Archive for January, 2008
January 30th, 2008
Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA®
In light of the continuing market volatility we thought you might enjoy an advance look at the feature article included in our forthcoming quarterly newsletter. Clients have been recently asking if they should consider reducing their exposure to equities in response to the recent market turbulence. Click on the link below to gain some perspective regarding our thoughts on the matter. The article includes a series of questions you might ask yourself to asses the appropriateness of your current allocation. As always, let us know if you have any questions.
http://www.savantcapital.com/pdf/savantalk_allocation.pdf
January 28th, 2008
Brian J. Knabe, MD
My previous entry highlighted some common-sense approaches to maintain one’s health and prevent diseases. Similar simple measures can help you in the financial area as well. For example:
- Start investing early in life – save a portion of each paycheck.
- Choose investments with low costs – the more of your money you keep, the more you will have at retirement.
- Don’t chase returns – by the time an investment is the latest craze, it is probably over-priced.
- Be a long-term investor. Moving in and out of the market frequently will increase trading costs and taxes, and it is not possible to consistently time the market.
- Make sure you have an up-to-date will - and a living will.
Your physical health and your financial health are very similar in this respect – following simple, common-sense advice can result in significantly improved outcomes in the long-term.
January 25th, 2008
Brian J. Knabe, MD
As a family physician, I often give advice to patients regarding wellness and disease prevention. The article in the following link illustrates some of this type of advice:
http://health.msn.com/health-topics/articlepage.aspx?cp-documentid=100174651&page=1
Hey, it’s not the New England Journal of Medicine, but much of the content is common sense and sound from a medical standpoint. The most striking aspect of the article, in fact, is the common sense and simple nature of most of the points – drink more water, exercise regularly, and don’t skip breakfast! Another good point made by this article is the statistics that are quoted – “decrease your risk of stroke by 50 percent”, “reduce… depression by 71 percent”. Do you realize that many of us pay over $100 per month (or a $35 co-pay, if you have insurance) for a drug that may not offer this same level of benefits? Indeed, many diseases can be prevented or treated by relatively simple lifestyle changes. Ask your doctor which preventive measures would give you the most benefit – then act on the advice!
January 23rd, 2008
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
Tuition is expensive. There are lots of ways to pay it.
Abraham Lincoln used the phrase “Don’t change horses in the middle of a stream.” The phrase was probably coined by someone who DID try to change horses in the middle of a stream. That was, most likely, a mess. Cold, wet, and scared!
So, what do tuition and horses in the stream have to do with an investment philosophy?
Back in the late ‘90s lots of people changed strategies about the same time that the internet and technology craze hit mid-stride. They weren’t there in the beginning. No. They were the ‘smart’ ones. They waited until it was a ‘sure thing.’
At this time (mid-stream towards retirement) they changed their safe, staid, boring, and secure retirement strategy for the unparalleled opportunity to make it big! After all, technology was the wave of the future! To their dismay, the problem wasn’t that they ‘jumped in’ to tech stocks at the wrong time, the problem was that they jumped at all!
Had they just stayed on the course that they had originally mapped out, they would not have put their retirement in jeopardy. Sadly, they changed horses (strategies) in the middle of the stream (the course towards retirement) and they lost a lot. They’re still paying tuition for the education that they received from 2000 through 2002. Three long years of school, 7 long years of tuition bills, and a retirement that is still years away.
Well it’s not too different today. Recently the investment market has been…well, unfriendly. Lots of people are scared and believe it or not they’re thinking of changing horses once again. They are still in midstream (working towards retirement or already in retirement) and they are thinking of selling their portfolio so as to place it in “safe and secure” assets.
How ironic, they want to sell their portfolio while it is at a low point. This hurts them a lot…first by giving up on a well thought out strategy, second by selling out at the bottom, and third by waiting on the sidelines for the market to fix itself…but not until it has proven it by going up for several weeks, months, or years – that is, after the fact! These folks, who change horses in mid-stream, pay a lot of tuition. They pay in money and they pay in emotional fears.
My message is quite direct…if you have a well thought out strategy, and the strategy is long term in nature…stay on the horse and stay on the course, even when the stream is turbulent. Since you’ll probably not spend all of your retirement funds on the same day, you have the opportunity to be richly rewarded just by staying on track. The market isn’t just stocks, it has the remarkable staying power of you and me…the market, to bring it back to good health and happier, more profitable days…enough to make the turbulence be less troubling.
Stay on course, you’ll be rewarded for sticking with your strategy!
