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Sep 22, 2010
via Reuters Investigates

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Sep 7, 2010
via Reuters Money

Why you could end up in a tax bracket intended for the rich

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Werner Renberg is a writer and author based in Chappaqua, N.Y. He is the author of four books, including All About Bond Funds: A Complete Guide for Today’s Investors. The opinions expressed are his own.

If you and your spouse are middle-income retirees making less than $250,000 a year from regular sources of income – such as Social Security, interest, dividends, pensions, IRAs and 401(k) distributions – you could soon wind up in an income tax bracket intended for the rich.

Sep 3, 2010
via Reuters Money

Back-to-school investing

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Millions of children are getting ready to head back to school. Their parents have a long to-do list before them as well. My wife and I have had to purchase school supplies and new clothes, schedule haircuts, and make sure the kids have finished off their summer reading lists. Unfortunately, this flurry of activities causes many parents to lose sight of another critical component of any back-to-school checklist: financial planning for our children’s future. College is one of the best ways to increase a child’s chances for success. But it’s getting more expensive every year. In 2009, private school tuition rose 4.4 percent, to an average of $26,273, according to the College Board. While public school is less expensive, its cost is rising even faster — last year, the average tuition at a public, in-state university rose 6.5 percent, to $7,020. Planning ahead for this expense will ensure that it doesn’t sneak up on you. Whether you live in Seattle or San Antonio – and whether you expect your child to go to a big state school or a tiny liberal arts college – such planning begins with an assessment of your present situation. The first questions are easy: How old is your child? And have you started to save? In the blink of an eye, this year’s fifth graders will be headed off to college. So the sooner you begin saving, the better.  I speak from experience.  My son is 11 and my daughter is 9. College and the costs – times two – that come with it are just around the corner. While many people focus on 529 plans, other straightforward savings vehicles shouldn’t be overlooked. Both Education Savings Accounts (ESAs) and custodial accounts can be opened with most brokerages using the child’s Social Security number. Yet, each account offers different advantages. Let’s start with ESAs. You can contribute up to $2,000 per beneficiary in these generally no-fee accounts each year until your child turns 18 years old. ESAs are like individual retirement accounts for educational expenses. They give the account holder choices about how the funds within them are invested – perhaps in stocks, bonds, ETFs or mutual funds, for instance – and how those funds are eventually disbursed. ESAs offer several advantages. Although contributions aren’t tax-deductible, funds in the account grow tax free until distribution. Education expenses are broadly defined.  Parents can make tax-free withdrawals to pay for qualified expenses – like books, computers, and other school supplies. Higher-income earners — singles whose modified adjusted gross income is over $110,000 and couples whose modified adjusted gross income is more than $220,000 — aren’t eligible. But everyone else can easily open an ESA at almost any financial institution that handles investment accounts. Custodial accounts are another option – especially for parents who don’t qualify for an ESA. You can open one on behalf of your child regardless of how much money you make or how much you plan to put in each year. There are no contribution limits and money can be withdrawn at anytime and for any purpose as long as the child on the account benefits. These accounts also qualify for the annual $13,000 federal gift tax exclusion, which can help reduce your estate tax burden while keeping assets within your family. Custodial accounts are designed to give children a financial head start – by law, they can only be used to benefit the child whose name is on the account. If you start early enough, those benefits can be significant. If you put $200 a month into an account that earns 8 percent annually, you’ll have an account worth $36,000 after a decade. Over twenty years that account could grow to over $116,000. Of course, early planning is key. And the benefits of savings aren’t just monetary. Talking with your child about his or her ESA or Custodial account will help instill good financial values — no small thing in a country where high school seniors two years ago answered fewer than half of the questions on the Jump$tart Coalition for Personal Financial Literacy’s test of basic financial knowledge correctly. There’s no better way to put your child on the road to financial literacy than by introducing him to the power of compound interest firsthand. With college costs rising at eye-popping rates, it’s more important than ever to start saving for big educational expenses as soon as possible — even if your children are just starting preschool. No parent – myself included – wants their child to start the school year unprepared. But your child’s back-to-school prep will not be complete without thoughtful consideration of how you can invest in his or her educational future.

