Making Cents | John P Napolitano

Saturday, January 5, 2013

MAKING CENTS: Cliff realities in plain English

You can debate and argue all you want over whether the cliff situation was resolved or the can was just kicked down the road. But your reality is that there are new provisions in the tax code that will impact your cash flow starting with this week’s paycheck that you need to understand.

The first change is an increase of 2 percent in the amount of taxes that every wage earner shall pay toward FICA, or basically the entitlement systems under the Social Security umbrella. It is estimated that this increase for all Americans will raise approximately $125 million in revenue for the feds. This cost will be most felt by those who earn less than the 2013 FICA maximum of $113,700.

The most talked-about provisions are those impacting high-wage earners. For single wage earners earning over $400,000 and married taxpayers earning over $450,000, the top tax rates will rise to 39.6 percent for earnings above those threshold amounts. These same taxpayers will also experience an increase in the basic capital gains tax rate from 15 percent to 20 percent. But wait, there’s more. If you are lucky enough to earn more than those amounts and have a capital gain in 2013, you get to pay a special 3.8 percent surcharge to fund the Affordable Care Act, bringing your total rate for the gain to 23.8 percent. For wage earners under the new limits, the rate for capitals gains has been permanently set at 15 percent.

The silver lining for equity investors may be the new tax rate on dividend income. There had been fears that the rate could rise as high as 43.4 percent, but it has gone to a base rate of 20 percent plus the 3.8 percent surcharge, for a total of 23.8 percent.

Another change is the restoration of limits on deductions for higher-earning Americans. For this phase-out, however, Congress wasn’t too generous. For single wage earners making more than $250,000 and married couples earning more than $300,000, deductions for home mortgage interest, charitable contributions and state income taxes and personal exemptions for children and other dependents will be phased out. The significance of reopening these Clinton-era limitations on deductions may rear its head during the next two months of spending negotiations. Keep an eye out for future limits placed on deductions as the spending battle looms.

The estate-tax exemption has been made permanent at the $5 million level, indexed for future inflation, but the top rate has increased from 35 percent to 40 percent. Counting your home state, it is possible that you are once again in the 50 percent estate-tax bracket. The good news is that there are still ways to plan for mitigation or complete elimination of the estate tax for the wealthiest taxpayers interested in planning their affairs to maximize the inheritance for their heirs or charities instead of the federal taxing authorities.

The next shoe to drop, of course, is the spending battle. In this agreement, some $100 million in planned spending cuts were postponed until Feb. 29. Keep an eye on the ball, as the possible outcomes are sure to keep markets volatile.

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.

Wednesday, January 2, 2013

Key Provisions of H.R. 8: American Taxpayer Relief Act of 2012

(“Fiscal Cliff Agreement”)

SUMMARY:

The 112^th Congress was recently dubbed the “Do Nothing Congress” for the minimal amount of legislation enacted during the two-year session. Two hours after going over the Fiscal Cliff at midnight on January 1, the Senate voted 89-8, and the House of Representatives voted 257-167 to pass the American Taxpayer Relief Act of 2012 to reverse some of the measures which may have had a severe negative impact upon the economy.

The Congressional Budget Office projects the legislation will add $4 trillion to the U.S. deficit over the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.

The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.

KEY PROVISIONS:

o Tax rates will be allowed to rise on individual incomes over $400,000 per year, and household incomes over $450,000 per year to a maximum rate of 39.6%.

o The tax on estates would rise to a 40% maximum rate, with a permanent exemption of $5 million, indexed for inflation.

o Permanently sets maximum long-term capital gain and dividend tax rates at 20% for households making more than $450,000.

o Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.

o Permanently sets maximum long-term capital gain and dividend tax rates at 15% for households making less than $450,000.

o The 2% temporary decrease in FICA payroll taxes relief was allowed to expire. This provision has a disproportionate impact on those making less than $113,700 (the FICA limit in 2013). This is expected to take $125 billion out of consumer income.

o Extends the tuition tax credit and child and dependent care tax credits for five years.

o Workers will be allowed to rollover 401k funds to a Roth IRA while still actively participating in a 401k plan. Think of it as an ‘In-Service’ distribution.

· Pay income tax currently.

· Not subject to Required Minimum Distributions at age 70½.

· Future earnings are tax-free.

o Permanent adoption of the Alternative Minimum Tax exemption amounts. Impacts 32 million Americans who may have been subjected to AMT in 2012 and indexes AMT for inflation.

o Postpones $109 billion sequester for two months.

o Extends unemployment insurance for two million long-term unemployed Americans.

o Extension of the 2008 Farm Bill through the end of this fiscal year (September 30, 2013). Keeps the price of milk from potentially doubling.

o Prevents a 27% reduction in Medicare payments to doctors and other health care providers treating patients on Medicare.

* We do not provide tax advice or services. Please consult your tax advisor regarding your specific situation.

* The above material was prepared by Peak Advisor Alliance. (approval #1-129110)

Saturday, December 29, 2012

MAKING CENTS: Cliff walking with your portfolio

Whether we jump off the cliff or have a soft landing because of a compromise that Wall Street and employers both like is yet to be seen. The short-term reactions to the cliff and any deal are just that, short-term reactions that may be more heavily influenced by emotions rather than fundamental valuation standards.

pic credit: blog.ecivis.com

If you have the vision to see beyond the changes that are sure to stick with tax policy and spending cuts, you too shall realize that life, and investing for that matter, must go on. Most of us will still be seeking returns in excess of inflation, and unfortunately, we also know that this choice carries some risk of loss.

