Upcoming Tax Increases To Keep In Mind

Regardless of how the elections turn out tonight, and barring any legislation before the end of the year, changes to our personal income taxes will automatically occur.  I’m sure everyone is aware of the increasing marginal tax rates, as well as the increased capital gains tax rates.  

I thought I would summarize some of the key changes that will automatically occur come January 1^st:

• Personal income tax rates will rise.  The top income tax rate will rise from 35% to 39.6%.  The lowest rate will rise from 10% to 15%.  The full list of marginal tax rate hikes is:

o   10% bracket rises to an expanded 15% bracket

o   25% bracket rises to 28%

o   28% bracket rises to 31%

o   33% bracket rises to 36%

o   35% bracket rises to 39.6%

• The “marriage penalty” (reflected in standard deductions and tax brackets for married couples that are less than double the single amounts) will return.  This change will cause many two-earner couples to owe more tax and may discourage couples from marrying.

• The capital gains tax will rise from 15% (0% for taxpayers in the current 10% and 15% tax rate brackets) this year to 20% in 2011.  

• The dividends tax will rise from 15% this year to potentially 39.6% in 2011 – dividends will be taxed at ordinary income tax rates.

• Itemized deductions and personal exemptions will again be phased out (no phase out limits for 2010), which has the same mathematical effect as higher marginal tax rates.

• The child tax credit will be cut in half from $1,000 per child to $500 per child.

• The dependent care credit will be calculated on $2,400 of expenditures (rather than $3,000) for one dependent and $4,800 (rather than $6,000) for two or more eligible dependents.

• Stepped up basis on inherited property returns along with a $1MM personal exemption and a top estate tax rate of 55% for estates over the $1MM level.

• The increased alternative minimum tax (AMT) exemption will expire, causing millions more taxpayers to owe AMT.

• The $250,000 immediate expensing of business equipment provision will be reduced to $25,000, and 50% bonus depreciation will expire.

The best plan is a proactive plan, so if any of the changes listed above could adversely affect you it’s best to address the issues now rather than trying to be reactive come January 1.  Any questions at all, just send me a message!

They're Baaaack......

In response to the drastic stock market decline in 2008, Congress (as part of the Worker, Retiree, and Employer Recovery Act of 2008) suspended required minimum distributions (RMDs) from IRAs and defined contribution employer plans for the 2009 calendar year.  As a result, individuals could avoid having to deplete retirement assets while the value of those assets was suddenly depressed.  But RMDs are back as of January 1, 2010.  If you’re out of practice – or making a required distribution from your IRA for the first time – here’s what you need to know:

When Do RMDs Have To Be Taken?

According to IRS regulations, people aged 70 ½ and older must take their distributions by December 31 of each year, or when they separate from the employer sponsoring their retirement plan, whichever is later.  There is one exception – if you turned 70 ½ in 2010 (and you are retired) you can wait until April 1, 2011 to take your first RMD.  It is important to note, though, that the RMD taken is for the 2010 calendar year – you will still have to take the RMD for 2011 by December 31, 2011, thus creating two distributions for 2011.

How Much Do You Have To Take?

Distributions are calculated by IRS rules, so you have to adhere to a very specific formula.  Your 2010 distribution will be based on your retirement account’s value on December 31, 2009 and one of three IRS tables found in Appendix C of IRS Publication 590.  Essentially, you are dividing your IRA balance by what the IRS has determined your life expectancy to be, depending on which table you are using.    If an individual has several IRAs, they can generally add the balances together and take the required distribution from just one account.  This is not true for 401(k) and 403(b) plans.  If an individual has money in several plans from previous employers, distributions must be taken from each plan – a good reason to combine them into a single IRA.  If you are unsure which table applies to your situation please contact your tax professional or MTR Financial Services for guidance.  It is important to remember that these calculations only determine your required distribution – you can always take more than the required distribution if you wish.

Consider The Taxation of Distributions

The money taken from your retirement account is taxed as ordinary income in the year taken because you received a tax deduction when you contributed to it.  With income tax rates widely expected to increase in 2011, the timing and amount of distributions you take need to be closely monitored.  If you did turn 70 ½ in 2010, it may make sense to take your first RMD in 2010 rather than deferring it to April 1 of next year.

Who Else Is Required To Take Distributions?

If you inherit an IRA (either a traditional or Roth) or employer-plan account from someone other than your spouse, you must begin taking RMDs over your life expectancy, starting with the year following the year of the account owner’s death.  (Spousal beneficiaries can simply roll the inherited account into their own IRA, and will not be required to take distributions until age 70 ½.)  Therefore, if you inherit an IRA from a parent, for example, and you are only 50 years old, you will be required to take annual distributions from that account each year for as long as you live.

