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Making Safer Investment Decisions in 2009
January 21, 2009
It’s hard to say what 2009 will look like. While there are still several concerns (the housing market, rising unemployment, etc.), there will also be considerable government intervention to help improve the economy this year, both in the U.S. and worldwide.
So what should you do in 2009 to make your portfolio and overall financial picture better? Here are some general ideas to employ as markets and economies hopefully stabilize in the New Year:
Start with a plan (or review an old one): If you’ve worked with a financial planner in the past, now is a good time to review your plan to make sure you are still on track to meet your goals. If you haven’t worked with a financial planner before, or if you haven’t prepared a financial plan before, it might be time to meet with a Certified Financial Planner™ to create a plan. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.
Should You Move to “Safer” Investments?
January 17, 2009
After watching their 401K balances shrink up to 40% in 2008, many people are wondering if they should change their allocation to include more “safe” investments, or if they should move completely to “safe” investments then move back into the market later.
Here’s what Walter Updegrave with Money Magazine has to say about this:
But as understandable as the urge may be to transfer all your money into the investments that seem safest – stable value funds, capital preservation funds, money market funds and the like – that would be a mistake.
1099-B Forms Delayed This Tax Season
January 14, 2009
The IRS has announced that brokers may furnish certain composite annual tax reporting statements by Feb. 17, 2009, without penalty.
The notice provides that the new February due date established under a recent law change to provide Form 1099-B information to customers also applies to other tax information customarily reported to customers with Form 1099-B statements, such as interest and dividends. This means that customers can expect to receive Forms 1099-INT and 1099-DIV late as well.
If you normally receive Forms 1099-INT, 1099-DIV and 1099-B for investment income and transactions, be aware that these forms will arrive later than usual this year. Some clients have reported that they have received letters from financial institutions saying not to expect these forms until the end of February (although the official due date is February 17).
As a tax preparer, I’m not particularly happy about this change, but on the bright side, I’m hoping the extended deadline will cut down on the number of corrected 1099s issued this tax season.
Social Security Benefits Increase 5.8% for 2009
January 12, 2009
Finally some good news for retirees… Social Security benefits are being increased 5.8% for 2009. This is the largest increase in more than 25 years!
This increase will boost the average monthly Social Security retirement check from $1,090 to $1,153.
Even more good news… for the first time since 2000, Medicare premiums will not go up in 2009. Currently the Medicare Part B premium is $96.40 per month.
This is good news for Seniors who have seen their portfolios plunge over the last 15 months. If possible, you should use this increase to reduce the amount you are withdrawing from your portfolio, to give it more time to recover recent losses.
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Seniors Get a Tax Break in 2009 – Congress Suspends RMD
December 12, 2008
I know many people were hoping this would pass for 2008 rather than 2009, but I guess late is better than not at all.
Congress approved legislation this week that will provide some relief to Americans over 70 1/2 who have suffered significant losses in their IRA accounts. The bill will temporarily suspend the excise tax that is levied when seniors fail to the the required minimum distribution (RMD) from their retirement accounts.
This penalty is waived for 2009, which means that seniors will not be required to take withdrawals from their tax deferred retirement accounts during 2009, which will hopefully give these accounts time to recover before the 2010 required distribution. Unfortunately, this law does not apply to 2008 when it would have made the most difference to investors who have lost significant amounts in their accounts.
Home Energy Credits Back For 2009 Only
December 2, 2008
A new tax law in 2006 allowed homeowners to claim credits for purchases that make their homes more efficient. This law was originally only for purchases or improvements made in 2006 and 2007, but has been extended by the Emergency Economic Stabilization Act of 2008 to include 2009 (not sure why but 2008 was skipped).
Here is a refresher on the original law (edited for 2009):
During 2009, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns. Manufacturers offering energy efficient items such as insulation or storm windows can assure their customers that their energy efficient items will qualify for the tax credit if certain energy efficiency requirements are met.
This tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.