January 21st, 2008
Tawn M. Jacobs, MST, CPA, CFP®
Yes it is true! For 2008 through 2010, the long-term capital gains* rate for some investors will drop to zero. But before you start planning a fire sale of your stocks and mutual funds, make sure you’ll be eligible for this tax break. The zero-percent capital gains tax rate will only apply to those individuals who are in a 10% and 15% tax bracket.
Currently, the top long-term capital gains rate is 15% compared to a maximum ordinary income tax rate of 35%. Last year, those in the 10% and 15% income tax brackets qualified for a 5% capital gains rate; however in 2008 their capital gains tax disappears. To take advantage of the 0% capital gains rate, your ordinary taxable income cannot exceed $32,550 if you are single or $65,100 if you are married filing jointly (MFJ).
To arrive at ordinary taxable income, all your ordinary income (such as wages, retirement plan distributions, interest income, and social security) is reduced first by your deductions (the standard or itemized deduction and your personal exemptions). This is before adding in any capital gains. If this total is below $32,550 for a single taxpayer or $65,100 for a MFJ taxpayer, then some of your long term capital gains can be taxed at the 0% tax bracket. Why only some? Well, it depends on the amount of capital gains you have versus the amount of ordinary taxable income you have. If you have zero ordinary taxable income, then all of your capital gains up to the two amounts listed above for single and MFJ will be taxed at 0%. If there are excess capital gains that don’t qualify for the zero-percent tax rate, they will be taxed at 15%.
The individuals that may have been able to really benefit from this law were college age students. Unfortunately, the new “kiddie tax” rules that take effect in 2008 have blocked shifting income from parents to their children by taxing them at their parent’s rates up to age 24. Another unforeseen outcome of cashing in one’s stocks or mutual funds is increasing the amount of social security that is taxed by seniors. Keep in mind that any increase in income (by creating capital gains) increases the amount of social security that is taxed. This may inadvertently negate the benefits of a 0% tax bracket.
Again, this tax-free treatment of long-term capital gains is scheduled to apply in 2008, 2009, and 2010, but some skeptics worry that Congress may rescind the measure in future years as it searches for revenues to offset other tax changes. So if you are likely to benefit from this strategy—perhaps if you are self-employed or retired and can control the timing of your income—set your sites on 2008 to cash in on the break before it disappears. And don’t forget to have your tax professional run the numbers first.
* To qualify for preferential long-term capital gains treatment, you must hold shares for more than a year before selling.
January 18th, 2008
Tawn M. Jacobs, MST, CPA, CFP® The kiddie tax law was originally established to prevent well-off families from abusing the strategy of shifting unearned income to their children, where it would be taxed at a lower tax rate than their own. Under the kiddie tax, any amount of a child’s unearned income in 2007 in excess of $1,700 (probably $1,800 for 2008) is taxed at the parent’s tax rate. Until recently, the kiddie tax only applied to children under the age of 14, but in 2005, the age moved to 18. Now, effective Jan. 1, 2008, the kiddie tax will apply to children age 18 and younger as well as college students under the age of 24.
So who’s a kiddie in 2008? Definitely a child under the age of 19, and potentially a child between the ages of 19 and 23 if they are a student is a kiddie. Put another way, the kiddie tax will never affect a child who is 24 or older at year-end.
In the law passed last spring, the kiddie tax was considered to be an offset provision for tax breaks given to small businesses, but there is more to the story. Congress got a little nutty when it passed a previous law that allowed the capital gains tax rate to drop all the way down to zero in 2008 for people in the lowest tax brackets (see tomorrow’s blog). Then they realized that even kids from wealthy households could be in the lowest tax bracket. So they passed the new kiddie tax and turned all the American “kiddies” into little Dutch boys to plug the hole in their legislative dike and give small businesses a break.At the end of the day, the kiddie tax leads to a higher tax bill, and families will ultimately seek out alternative types of investments and accounts, in conjunction with credits, to minimize their taxes.
January 16th, 2008
Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA®
We thought you might appreciate an update regarding our observations around the current state of financial markets. As you are probably aware, after several years of smooth sailing for stock and real estate markets, things became more challenging in the second half of 2007 and in early 2008. Though we don’t have a crystal ball, we can provide some perspective and understanding of these current challenges and provide you enhanced confidence in the future. Click on the link below to read more.
http://www.savantcapital.com/pdf/letter011008.pdf
January 14th, 2008
Tawn M. Jacobs, MST, CPA, CFP®
Finally, in the last week of the year, Congress boosted the alternative minimum tax (AMT) exemption amounts for 2007. So what? The significance of this may not be felt by many taxpayers who haven’t fallen into the AMT trap yet, but were headed blindly into the abyss. A little background will help explain this phenomenon.
