MAKING CENTS: How to track basis

As millions scramble to complete their 2012 tax returns, the term ‘basis’ is frequently bantered about.

pic source: linnareacu.org

Basis is tax speak for cost. In order to know how much of your sale represented a taxable gain, you need to know the cost basis of the asset sold.

 

Determining your basis is never an easy task, especially for assets held a long time or inherited. So, let’s start with the easy stuff, like mutual funds. The tax basis of a mutual fund should be right on the monthly statement. If you do not have that information, place a call to the fund company and ask if they can help you track your basis. Don’t forget the re-investment of dividends and other distributions. When you own a fund and elect to reinvest dividends and distributions, you get taxed on that gain but never see the money because it is reinvested in the fund. The amounts of reinvested dividends and distributions should be added to your original purchase price to determine your total cost basis of the fund.

For stocks or bonds, these too should be on your statement. But in the case of holdings bought long ago or transferred in from another brokerage firm, you may have to do a little digging. If you have looked through old statements and exhausted your resources from the former brokerage firm to the current firm, you may have no choice but to estimate the basis. Take your best guestimate of the purchase time and then look up the price of the particular security in question.

For inherited or gifted securities, there is a greater likelihood of having an unknown basis. The actual basis of inherited assets is equal to the fair market value of the asset on the date of the decedents passing. This is easy enough to look up as long as you know the date of death.

For gifted assets, your basis is what the IRS calls a carryover basis. That means that your tax cost is the same tax cost as it was for the original purchaser. In practice, we frequently see gifts of everything from securities to real estate where little attention was paid to the purpose of the gift and the tax basis of such. As a result, many are surprised at tax time when they are informed of the amount that they owe from the gain on the sale.

Perhaps one of the most problematic of cost basis calculations arises with real estate that has been owned for a long time. For either personal use real estate or rental real estate, there are certain capital expenditures that add to basis. For rental property, prior depreciation will also reduce the basis. In order to make this as easy as possible for your future sale or gift, start a file now that tracks every nickel you spend on real estate. If you haven’t done this yet, go back now and use your best memory of the types and costs of improvements that you’ve made.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

 

 

MAKING CENTS: Headlines continue to tempt investors

Today, there are still record numbers of investors with more than a nominal sum of cash on hand.

pic source: fullfinance.com

The last market downturn of the lost decade had badgered many into submission. Now, several years into a strong U.S. equity market recovery, cash investors are taking notice and slowly taking low yielding cash instruments and thinking about ways to invest and take some risk. Maybe it is the right posture for you to take, but how would you feel if the quarter after you took the leap of faith your investment was worth 10 percent less?

Just because the statistics show a double in the U.S. equity markets since the low points of only six years ago doesn’t mean that it was a straight line up. Many times in the past six years investors’ commitments were tested as short-term volatility in the negative direction eroded the value of that investment. This will happen again, so you better be prepared to deal with it or learn how to construct a portfolio that may assist with downside protection.

This is even more poignant for index followers whose goal is to mirror or match the performance of a given index with as little cost as possible. If you succeed in building a portfolio that indeed mirrors a particular index, that means you would, in theory, expect to capture all of the upside and all of the downside. This experience, therefore, will be judged based upon your entry point. If you bought the day before a 10 percent correction started, you’ll feel lousy. If you buy the day after a 10 percent correction ended, you’ll feel like a genius.

There are many theories on how to mitigate this, but the best way to start is to ask yourself two very important questions. First is how much do you need to earn on your portfolio to keep up with inflation and live your life in a manner to which you envision. If the answer is 0 to very little, then you may not even need to expose yourself to any volatility of downside. If the answer is something higher than you can safely earn in a guaranteed account, then you may be correct to seek higher returns for a portion of your savings.
 

From here, construct a portfolio that will limit your volatility and attempt to deliver the returns that you need. The portfolio may consist of traditional asset classes such as equities and fixed income instruments. But to reduce volatility, you may want to consider other asset classes such as real estate and categories where performance is not tied to, or correlated with your other choices. These un-correlated classes may go down when your traditional classes are rising or vice versa.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Why many won't discuss their finances

Many people would rather talk about their love lives than their finances. This is a conundrum to me, but I have a few theories on what may be holding you back.

The fear of confirming ignorance appears to be a riskier place for many than the complacency of innocence. For many, it is as simple as being ok with what they don’t know – especially if the process of learning will make them feel incompetent or dare I say… ignorant. Get over it. If you are waiting your entire life to address issues that may be needing attention until you know enough to fix it yourself, it may be too late.

Another fear is the “who to ask” without revealing your innocence or exposing you in a way that you’d rather not be judged. Of course, the best answer would be to ask someone that you know is competent in the subject in need of attention. Just a warning, that person in the know is frequently not found around the water cooler at work or around the dinner table. Start by asking the people that you respect where they go for reliable answers. They may lead you to a valuable free resource from a book or a web site or they may lead you to a competent professional with whom they’ve worked for years.