The following items are eligible:
* Insulation systems that reduce heat loss/gain
* Exterior windows (including skylights)
* Exterior doors
* Metal roofs (meeting applicable Energy Star requirements).
Watch Out for Capital Gain Distributions in 2008
December 1, 2008
Despite widespread stock market losses in 2008, several mutual fund companies have announced that they will make capital gain distributions to shareholders in mid-December.
This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund. This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.
So why do mutual fund companies distribute capital gains to shareholders when the fund itself has incurred a loss for the year? There are three reasons that funds are making payouts, even though they’re up to their ears in losses:
First, emerging markets and energy funds had big gains when the year began and realized some gains along the way. Then they suffered redemptions, which means that those gains have to be spread among fewer shareholders (i.e., the shareholders who did not bail have to pay the price for those who are trying to time the market).
Donating Your RMD To Charity – Law Extended for 2008 & 2009
December 1, 2008
Update: The Tax Relief Act of 2010 extends the ability to donate your RMD to charity for both 2010 and 2011. For more information, please read “Yes You CAN Donate Your 2010 RMD to Charity”.
The Pension Protection Act of 2006 allows IRA owners age 70 1/2 or older to make direct transfers of up to $100,000 per year from their IRA to a charity. The provision became available for IRA distributions taken after Aug. 17, 2006 and originally only applied through the end of 2007. Note: the Emergency Economic Stabilization Act of 2008 extends this law to include 2008 and 2009.
Distributions can be made from taxable funds in an IRA or Roth IRA, but not from employer plans or SEP and SIMPLE IRAs. The distribution will not be taxable to you, but you don’t get to deduct the charitable contribution on your tax return. This is more advantageous to taxpayers because even though you get a charitable deduction if you take the IRA withdrawal and report that amount in income, many taxpayers do not itemize, and therefore they don’t always get to take advantage of the deduction.
The direct transfer from the IRA to the charity can also satisfy a person’s required minimum distribution for the year. If you are charitably inclined, it may be best to contribute from the IRA, at least up to the RMD amount thereby avoiding that amount being included in income. This will lower your adjusted gross income (AGI) and might avoid or lessen the amount of Social Security benefits that are taxed.
The reduction in AGI can also increase tax deductions, exemptions or credits that are pegged to AGI either in terms of specified amounts or as a percentage of AGI. The distributions are deemed to come from income first if the IRA has non-deductible contributions. This contrasts with the normal pro-rata rule that applies to other IRA distributions where there are after-tax funds in the IRA.
Say Goodbye to 2008 with Some Smart Tax Moves
December 1, 2008
December’s a busy month with holiday preparations, but it’s not too late to focus on last-minute tax savings. Consult with your tax professional to see if these might work for you:
Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.
Check investment gains and losses: After the market drops we’ve seen this year, it’s likely you have some capital losses in your taxable investment accounts. It might make sense to sell and offset them against any capital gains you’ve realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year. Note: According to Morningstar.com a lot of mutual funds are expected to distribute capital gains to shareholders, despite funds being down 30-40%. Check your mutual funds to see if you are expected to receive a capital gain distribution; if so, it might make sense to do some tax loss selling before the December distribution to avoid another taxable event.
Get Your Charitable Donations Lined Up Before The Holidays
December 1, 2008
There’s a special sinking feeling as you approach Dec. 31 and realize you’ve done no tax planning whatsoever. That includes big issues like end-of-the-year investment decisions, and the smaller ones – like that stuff you no longer use piling up in the basement.
Charitable giving is an important part of tax planning at year-end, so let’s look at the cash and noncash aspects of giving. It makes sense to contact a tax expert or financial planner to talk about what giving makes sense for you:
You have to itemize: Only individual taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ). However, there has been talk about allowing “above the line” charitable deductions, so I’m hopeful that this tax law will change soon.
Get out the checkbook: Uncle Sam likes a record. To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution – and it definitely helps to have both. Bank records mean canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. If you remember the IRS being satisfied with personal bank registers or scribbled notes to document the donation, they’re not anymore.