The technical definition of AMT is as follows:
“The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT tax rate of 26% or 28%”.
Again, so what does that mean? In a nutshell it means that the IRS has two tax systems, a regular tax and an alternative minimum tax. The AMT was suppose to tax the “rich.” However, in recent years, it seems that it is hitting more and more middle class taxpayers who definitely do not consider themselves rich. So what is the exemption change?
Prior to the new law, an individual’s AMT exemption amounts for 2007 (before the phase-out) were $45,000 for married individuals filing jointly (MFJ) and $33,750 for single taxpayers. (Note: these were the amounts in effect for 2000). Under the new law, the exemption amounts are $66,250 for MFJ and $44,350 for single taxpayers. This may not seem like such a big deal, but this increase in the exemption will keep thousands of unsuspecting taxpayers out of the throes of AMT. This is the second year in a row that Congress has acted during the year to adjust the exemption amount up.
Beware. This is a temporary fix only. Absent Congressional action, the 2008 AMT exemption amounts for individuals will revert to the levels they were at for 2000.
January 11th, 2008
Theresa A. Harezlak, CFP®
Did you know that the federal government has established guidelines for gift tax exemptions and gift tax rates for all property? While these guidelines are generous– everyone has a lifetime gift tax exemption of $1,000,000– it’s still important for you to understand them.
In 2007 and 2008, the IRS determined that gifts under $12,000 per person, per year, were exempt from a federal gift tax. Gifts over the annual $12,000 per person limit are called “taxable gifts.” In the case of a “taxable gift,” IRS Form 709 would have to be filed. Remember, you have a lifetime gift tax exemption of $1 million, so even though you may be required to file a federal gift tax return, unless you have exceeded your $1 million lifetime exemption, you will not actually owe any federal gift taxes.
If you are married and filing joint tax returns, each of you is allowed to gift $12,000 per recipient, yearly, tax-free. In other words, if you are married and have two children, as a couple, you can gift up to $48,000 annually without having to file a gift tax return.
Another key point to keep in mind, especially if you’re gifting toward the end of the year, is that the IRS counts the gift on the day the check is cashed, not on the day the check was written.
There are other gifts that are considered exempt from gift taxes assuming they meet the following guidelines:
- Tuition expenses – Tuition payments to assist an individual’s educational cost must be made directly to the qualified institution, not the individual. The payment must be used to fund the cost of attending the school and may not be used to pay for books or other educational supplies.
- Medical expenses – Medical expenses to assist an individual must be made directly to the medical facility, not the individual. And, those expenses may not be eligible for reimbursement by any insurance coverage.
- Gifting between spouses – Gifts between spouses are unlimited.
- Charitable gifts – Gifts made to qualified charitable organizations are also unlimited.
As it is said, “giving is so much better than receiving.” While it is gratifying to give, most of us do not feel the same way about paying gift taxes. Therefore, when making a substantial gift or a series of gifts, consult with your advisors to ensure you are taking full advantage of your exemptions and not inadvertently placing yourself in a taxable position.
January 9th, 2008
Theresa A. Harezlak, CFP®
After 20 years in the financial planning business, I’ve learned a lot from education opportunities, mentors, financial advice books, business and personal experiences, and from my customers.
One of the most important is that no matter how we measure success, when life presents challenges, financial or otherwise, it’s truly how we approach those challenges that matters most. We may not have control over everything that happens to us, but we all certainly have control over how we will view our situations and how we will deal with them.
The following is a story that has inspired me and my family. I hope you will find it inspiring as well.
Good Luck and Bad Luck
There was once a wise farmer who knew that life’s experiences are often not what they appear. He owned a beautiful mare that was the finest in the entire village. One day, someone left the corral gate open and the mare ran off. The villagers said to the farmer, “What terrible luck.” The wise farmer replied, “Good luck, bad luck, who can tell.” Several days later, the mare returned with a beautiful herd of wild stallions accompanying her. The villagers marveled at what good luck the farmer had. Again, the wise old man observed, “Good luck, bad luck, who can tell.” One day the farmer’s only son was out in the yard breaking in the wild stallions. When he was thrown from his horse and broke his shoulder, the villagers remarked, “What terrible luck.” Once again, the farmer said, “Good Luck, bad luck, who can tell.” A week later the government declared war, calling into service all able-bodied men from the village. All went to war with the exception of the farmer’s son, who was still healing from his injury. When all the young soldiers from the village were caught in an ambush and killed, the villagers again remarked to the farmer, ”What good luck that your son broke his shoulder and was spared.” And on goes the story.
~An old Chinese story, Author unknown
May 2008 bring you and your families much joy, happiness, and good luck.
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Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA® 