Dan Greenshields is president of ShareBuilder. The opinions expressed here are his own.

Millions of children are getting ready to head back to school. Their parents have a long to-do list before them as well. My wife and I have had to purchase school supplies and new clothes, schedule haircuts, and make sure the kids have finished off their summer reading lists.

Aug 18, 2010
via Reuters Money

The political and pragmatic promise of municipal bonds

Embracing a Pragmatic Approach to Municipal Bonds By Rick Ashburn For many state and local governments, the new fiscal year has already begun. Yet they are operating without an adopted budget. The news will likely get worse before it gets better. After several decades of endless revenue increases, the governmental sector is at long last faced with a titanic clash of demands on its traditional largesse. Voters want schools and nice roads and parks and such, along with low taxes. And they vote. Employee unions want pay and pensions and health benefits. And they vote – in a large block. We do not know which group will get what they want. But our job is to manage investments for our clients. Our clients own a lot of municipal bonds, so we turn our attention from the political to the pragmatic. Muni bonds represent promises. As we know, our various state and local governments have made a lot of promises and some of those promises are going to get broken. Our task is to ensure that we don’t own any broken promises. I have worked in the muni bond world for 25 years, as a consultant, investment banker and financial advisor. I’ve been on both the “sell side” and the “buy side.” I learned a few key lessons early on. Most importantly, I learned that there exists an astonishing variety of bonds called “municipal.” A vast quantity of them has almost nothing to do with what we generally consider municipal functions and services. The bond might be issued by a municipal entity and carry its name in the title, but the revenue stream might be derived from a private business enterprise. An example is a bond issued at the height of the housing bubble in 2006 by something called the Independent Cities Lease Finance Authority. This entity is a California joint powers authority whose nominal members include 9 cities in south Los Angeles County, but which doesn’t actually have any staff and does not conduct regular public meetings. Its address is a post office box in Palmdale, California in north Los Angeles County – nowhere near either the project or the member cities. The $39.9 million in bonds were used to acquire a 312-unit mobile home park in San Juan Capistrano, the town in Orange County to which the swallows return each spring. The park was appraised for $38 million, for a 105% loan-to-value ratio. And you thought sub-prime lenders were naïve! The bonds will be repaid not by any municipal entity or revenue source, but entirely and solely from rental income in the mobile home park. While this bond might be issued by a governmental entity and its interest payments might be tax-free, this is most certainly not a municipal bond under the usual understanding. This is a loan to a private entity that operates mobile home parks. Somehow, Standard & Poor’s saw fit to assign a BBB- rating to a $29 million slice of this bond – an investment-grade rating usually reserved for actual municipal entities that receive actual tax or utility revenues. The annual payment on the $39.9 million loan is over $2.5 million per year. The park has been generating net revenues of around $1.8 million in recent years, before it had loan payments to make. Can you do the math with me here? If you or I went to S&P and asked it to rate a conventional loan like this to a 312-unit mobile home park, they would laugh us out of the building. But, slap “municipal” on the title of the loan and they suddenly think it’s a suitable investment for widows and orphans. And therein lies the second key lesson I learned early on: For the most part, the big bond rating agencies really don’t know what they’re doing. I have never relied on their ratings when analyzing a bond. There are a host of “high yield” muni bond mutual funds out there offering tempting high yields. But beware: those funds are loaded with bonds like this mobile home loan. Bonds for hospitals, low-income housing, port facilities, pollution control add-ons to oil refineries and all sorts of bonds that are really loans to operating companies (non-profit and for-profit). At the other end of the muni bond credit spectrum are bonds of the genuine public purpose type. Bonds that funded school buildings, water systems and roads that are operated by genuine municipal governments with actual physical addresses and elected bodies that meet regularly. Without conducting a graduate class in muni bond credit analysis, I can give you a few simple pointers that might save you some grief. First, look for bonds whose proceeds paid for some type of project that you agree is of the classic public-purpose type. Again – schools, highways, water systems, etc. Second, look for bonds that have been approved by voters, or that are secured by revenues from an essential service. Some bond revenue sources are subject to an annual appropriation process, meaning that the elected officials decide each year whether or not they want to make the payments. Instead, voter-approved tax bonds – known as general obligation bonds in most states – will provide you with payment whether the politicians like it or not. An example of this type of bond is one issued by the school district in Irvine, California. This $96 million bond issue is secured by special taxes authorized by qualified voters in 1985. The taxes are paid by over 10,000 separate taxpayers and the land securing these taxes is valued on the county assessment rolls at more than $10 billion. S&P rated this bond issue single-A, only a few gradations higher than the mobile-home park bond described above. Under my own credit rating criteria, I place a higher probability on Vladimir Putin living in the White House than this Irvine school district bond defaulting. You will continue to read about the extreme financial stress that our state and local governments are experiencing. Those stresses are not unlike what the private sector is experiencing, and will lead some government entities somewhere to default on debt. When the ensuing panic drives down muni bond prices, you will be able to find gold among the rocks by buying genuine voter-authorized tax-supported bonds whose risk of default is very nearly zero. Rick Ashburn is the managing partner of Creekside Partners, based in Lafayette, California. He is a certified financial planner. He can be reached at: rick@creeksidepartners.com

