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1
Nov

Now is the time to make 2014 charitable gifts of appreciarted assets.

Using appreciated assets for charitable gifts can be very beneficial.  The ta x deduction, if applicable,  is based on the fair market value on the date of the contribution.  The appreciation is not subject to income tax.  There are exceptions and special rules that may reduce or eliminate the benefit of the tax deduction.

The deduction limitations depend on the type of property given and the type of organization receiving the property.

Avoid using property that has depreciated in value.  The loss on such property cannot be deducted if the property if donated.  Sell the asset if you want to use it to fund a charitable contribution.  You can deduct the loss, subject to limitations and restrictions, if you sell the property and donate the proceeds.

Capital tax rates are determined by the type of asset and the holding period.  The appreciation will be taxed if the gain is does not qualify for capital gains (ordinary gain).    Make sure you have held the property long enough for capital gain treatments.

Do not assume the information is the same as the last time you used appreciated assets to make a charitable contribution.

Contact the charitable organization before making the contribution.  Verify that the organization is still a “qualified organization”.  Determine what their current procedures are before you make the contributions.  Make sure they will accept the property you want to donate.  Some organizations will not accept property other than cash, checks, credit card, etc.  Those that accept other forms of payment may only accept marketable securities.

Next check with your custodian to find out what their current procedures are. The forms required and the time to process the transaction may have changed.  All custodians (for corporations, brokerage, mutual funds, etc.) procedures are not the same.

Obtain a “qualified appraisal” if the property is not a marketable security.  The procedures are different depending on the type of property and the value of the contribution.

The above is not intended to be a complete discussion of this topic.  Be sure to consult with you tax advisor to determine how the transaction applies to you.

You may not be able to complete the gift before year-end if you wait too long.  Be sure to give your tax advisor adequate time to evaluate the planned transaction and see if the benefits are what you intend.

 

20
Oct

Market movements are often not based on fact.

Robert J. Shiller’s October 18th New York Times article, “When a Stock Market Theory Is Contagious” discusses the recent stock market fluctuation.  In addition to being a professor of economics at Yale University, he has authored many books, writes columns, co-created the “S&P/Case-Shiller Home Price Indices” and was 1 of 3 recipients of the 2013 Nobel Prize in Economic Sciences.

The topic of the  article ties into my comments about risk and volatility in my October newsletter.

“The problem is that short-term market movements are extremely hard to forecast.  But we live in the present and must try to understand what’s driving the market now, even if it’s much easier to predict their behavior in the long run.”  That is to say we do not know the future, but we can explain what happened in the past.

“…stock markets are driven by popular narratives, which don’t need basis in solid fact.”  The article compares the narratives with the “Ebola virus: they spread by contagion.”  The narratives causes investors “…to take action that propels prices…in the same direction.”  That is, we do not know why the market fell but people and companies may respond by cutting spending resulting in the market falling further.

Recent stories attribute the current drop in the stock market to a “global slowdown”.  The narrative can cause people and companies to spend less continuing the fall in the stock market.   He concludes with the following. “The question may be whether the virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market.”

 

 

 

5
Sep

Financial markets fluctuate

Discussions in articles, books, studies and commentaries from different sources have some common elements about investing.  Investing is discussed in different contexts.  Examples of the different discussions include: performance, risk, retirement, budgeting, goals and government policies.

An example is an August 15th New York Times article:”Fears of Renewed Instability as Fed Ends Stimulus”.  The article reflects a conversation with Jeremy Stein, who left the Fed’s Board of Governors at the end of May to return to Harvard’s economics department.

Many investors are getting nervous because of the length of good stock and bond performance.  Recent fluctuations are a reminder that markets go down as well as up.  Maybe the recent gyrations are signs of impending instability.

Referring to the Federal Reserve (Fed) actions the article discusses the possible unintended consequences of the Fed policies that have guided us through the recent financial crisis.  The low rates have resulted in investors reaching for yield.  The consequence of reaching for higher yield is increased risk.  Some investors may not realize the increased chance of losses.  The result could be further strain on our economy.

The author of the article, James B. Stewart, included the following:

The Princeton economist Markus K. Brunnermeier, an expert on asset bubbles and crashes, has identified what he calls “synchronization risk,” a phenomenon in which investors ride a wave of price increases even if they realize the assets are overpriced.  “It’s what economists call a lack of common knowledge,” he said.  “We may all know an asset price is too high, but we don’t know the others know it, too.  Timing is everything.  The danger is if you move too early and the market doesn’t follow up.  So everyone waits on the sidelines watching and listening,”  as long as asset prices keep rising.  The danger comes when they all try to get out at the same time.”

“No one wants another crash, but a garden-variety correction may be just what’s needed to avoid one in the future.”

