JoeTaxpayer

Or “your tax guy is not your planner*”. Last month, I posted on Year End Planning and offered a couple thoughts for issues that need to be addressed before 12/31. As I thought more on this topic, it occurred to me that many people use a paid tax preparer, and while I have no issue with this, keep in mind that unless you have a November visit with your tax guy or planner, you will find that most things you might have done to optimize your finances have passed the 12/31 deadline. I mentioned charitable donations, specifically, that 2007 is the last year you may opt to donate money directly from your IRA if you are over 70-1/2. I also discussed converting some of your IRA to a Roth.

This is also the time to make sure you’ve taken the RMDs (required minimum distributions) from your IRA if you are 70-1/2 this year.

Also to think about at year end, is to review your portfolio and determine whether any rebalancing would be appropriate. I am a believer in long term investing, but a regular look at your portfolio composition is important. For the working investor, you may choose to balance as you go, making new purchases to keep each asset class at its targeted level, or for the retiree, to take withdrawals from the class which has become overweighted.

Tallying up your gains and losses for year can also help. Say you have a short term gain of $5000, which would be taxed at your standard rate (the same tax bracket as ordinary income). You may find a stock you are holding onto at enough of a loss to offset that gain. If you still wish to own that loser, you can either double up, more than 30 days prior to the sale, or buy it back 30 days after the sale, to avoid wash sale rule disqualification.

Your employer is probably advising you that any changes to your Flexible spending account and Dependant care account are due shortly. If you participate, go do the math. If not, review the details of these two programs, as the savings can really add up.

This is a good time to evaluate your 401(k) and IRA savings level. I read that 20% of people with access to a 401(k) do not deposit enough to capture the matching funds. I view that as money down the drain.

(As always, I welcome all comments, and suggestions if I’ve missed any key points)
JOE

*well, he may be. My point is just that there are a number of decisions to make well before you bring your box of statements to the tax man.

written by JOE \\ tags: Finance, Retirement, roth ira, Social Security, Taxes

There are many financial issues that apply to a small group, relatively speaking, but for those for whom it applies, there’s some savings to be had by being aware. This is one such topic. Net Unrealized Appreciation (NUA) applies to company stock held in one’s qualified retirement account (such as 401(k)) and is the difference between the market value and the cost within the account. This often missed rule allows you to take the company stock out of your account and pay (regular) income tax on the original cost. The remaining difference is treated as a long term capital gain. This difference in tax rates can be huge for those who have loaded up on company stock in their retirement account especially if the shares have had a large run up in value. A bit of googling and I found a Company Stock Distribution Analysis Calculator which offers some further details and a nice calculator to see your potential savings.
JOE

written by JOE \\ tags: 401(k), Net Unrealized Appreciation, Retirement, Savings, tax, Taxes

Not to be confused with my recommended list, these are the books I’m lining up to read in the next few months (I’m a slow reader and busy with my day job);

The Age of Turbulence, by Alan Greenspan (In process, reading this now)
Way of the Turtle, by Curtis M. Faith (I’d seen the ads in Barron’s and this book caught my attention, even though I don’t consider myself a trader.)
Microtrends: the Small Forces Behind Tomorrow’s Big Changes, by Mark Penn
The World Is Flat: A Brief History of the Twenty-first Century, by Thomas L. Friedman
Wealth and Poverty, by George Gilder
Supercapitalism, by Robert B. Reich

JOE

written by JOE

As the end of the year draws near, I try to think of the Year End moves and financial planning that one may wish to consider. The consideration of a Roth and how it might benefit you continue to enter my thoughts.

If this year you fall into a lower tax bracket than usual, this may be a good time to convert some money from a regular IRA to a Roth, just enough to ‘top off’ the current bracket you are in.

If your income is too high to be allowed to save in a Roth IRA, you may consider saving in a non-deductible IRA as the law allowing conversion will change: from RothIRA.com “Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.” This offers a remarkable opportunity to save post tax (you will only owe tax on the growth from now until 2010*.) and enjoy tax free growth and withdrawals when you retire. If left as post-tax deposits in the IRA, it woul be subject to full, ordinary income rates at withdrawal.

*For any readers who have IRA deposits which are pretax, the conversion rules require you to prorate your entire IRA balance to calculate what is taxable at conversion. e.g. If you made $10K in pretax deposits, and $20 in non deductible deposits, and the account is now worth $50K, 80% of Roth conversion would be taxable (10/50 = 20% is not taxed). If your only pretax savings is in 401(k) accounts, this will not impact you. Always glad to read feedback on my postings, don’t be shy.

JOE

written by JOE \\ tags: Finance, Investing, Retirement, roth ira, saving

I am working on an upcoming article for my feature site JoeTaxpayer.com titled “Can you Save Too Much, Pre-Tax?” In a first for my blog (here) I thought I’d offer the blog readers a special sneak peak (thus, this post’s title) and ask for comments.