Rick Ashburn (pictured below) is a certified financial planner and managing partner of Creekside Partners, based in Lafayette, Calif. The opinions expressed are his own.

For many state and local governments, the new fiscal year has already begun. Yet they are operating without an adopted budget. The news will likely get worse before it gets better.

Jul 29, 2010
via Reuters Money

What to expect if Bush tax cuts expire

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What Will Happen If the Bush Tax Cuts Are Allowed to Expire? Date: July 27, 2010 Type of Clients: Individuals and businesses that are not run as C corporations. Situation: Clients may not understand what’s in store if the Bush tax cuts are allowed to expire as scheduled. Deadline: Expiration will occur at the end of this year, unless something changes. Tax Action Required: Read this release, and keep your stomach medications nearby. Background As you know, the so-called Bush tax cuts (from legislation enacted in 2001 and 2003) are scheduled to expire at the end of this year. But, your clients may not understand the full extent of what is in store for them if Congress simply sits back and allows the expirations to occur without making any changes. Here’s the little-known truth. Appendix 1contains a summary of 2010 versus 2011 rates and amounts if the Bush cuts expire as scheduled. Higher Income Tax Rates for All Some clients may believe that only individuals in the top two federal income tax brackets will face higher rates when the Bush cuts go bye-bye. Not true! Unless Congress takes action and President Obama goes along, rates will automatically go up for everyone who pays taxes—not just “the rich.” Specifically, the existing 10% bracket will go away, and the lowest “new” bracket will be 15%. The existing 25% bracket will be replaced by the “new” 28% bracket; the existing 28% bracket will be replaced by the “new” 31% bracket; the existing 33% bracket will be replaced by the “new” 36% bracket; and the existing 35% bracket will be replaced by the “new” 39.6% bracket. [See IRC Sec. 1(i) .] Appendix 1 shows income levels in each of these brackets for 2010 and 2011 assuming that there are no inflation adjustments between 2010 and 2011. Outlook: The Administration has pledged to keep the three lowest brackets (the 10%, 15%, and 25% brackets) in place. The 28% bracket would be expanded to accommodate unmarried taxpayers with income (whatever that is determined to mean) below $200,000 and joint filers with income below $250,000. Only taxpayers with income above those levels would be affected by the new 36% and 39.6% rates. As we said, however, Congress must make changes, and the president must go along for these things to happen. Right now, that’s looking more problematic than a few months ago, and it now appears that Congress won’t even bring up the subject until sometime after returning from its summer recess in August. To sum up, the only thing we know for sure is that tax rates will go up for everyone if Congress sits on its hands. Marriage Penalty Will Get Worse Right now, the 10% and 15% rate brackets for married joint-filing couples are 200% as wide as the 10% and 15% brackets for singles. Similarly, the standard deduction for joint-filing couples is 200% of the amount for singles. Right now, the 10% and 15% rate brackets for those who use married filing separate status are the same as the 10% and 15% brackets for singles. Similarly, the standard deduction for those who use married filing separate status is the same as the standard deduction for singles. The Bush tax cuts put this relatively favorable framework for married individuals in place to reduce the so-called marriage penalty, which can cause a married couple to pay more federal income tax than if they were single. Note that the marriage penalty still exists for many married couples, but it’s not as harsh as before the Bush tax cuts. [See IRC Secs. 1(f) and 63(c) .] However, unless Congress makes changes and the president goes