Consider talking to your spouse or another trusted family member who may also be a bit innocent, and not in the know. In fact, speaking to a spouse about money may be the best thing that you can do for your relationship. Divorce attorneys frequently cite money issues or simply a lack of communication about money issues as a primary cause for stress in marital relationships. When you find someone that you trust, it may be easier for both of you to come up with a plan to end the innocence and get on the path to pro-actively taking care of your financial needs.

What to ask also holds back many. Headlines and sound bites are useful for getting your attention, but not for disseminating advice. They are, however, a good place to start on the concern of what to ask. Use these readings and those of other great financial publications as your issue recognition start. The objective here is to get your baseline of knowledge to inch up the knowledge ladder. You can progress from innocence to realizing that you need knowledge to knowing what you need to know, and then solve the problems that have been hidden in plain sight for most of your adult life.

The last part of the picture is action. Knowing what to ask, or where you need help is the first part of the equation. What makes this all worthwhile is implementation. Start making a list of all the areas where you believe that you need help or further knowledge. The implementation part does not need to be radical surgery and all done at once. Start in small bites and accomplish one thing at a time. But do yourself a favor and get started.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: The Rule of 168 helps set life priorities

The Rule of 168 isn’t some fancy way of seeing how fast your money doubles or a code section from the IRS, it is a law of life. The law is that there are only 168 hours in a week, and you need to use them wisely if you want to live the ideal life that you dream about.

When you think about your day under the influence of the rule of 168, you’ll quickly realize that there isn’t much time left to pursue your ideal activities. Just work and sleep consume at least 16 of your daily 24. Add the basics such as eating, commuting, bathing and community activities, and that available time shrinks even further.

Many think that dreaming about an ideal life is a waste of time. I disagree vehemently. Dreams are good, and they can be healthy if they help you envision just what your ideal life looks like. Some mental health experts say if you can’t visualize and see yourself in that moment, it will never happen. If you are a do-it-yourself home repairer, money manager, financial planner and auto mechanic, you’ve probably exhausted your 168 hours.

This process starts with a dream, a clear vision of how you would love to spend your time. After you and your spouse decide what would be the ideal amount of time spent with family, on vacation, with hobbies and in your community, you have taken the first step in creating your ideal life.

Some of you are now thinking about the money and wondering whether I’m dreaming or otherwise delusional. I’m neither. I am simply suggesting that it is your life, and you can go with the treadmill-like day-to-day flow or begin to take control. In fact, I work with many people who have a lot more money than they need to live their ideal lives; they just haven’t stopped to answer the questions about what is most important in their lives. Money is rarely the answer.

With some thoughtful financial planning, you’ll discover the extent to which you can start to live your ideal life or exactly what it may take to get you closer to ideal.

Most financial advisers do not go too deep on this squishy topic. They typically get a list of goals, then rush to the answers, which invariably involve some investment or insurance that they are offering. This isn’t necessarily a knock against your adviser. Many people are both underinsured and spending way too much time reading about investments and managing their own portfolios.

You’ve heard many clichés about time, money and happiness. But at this stage of your life, I suggest that you stop using other people’s words, get your financial house in order and work with a competent professional to reach your personal ideal life.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Plan for 2013 taxes while you prepare this year’s return

pic source: rothamelbratton.com

As we are all gathering the important tax documents needed to prepare your 2012 tax returns, imagine how your return might look under the new tax rules in effect for 2013. This could actually give you the first glimpse of what these new tax rules mean to you personally.

The time to plan for a lower tax bill is now. There isn’t much that you can do for last year at this point, but for 2013, you have the next 10 months to carefully plan to keep your income tax bill as low as legally possible. No one really knows who took advantage of the lower rates we saw in 2012 by accelerating income or creating capital gains, but everyone is now concerned about what the new tax rules will cost them.

To plan for 2013, start with a forecast of what you expect to happen for income-related items in 2013. It may be difficult for some to forecast 2013 earnings because they own a business or have a job with variable compensation. But at this early stage, you must come up with a forecast if you want to fully assess the potential moves. Use the data from your current return to estimate what each line item of the return may look like in 2013 without any additional planning. From here, you can overlay strategies and ideas and assess the consequences.

A strategy gaining a lot of momentum in professional circles is the concept of asset location. Asset location has to do with the type of account that you plan to house certain investment within. For example, placing high-interest or dividend holdings inside a qualified umbrella such as an IRA may make more sense than holding these instruments in a taxable account. This concept has always been available to investors, but it is gaining in popularity now that rates have in fact risen.

Another strategy is to use annuities in lieu of traditional taxable savings. A caution here is the lock-up period, surrender charges and the underlying strength of the insurer guaranteeing your money. Avoid long surrender periods and long lock ups, and steer clear of companies that are less than very highly rated.

For the charitably inclined, this is the time to look at contributing appreciated property rather than selling it yourself and then donating the cash. A donation of appreciated property will give a deduction equal to the fair market value of the property on the date of the gift, without regard to your cost of the property. Rental real estate could pose special other tax provisions such as accelerated depreciation recapture, so check with a tax professional before you simply give away any rental real estate.

For every taxpayer in America, taxes have gone up. Hopefully that additional tax burden won’t cause the tax tail to wag the dog, but paying attention as you go this year could make a material difference in your total taxes for next year.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.