The point of the article is to illustrate that one would have to save a huge sum, especially as a percent of their income, to save their way into a higher bracket. I think the article makes the point pretty well, but just as I might ask a friend to proof read a feature story, I’ll ask you to take a look and tell me what you think. If the feedback is helpful, I may offer future ’sneak peaks’.
Thanks!
JOE

written by JOE

Well, not really. Just taking the day off, from my day job and my blog. Going to enjoy the quiet.

JOE

written by JOE

I wrote about the high Phantom Rates one may encounter due to the taxation on Social Security benefits, and I continue to receive positive feedback on that article.

I received two questions which I thought appropriate to address here.

Is there an age after which you can earn as much as you want and the phantom tax does not apply?

If you are under ‘full retirement age’ $1 in benefits are lost for each $2 you earn above $12,960. That’s quite a hit, and someone who is working should think about whether it makes sense to draw any benefits earlier than full retirement age. Note: full retirement age changes based on the year you were born. The Social Security web site has a link to see your retirement age.

Do you count passive income the same as earned income when doing these calculations?

For the phantom tax bubble I illustrated, I show either earned income or 401(k)/ IRA withdrawals which are taxed the same. Dividends or Capital Gains have their own curves which are unpleasant in their own right, the marginal rate appearing to be 32% on what should be 5% rate dividends. The best advice is to go to www.ssa.gov which is an easy site to navigate, and to buy a copy of TurboTax, and run your own scenarios. To produce those charts, I set a fixed SS payment, changed income by $1000 increments, and charted the numbers. I offered two examples, one from experience, the other at a reader’s request. The tax software will make your exact situation clear to you. JOE

written by JOE \\ tags: Retirement, Social Security, Taxes

A few Weeks back I wrote “You are Rich!” because according to the data presented at Global Rich List, you are likely in the top 99% of the world’s annual income. Now comes the question, why do we feel so poor? One of the anecdotes in Nassim Nicholas Taleb’s book “The Black Swan“, offers the story of a man making a good living, $250K+, who buys a house in a nice neighborhood, as large a house as he can afford on this income. Much to his chagrin, he quickly realizes that his neighbors, who have lived there a while, make more money than he does, and have a lesser mortgage. They own boats he cannot afford and keep their wives in clothes and jewelry he cannot afford. In the US, his income puts him in the top 1.5% of wage earners, but he has managed to find himself in such a surrounding that his wife is embarrassed that he is a failure.
For others, the Joneses next door are not richer, but are living off credit, and are as they say ranchers who are “all hat and no cattle.” I won’t presume to offer any moral to this observation, but to leave it as one of my random thoughts. Enjoy the weekend.
JOE

written by JOE

Yesterday, I talked about the Savings and Loan Crisis of the early 80’s and observed that we are now in the midst of another crisis, having learned little in the 25+ years passed. Another “what have we (not) learned” thought:
In the early 80’s we had the first video recorders, it’s really amazing to think how recent their introduction was. I bought my first machine for $600 which with inflation, is equal to $1415 today. But with Moore’s Law, one can buy a combination DVD/VHS player for around $100 today, remarkable. But back then, VHS wasn’t the only format, Beta was a competing format, one that many people felt was actually superior in quality. So we had the Beta/VHS War and in the end, who lost? Indeed, the consumer. VHS won, and any user of Beta found their selection of movies to rent dwindled to nothing over time. This took years to play out, of course, but today the result is obvious. Ask anyone under 30 if they remember Beta and see their response.
Now, in line with my title, we have a repeat of history, the current HD-DVD vs Blu-Ray. I am not in a position to debate the relative merits of either. I just can’t help my ask myself and you, my reader (how did you find this blog, anyway?) have we not learned anything? I like technology, but I’m not an early adopter, I will likely wait to buy a High Definition player until after I know which format has won, because I don’t believe that two formats will both survive. If I’ve missed something, if there’s some stupid thing we did back in the 80’s that you see happening now, I’m happy to add a third ‘History’ article, but until then.
JOE

written by JOE

This is from the “random thoughts before I fall asleep department.”
As a society, will we ever learn? Two unrelated issues, similar timeframes. First, in the early 80’s we enjoyed the Savings and Loan Crisis. The origins and result of that crisis are beyond my ability to analyze on my blog, it’s easy enough to Google to read up on the history, but it’s safe to say that it wasn’t so long ago that we don’t remember that there were some painful times back then. It’s safe to say that one component of that crisis was rising interest rates, and the fact that banks were paying more on CDs than on the interest on their outstanding loans.
Today, we have the flip side of this. Rates dropping so low that the teaser rate on an ARM was 1-2% and had nowhere to go but up. And that ‘up’ somehow caught everyone by surprise. There’s enough blame to go around, aggressive mortgage salesfolk, an industry that wasn’t abiding by the rules all the time, ratings companies that misrated the resulting mortgage packages, and consumers who were, well, let’s just say they didn’t quite understand what they were buying. That’s enough for one day’s (or night in my case) thought. Tomorrow, history repeats, again. Groundhog Day, or 50 First Dates, depending on your age.
JOE

written by JOE \\ tags: ARM, Finance, money, Mortgage, savings and loan crisis, subprime meltdown