along, the marriage penalty will automatically get worse when the Bush tax cuts expire. Starting next year, the new lowest bracket of 15% for Married Filing Joint (MFJ) couples will be only 167% as wide as the 15% bracket for singles—for Married Filing Separate (MFS) couples, it’ll be 83.5% as wide as the 15% bracket for singles. Similarly, the new standard deduction for joint-filers will be only 167% of the standard deduction for singles. For MFS status, it’ll be only 83.5% of the amount for singles. See Appendix 1 for 2010 versus 2011 amounts assuming no inflation adjustments for 2011. Outlook: Presumably, the Administration’s pledge to keep things the same for lower and middle-income taxpayers includes extending the Bush tax cut elements that reduce the impact of the marriage penalty. However, extending those elements would require Congress to make changes and the president to go along. Will it happen? We don’t know, and neither does anyone else. Itemized Deduction Phase-out Rule Will Return with a Vengeance Before the Bush tax cuts, a nasty phase-out rule could eliminate up to 80% of affected itemized deductions for higher-income individuals. The phase-out rule covered the big-ticket deductions for mortgage interest, state and local taxes, and charitable donations. Deductions for medical expenses, investment interest expense, casualty and theft losses, and gambling losses were not affected. Thanks to the Bush tax cuts, the phase-out rule was gradually eased and finally eliminated this year. Next year, however, it will automatically return with a vengeance, unless Congress takes action and the president goes along. If nothing changes, clients will lose $1 of affected deductions for every $3 of AGI in excess of the applicable AGI threshold (subject to the 80% disallowance limitation), starting next year. As shown in Appendix 1, the threshold for 2011 is estimated to be $171,100 (or $85,550 for those who use MFS status). (See IRC Sec. 68 .) Outlook: The Administration has said it wants the phase-out rule back, but at higher AGI thresholds of $250,000 for married joint-filing couples and $200,000 for other taxpayers. However, raising the AGI thresholds would require Congress to take action and the president to go along. Don’t bet the house on it. Personal Exemption Phase-out Rule Will Return with a Vengeance Before the Bush tax cuts, another nasty phase-out rule could eliminate some or all of a higher-income individual’s personal exemption deductions. Thanks to the Bush tax cuts, this phase-out rule was gradually eased and finally eliminated this year. Starting next year, it will automatically return with a vengeance, unless Congress takes action and the president goes along. [See IRC Sec. 151(d)(3) .] If nothing changes, clients need to be ready for yet another bite out of their wallets if their 2011 AGI exceeds the applicable threshold. As shown in Appendix 1, the phase-out thresholds for 2011 are estimated to be $256,700 for MFJ; $171,100 for singles; $213,900 for heads of households; and $128,350 for MFS. Outlook: The Administration has said it wants the phase-out rule back, but at different AGI thresholds: $250,000 for married joint-filing couples, $200,000 for unmarried individuals, and $125,000 for those who use married filing separate status. Since this is pretty close to what will happen without any making changes, it would not be surprising if Congress chooses to do nothing. Higher Capital Gains and Dividends Taxes for All Right now, the maximum federal rate on garden-variety long-term capital gains and qualified dividends is 15%. (As you know, a 25% maximum rate applies to unrecaptured Section 1250 gains, and a 28% maximum rate applies to long-term gains from collectibles.) Starting next year, the maximum rate on garden-variety long-term capital gains will increase to 20% (or 18% on gains from assets held for over five years). Starting next year, dividends will once again be taxed at ordinary income rates. So, the maximum rate on dividends