The discussion recognizes that the market fluctuates.  Frequent and/or large fluctuations indicate concern about the future direction of the markets.  No one thinks they know what direction the market will go when it fluctuates.  Investors are cautious when the market gyrate.  They become optimistic when the market continues to rally.  This is when investors become confident and make mistakes.

Economists, journalists, regulators and politicians are all poor forecasters of the future movement of the markets.

 

3
Aug

Do you know if you will owe tax as a shareholder of a company that completes an inversion?

“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.

An “inversion” is when a U.S. company merges into a foreign company.  Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.

It is expected that the “inversion” will be taxable to U.S. shareholders.  Technically the U.S. company is being acquired in a taxable transaction.  It is unlikely that the shareholders will receive any cash.

The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.

The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.

The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.

Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.

Taxes are only on factor to consider, not the controlling factor, in deciding  if the stock of a company considering an “inversion” should be bought, sold or held.

“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes.  At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”

The tax could be reduced if you have any unused losses from prior years.

Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.

Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent)  is another stragey to reduce the tax.  The timing of the gift is important.

Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain.  The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations.  Be sure to get a timely qualified acknowledgment.  Allow enough time to complete the transaction  before the “inversion”.

Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.

This is not intended as a complete discussion of all the factors and consequences to consider.  You should consult with your personal advisers to determine what if any action is appropriate for you.

 

 

 

 

 

23
Jul

Is your portfo as divesified as you think it is?

The following is taken fron an article in the July 2014 issue of Morningstar ETFInvestor.  Samuel Lee was the author of the article.

“Most investors understand that they should diversify a lot.  However, some hurt themselves by behaving inconsistently.  They diversify a lot while implicitly behaving as if they know a lot.  A big subset of this group is investors who own lots of different expensive funds.  Owning one expensive fund is a high-confidence bet on the manager.  Well-done studies estimate that the percentage of truly skilled mutual fund managers is in the low single digits.

It would be strange if your process for assessing mangers turns up lots and lots of skilled ones, because there aren’t many in the first place.  (If you see skilled mangers everywhere, chances are your process is broken or not discriminating enough.)  It  would be even stranger if you bet on many of them.  Doing so dooms you to getting index-like results while paying hefty fees.  It makes little sense to pay 1% or more of assets on an aggregate portfolio with hundreds of positions and marketlike behavior.

An exception is if you assemble a portfolio of extremely concentrated fund mangers.  Owning 10 funds with 10 stocks each put together will look like a moderately concentrated fund manager.  This is a model some successful endowments, hedge funds, and mutual funds use.

Most investors should own diversified, low-cost funds.  Those who believe they know something should concentrate to the extent that they’re confident in their own abilities.  A big dang is that humans are overconfident; many will concentrate when they should be diversified.”

Pay special attention to the above if you think it does not apply to you!

17
Jul

Recent tax rules permit longevity annuities (LAs) to be held in 401(k), IRA, 403(b) and other employer-sponsored individual account plans

A recent press release announcing the final rules explains that, “as boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
In general, the final rules:
• Amend the required minimum distribution (RMD) rules so payments don’t have to be taken from LAs to satisfy Required Minimum Distribution (RMD) requirements
• Set a maximum investment in an LA to the lesser of 25% of the plan account balance or $125,000 (adjusted for cost-of-living increases)
• Provide individuals with the opportunity to correct inadvertent LA premiums that exceed these limits
• State that the LA must provide that payments begin no later than the first day of the month next following the participant’s 85th birthday, although the maximum age may be adjusted later due to changes in mortality
• Allow for LAs to include “return of premium” death benefit provisions
• Expand the manner in which a contract can be identified as an LA
• Provide that LAs in qualified plans may not include “cash out” provisions, and no withdrawals are permitted in the deferral period, and, unless the optional death benefit or return of premium options are available, no payments will be made if the annuitant dies before the payment start date, although each of these restrictions may be found in LIAs that are not purchased within tax-qualified accounts
• For more information, the final rules can be read here.

Caution: This ruling will most likely have limited applicability. Taxes should not be the primary reason for financial decisions. It is a factor that should be considered after seeing how it impacts your financial plan.

What is a longevity income annuity?

A longevity annuity (LA), also referred to as a deferred income annuity or longevity insurance, is a contract between you and an insurance company. As the insured, you deposit a sum of money (premium) with the company in exchange for a stream of payments to begin at a designated future date (typically at an advanced age, such as age 80) that will last for the rest of your life. The amount of the future payments will depend on a number of factors, including the amount of your premium, your age, your life expectancy, and the time when payments are set to begin.

Caution: Guarantees are subject to the claims-paying ability and financial strength of the annuity issuer.

