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The length of the benefit period
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The amount of the daily benefit
3) To qualify to receive LTCI benefits:
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The insured must sell any primary residence.
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The insured must need assistance with basic daily activities.
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The family must elect to begin coverage.
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The family must obtain permission from a nursing home.
4) What is the tax treatment of LTCI policies?
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Premiums are fully tax-deductible.
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Premiums are tax-deductible only by retirees.
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Premiums may be partly tax-deductible.
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Premiums are never tax-deductible.
5) The amount that can be used to defray nursing home costs:
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Depends on the daily benefit.
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Depends on the insured’s age.
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Depends on the retirement assets owned by the insured.
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Is limited by state law.
6) A policy that is “guaranteed renewable” for life means that:
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It can’t be voided if the insured’s health changes.
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It can’t be voided whether or not the premiums are paid.
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It will still pay benefits after the lifetime limit has been exceeded.
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Premiums can never increase.
7) LTCI policies are generally offered by:
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Banks.
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Estate planning attorneys.
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Medical practitioners.
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Financial services firms.
Answers: 1-d; 2-b; 3-b; 4-c; 5-a; 6-a; 7-d