Still Not Sure?

If you are still not sure if you have to make a required distribution by December 31, 2010 please consult your tax professional or MTR Financial Services for clarification.  The penalties for not taking the required minimum distribution, or any distribution at all, are severe.  You will be taxed 50% of the amount that you should have taken but did not.  That is a pretty stiff penalty that you will want to avoid!

Study on Lottery Players

A recent study conducted by Cornell University reports that lottery players who earn $13k per year spend an average of $1,100 of their income per year on tickets. They contribute 82% of all lottery revenue!  That is a very sad and scary statistic.  The lottery is simply a tax on the poor, in my opinion.

Are You Too Busy Tomorrow Night For This?

Studies show that kids are looking for answers relating to money - how it works, how it's spent.....why they're getting so little of it!  Take some time tomorrow and participate in National Money Night.  Talk to your kids about your household's financial situation.  Doing so will give them a deeper feeling of inclusion within the family unit.  Who knows......maybe they'll actually make a suggestion that will benefit the family! 

Read more about National Money Night here:  National Money Night

10 Questions To Ask When Picking A Financial Advisor

Great article by Mark Miller I thought I'd share with everyone.....


The financial planning profession is growing explosively as millions of aging baby boomers confront the challenges of planning for retirement security. Readers of this column have been writing to ask if they need a planner-and how to go about hiring one.

Retirement planning poses complex challenges-and investing wisely is just one part of the picture; you also need to understand the roles of Social Security, taxes, mortgages, insurance, debt, health care and longevity. You should learn all you can about these topics, but professional assistance with decision making and timing can make all the difference in helping you to get ahead for the long run. More often than not, a financial planner is worth the expense.

But how do you go about finding a knowledgeable, trustworthy advisor? Financial planners aren’t regulated by state or federal government, so anyone can hang out a shingle and start peddling services.

It’s critically important that you shop rigorously and ask the right questions. Here, then, are the top 10 questions to take along when you interview a financial planner:

1. What are your credentials? Planners can earn a wide range of professional designations from various private professional associations. I’m able to identify at least nine of them, each with a different meaning. Among the most common designations is Certified Financial Planner (CFP)-someone who has passed an exam and is earning a certain amount of continuing education credit on a regular basis. Some designations indicate a specialty in a particular area of investment, such as Chartered Mutual Fund Counselor (CMFC).

The key thing to know is that these designations are earned voluntarily; an advisor isn’t required to have any of them in order to practice. When you interview planners, ask about their professional designations and don’t be afraid to ask them to explain what they mean.

2. How much experience do you have? Always ask how many years a planner has been practicing. Find someone with at least five years’ experience; if it’s less than 10, ask about other experience that may be relevant to their planning expertise.

3. How many other clients do you have? A large number isn’t necessarily better! If a planner works with too many clients, you may not have access when you need it. Find out whether you be working directly with the planner or with an assistant.

4. How do you get paid? Many financial planners charge an hourly or flat fee. Others charge a fee plus commission on the products they sell, and some earn product commission only. In addition, some planners charge an annual asset management fee ranging from 1 to 3 percent of your assets.

There’s no consensus on which approach is best, although many experts dislike commission-based selling, arguing that planners who earn their living solely from commissions on the investment products they sell have a built-in potential conflict of interest.

“Find an experienced certified financial planner (CFP) who will do the planning on an hourly or project basis, with no requirement that the client have their investment assets with the planner,” says Joel Larsen of Navigator Financial Advisers.

If you go the fee-only route, expect to pay an hourly rate of $100 to $250 per hour, or a flat fee. You’ll go elsewhere to implement your planner’s recommendations.

5. Who do you really work for? If you’re interviewing commission-compensated advisors, determine whether they work for a single company or represent a larger, balanced range of products. You need to make sure the advisor has your best interests at heart, not an employer’s.

6. Have you ever been in trouble? You want a planner with a spotless record. Ask planners if they have ever faced public discipline for any illegal or unethical professional actions. You can verify this yourself for free at Web sites such as the Financial Industry Regulatory Authority (FINRA), the National Association of Insurance Commissioners or the U.S. Securities & Exchange Commission. I’ve posted links to these watchdog pages below.

7. What’s your investment philosophy? How does the planner approach investment risk and how will your portfolio will be adjusted as you age? Will you receive a written statement about the investment policies that will be used in managing your money? Will you be granting the planner authority to make investment decisions without your prior approval?