16
Jul

Reaching Your Goals

Gregory Karp, in his “Spending Smart” column “Money maxims: What dads can tell grads”, June 1, 2014 Chicago Tribune is the incentive for this blog.
Money can be saved or spent. How you handle money will have a significant impact on happiness and future financial well being. Studies relating to finances have increased in the last 15 years. Each year there seem to be more studies. Studies on happiness conclude that people are happier when they spend money on experiences rather than things. Other studies find that most people’s happiness increase as their income increases, up to about $70,000. Studies about retirement have found that the most important thing that anyone can do to reach their retirement living expenses is to save.
Saving is hard to do. Spending must be limited to available income. For most people, living within their income does not mean complete denial. It does require selectivity in the timing and amount of splurges.

Good daily spending habits are important. We have more control over daily spending habits than large items. Minimizing unnecessary and/or unwise expenditures will reduce many items that reduce the amount that can be saved on a regular basis. Most people give larger expenditures, such as homes and cars, significant thought and deliberation. They should also do the same for daily expenditures.

There are also studies that show that we should imagine ourselves in retirement. Aging Booth is an app that will show what you might look like when you age. You may have more incentive to save for that person. Contributing to a 401(k) plans and capturing any employer match may seem more important. Having part of your pay direct deposited to an investment account may also seem like a good way to be kind to the older you.
Necessities and a reserve fund come first. The reserve fund provides a cushion for the frequent unexpected expenditures. Preretirement six months of living expenses is generally recommended. After retirement, a minimum of living expenses after reoccurring income (like social security) for a year is recommended.

The sooner a saving program is started the less required on a periodic basis. To determine how much to save, you need to set financial goals. Your progress should be monitored, at least monthly; more frequently is better. Without knowing the future, your circumstance will change from what you originally projected.

27
May

Pipe Dreams

Samuel Lee is an ETF strategist and editor of "Morningstar ETF Investor". His message is very similar to beliefs of many well known and respected individuals such as Jack Bogle, Warren E. Buffett, Larry E. Swedroe and Carl Richards. Researches by firms such as Morningstar, Vanguard and Dalbar have come to the same conclusions.

Investing is a zero-sum activity. If the seller is wrong the buyer is right. If you prefer, if the buyer is wrong, the seller is right. Each believes their decision to buy or sell is correct. Mr. Lee believes that close to 99% who try to beat the market will fail.

Costs are a significant factor in determining who will make money and who will lose money on any transaction. Trading increases cost and reduces the returns.

Mr. Buffett recently indicated his survivors should put their money in index funds and move on. His annual letter to Berkshire shareholders included the following: … "Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting friction costs can be huge and, for investors in aggregate, devoid of benefits. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."

Warren Buffet is the exception to the rule. He has exceptional skills and access to information and resources not available to most people. Most active mutual funds also do not outperform the market.

John Bogle compares investing to farming. Mr. Bogle compares investing to gardening in his book "Common Sense on Mutual funds. The book references "Chauncey Gardiner" (played by Peter Sellers in the movie) Jerzy Kosinki’s book "Being There". "The seasons of the garden find a parallel in the cycles of the economy and the financial markets, and we can emulate his faith that their patterns …will define their course in the future."

Investing should be based on a plan to achieve your financial goals. It is a long-term process that requires research and patience. Passive investing will improve the returns for most people. Almost everyone believes they are better than most people. The Dalbar studies for the past 25 years are based on real investor returns. Most people think they did better than their actual results.

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4
Apr

New Law Offers Special Tax Option for Philippines Relief Donations

Under special legislation enacted last week, taxpayers can choose to treat cash contributions made on or after March 26, 2014, and before midnight on Monday, April 14, 2014, as if made on Dec. 31, 2013. This special provision only applies to charitable cash contributions for the relief of victims of Typhoon Haiyan.

Eligible contributions can be claimed on either a 2013 or 2014 return, but not both. Contributions made after April 14, 2014, but before the end of this year can only be claimed on a 2014 return.

Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before midnight on April 14, 2014, are eligible contributions even if the credit card bill isn’t paid until after that date.  Also, donations made by check are eligible if they are mailed by April 14.

The Philippines Charitable Giving Assistance Act, enacted March 25, 2014, does not apply to contributions of property. Gifts made directly to individual victims are not deductible.

This benefit is only available to an individual that itemize their deductions.  The deduction is not available to those that claim the standard deduction.

Contributions must go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Exempt Organizations Select Check. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

Contributions to foreign organizations generally are not deducted.  IRS  Publication 526, Charitable Contributions, provides information on making contributions to charities.

A record of the name of the charity, the date of the contribution and the amount of the contribution are required for any deductible contribution.  Donations by text message, a telephone bill will meet the record keeping requirement.  Donations of $250 or more, taxpayers must obtain a written acknowledgment by the charity.

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3
Apr

IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule

I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”.  I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations.  The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.

IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.

Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.

The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case.  The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. 

The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.

What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.

You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.

 *Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.

 

 

The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.

 

 

 

 

 

 

 
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