will balloon to a whopping 39.6%. Right now, a 0% federal rate applies to garden-variety long-term capital gains and qualified dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, folks in the “new” lowest bracket of 15% will have to pay 10% on long-term gains (or 8% on gains from assets held for over five years) and 15% on dividends (since dividends will be taxed at ordinary income rates). Again—these things will happen automatically, unless Congress takes action and the president goes along. [See IRC Sec. 1(h) .] Outlook: The Administration has repeatedly said the current 0% and 15% rates on long-term capital gains and qualified dividends will be left in place except for married couples with income above $250,000 and unmarried individuals with income above $200,000. For this to happen, however, Congress must take action and the president must go along. A few months ago that looked likely, but now it looks more problematic. In particular, we think the odds are rising that dividends will once again be taxed at ordinary rates (of up to 39.6%), starting next year. We hope we are wrong. Some Bush Tax Cuts Are Likely to Be Continued Some elements of the Bush tax cuts have gained bipartisan support and become “extenders.” They will probably be continued, despite the scheduled demise of the Bush tax cuts. Examples include inflation-indexed AMT exemption amounts, the ability to use nonrefundable personal tax credits to offset individual AMT liabilities, the above-the-line deduction for qualified higher education tuition and fees, and the increased Section 179 deduction. We also think the current versions of the child tax credit, earned income credit, dependent care credit, and adoption credit are also likely to be continued, despite the scheduled demise of other elements of the Bush tax cuts. (The Bush tax cut legislation liberalized these credits, and later legislation liberalized them even more). Conclusions Despite what some people think, the Bush tax cuts don’t just help “the rich.” They help just about anyone who pays federal income taxes, including folks who only file returns to collect free money from the government thanks to refundable tax credits. The scheduled demise of the Bush tax cuts next year will hurt lots of people, unless Congress makes changes and the president jumps on board. We did not even get to the fate of the Bush estate tax cuts. That’s a whole separate story, and it’s even more up in the air than the fate of the Bush income tax cuts.

This column was written by William R. Bischoff, a certified public accountant in Colorado Springs, Colorado for PPC, which is part of the tax and accounting business at Thomson Reuters. The opinions expressed here are his own.

The so-called Bush tax cuts (from legislation enacted in 2001 and 2003) are scheduled to expire at the end of this year. But you may not understand the full extent of what is in store if Congress simply sits back and allows the expirations to occur without making any changes.

Jul 9, 2010
via Reuters Money

No fiduciary for all

The following is a guest post by Tim Kochis, the chairman and former CEO of Aspiriant. Barron’s ranked him fifth in its inaugural listing of the “Top 100 Independent Advisors” in the U.S. in 2007.

As the SEC prepares to begin its six month evaluation of the current rules governing registered investment advisors and brokerage firms, I hope that it takes a nuanced view of reality. Given the array of services, business models and client relationships that need to exist, I strongly believe that imposing a strict fiduciary standard on every firm and individual, in all circumstances, would be a big mistake.

Jun 3, 2010
via Reuters Money

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This is an example of a WordPress page, you could edit this to put information about yourself or your site so readers know where you are coming from. You can create as many pages like this one or sub-pages as you like and manage all of your content inside of WordPress.