8. What should I bring to our first meeting? Look for a planner who asks you to bring all of your financial information to the first meeting. Time is a valuable commodity. It’s imperative that both you and the planner make the most of what time you have together. If you decide to work together, you’ll be able to get started immediately.

9. Can I trust you? Do you feel comfortable with the person you’re considering? Says Cynthia Meyers of Foothill Securities: “Does the planner keep his or her promises to you? Is this person consistently on time for your meetings? Does the planner meet your standards for a trustworthy person?”

10. Do you understand me? Look for a planner who wants to understand what’s important to you. Says Laura Leavitt, a certified financial planner: “If the planner doesn’t care to know about what’s important to you, how can he or she give you advice that meets your goals?”

April Is National Financial Literacy Month: Week # 1 Topic - The Dreaded 'B' Word....Budget

The basic cornerstone to any family's financial success is having, and adhering to, a working monthly budget.  A budget is a plan, an outline of your future income and expenditures that you can use as a guideline for spending and saving.

Only 40 percent of Americans use a budget to plan their spending. But 60 percent of Americans routinely spend more than they can afford. A budget can help you pay your bills on time, cover unexpected emergencies, and reach your financial goals—now and in the future. Most of the information you need is already at your fingertips.

Start by following the simple steps outlined below to get a clear picture of your monthly finances.

1. Add Up Your Income
To set a monthly budget, you need to determine how much income you have. Make sure you include all sources of income such as salaries, interest, pension, and any other income sources, including a spouse’s income if you’re married. Using the worksheet below, write a dollar figure next to each relevant income source. Make sure that the figure you write down is the amount you receive from each income source on a monthly basis.

If you get a salary, be sure to use your take-home pay, not your gross pay. Taxes are usually taken out automatically, but if they’re not, remember to include them as another expense. If you receive money from somewhere not listed, enter the source of that money along with the amount under "other income."

2. Estimate Expenses
The best way to do this is to keep track of how much you spend each month. The worksheet should divide spending into two categories:

• Non-Discretionary - includes all mandatory expenses for the month (e.g. mortgage, food, utilities) 
• Discretionary - includes all non-mandatory expenses for the month (e.g. dining out, gym memberships)

If some of your expenses for one or more category change significantly each month, take a three-month average for your total.

3. Figure Out The Difference
Once you’ve totaled up your monthly income and your monthly expenses (both discretionary and non-), subtract the expense total from the income total to get the difference. A positive number indicates that you’re spending less than you earn – well done! A negative number indicates that your expenses are greater than your income and gives you an idea of where you need to trim expenses and by how much. 

It is during this exercise that you need to clearly define and understand the concept of  'wants' vs. 'needs'.  If you're running into negative net cash flow each month, look at your expenses and see if some of your expenses are merely wants disguised as needs.  If you are getting every cable channel under the sun, try going to just basic cable for a few months.  If you have unlimited texting with your cell phones each month, look at reducing the number of texts allowed each month to free up some money (much to the chagrin of your teenager, I'm sure!).  After going a few months without some of the luxury 'needs', you may just surprise yourself and realized that life isn't so bad without them!

Well done - you’ve created a budget. The next step is to track your budget over time and make sure you are still on target to achieving your financial goals.

April is National Financial Literacy Month: Time to Improve Your Finances and Your Life

I've been making a big push to get financial literacy into the spotlight not only for today's youth, but for their parents and grandparents as well.

Some of my efforts have been in the form of my book, establishing financial literacy courses this summer at Discovery College, getting articles out in the local papers, and continued facilitation of the Dave Ramsey Financial Peace course at my church.

Here are some sobering statistics illustrating why improving one's financial literacy is so critical:

For adults:
* 43% of working Americans have less than $10,000 saved for retirement. 27% have less than $1,000 saved.
* Out of 100 Americans aged 65 and older, 97 cannot write a check for $600 on any given day of the month (a sign of living paycheck to paycheck)
* 7 out of 10 households are currently living paycheck to paycheck

For students:
* 60% of college freshman with credit cards will max them out before the end of their first year of college.
* The average monthly credit card balance for college students is $4,776
* One in every three college students graduate with at least $10,000 of credit card debt alone (not even counting any student loan debt)
* More students are dropping out of college due to finances than academics
* Overbearing debt/financial issues is the leading cause of suicide among college students.

I will be dedicating even more time during this month to get as much information, tips, and suggestions out in front of everyone. I will also be blogging throughout the month, so please don't hesitate signing up and following my blog so you can be notified when new posts are made

I will try to get the first tip/lesson out tomorrow. If there are any topics you would like to see discussed or explained please let me know. The more information I can get out in front of others the better!

I hope everyone has a safe and enjoyable Easter weekend!