The two ends of the spectrum include a second recession caused by the 4-percent GDP cost from a full cliff jump or a slowdown from a compromise that also reduces the nation’s output, but not enough of a slowdown to throw us into another recession. At this point, it is difficult to see how 2013 will be a banner year for investors in the U. S. compared to other great years we have witnessed. But this slow-to-fair forecast doesn’t eliminate your need for investments gains; it just forces you to look elsewhere for your investment returns.

Elsewhere could be in a different asset class or industry. For example, an asset class that has been in the dumps for quite a while is real estate. Most see prices in their neighborhoods still far below their 2007 peaks. Certain markets, such as prime downtown residential space, have appreciated considerably over the past few years. But others, like suburban single-family or residential property in the Sunbelt have not appreciated considerably over the past few years, and may be worth a look for the handy person who doesn’t mind a second job.

What about Europe? Sure they’ve still got issues to deal with, but did you realize that European equity markets were generally up in 2012? Most people wouldn’t think of investing in European assets this past year because of all the headline scares about their own fiscal crisis. Germany, which appeared to have the most to lose from a European meltdown, appears to have been one of the economic champions in the equity markets from a strong rally in the second half of 2012.

For you hard-asset buffs – get more diversified. Sure, gold grabs the headlines and you see it nearly every day on the neck of a friend or co-worker, so it is always on your mind. But there are many more precious metals and resources to own other than gold. If you are looking for an inflation hedge, it would be wise to spread your risk over more than one or two metals.

Some of you will choose to stick your head in the sand and hunker down. This guarantee of principal may feel good in the short term, but the loss of purchasing power to inflation is hard to make up over extended periods.

Saturday, December 22, 2012

MAKING CENTS: Guidance on last-minute contributions

Many have spent the last month racking their brains thinking about gifts for their loved ones, friends or service providers. Yet when it comes to charitable contributions, many simply give at the end of the year without much thought about the tax consequences.

Cash works great, and is most sought after by charitable organizations with tight operating budgets. But try not to use greenbacks, the IRS will disallow contributions made with cash unless there is substantial other documentation available to prove the contribution.

If you give clothing and household items, you may generally take a deduction up to the fair market value of the property. The property must be in good used condition or better, and supported by documentation from the charity about what was received. For substantial deductions, keep a list and maybe even a few photos of what was given to support your deduction.

Cars, boats and planes have their own special rules. A few years back the rules were changed from looking at the wholesale book value to the actual cash proceeds. Your deduction is limited to the actual cash sale proceeds from that asset, which could be much lower than the book value. The charity will send you a form 1098-C which must be attached to your return stating the sale proceeds.

If you donated a week of use in your vacation home for the local church auction you will not get a deduction. The person who steps up at the auction and writes the check for the weekly rental typically gets no deduction either. The only way for the buyer of the week to receive any tax benefit would be if the price paid for the rental was in excess of the fair market value. And in that case, it would be only the excess payment over fair market value that would have any tax benefit.

I frequently get asked about deducting the value of services provided to a qualified charitable organization. The general answer is that you receive no deduction for the value of services contributed to a charitable organization.

Own a business and have excess inventory, gift it. As long as the inventory was valued on the books at the beginning of the year, you may receive a deduction in the year of the gift.

Gifting rules get tricky if you use anything other than cash. Be sure to check with IRS publication 526, your CPA or qualified tax advisor before making any contributions that you are not sure about.

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.

Saturday, December 15, 2012

MAKING CENTS: A gift to last a lifetime

With holiday shopping nearing its peak, maybe you can skip the lines and set your sights on a gift that will last a lifetime. Of course, I’m talking financial gifts that go beyond an envelope with a little hole in it to show the face of one of our past presidents.

A gift to a child that is likely to go beyond your lifetime could be a contribution to an IRA. Anyone can put money into an IRA, from a newborn to a retiree. The amount, however, may be limited to the earned income of the IRA account holder. This may be a little tough for a two-year-old, but for a child who is old enough to generate earned income from any type of job, an IRA would make a great gift. You may contribute 100 percent of their earnings up to $5,000 into an IRA account. This amount goes up to $5,500 in 2013. If your gift is for someone over age 50, the IRA contribution goes up to $6,000, and rises to $6,500 next year.

For a child, this IRA account would be best as a Roth IRA. It is likely that the child would not benefit from the deduction available for a traditional IRA, so why set the child up for required minimum distributions and future taxation at age 701/2? As a Roth, the child would never face required minimum distributions under today’s law. Don’t get hung up on the amount. If you can afford $100, then give $100. If you can afford, and the child has earned income at or above $5,000, contribute the maximum.

You are not likely to see the eventual long-term benefit of this gift. To help you understand just how great this gift is, get out a calculator* and figure out what this account could be worth if invested. Forecast it growing at 2 percent, then 4 percent then 6 percent or higher, and you’ll feel the power of just how meaningful this gift will be in the hands of any child 50 or 60 years from now. It is also a reminder of the power of compound interest or gains.

If this IRA is for someone who is not a child and has earned income, but not enough to save and advance their lifestyle, perhaps a deductible IRA would be better. But that choice would be best left up to the recipient and their advisor. Reality, however, is that this person probably does not have an advisor, so you may have to dig a little or involve your financial advisor to make this happen in the most efficient manner.

The mechanics of this can matter. I’d suggest that the gift actually be made outright to the recipient, and that they either write their own check or do a transfer into the IRA account. Remember, the purpose is to make a gift that can last a lifetime, and not send your brother-in-law to Cancun. So your actual involvement in the mechanics of this strategy may be important to seeing this transaction through completion.

*Roth IRA calculator: http://www.dinkytown.net/java/RothIRA.html#calc

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

Saturday, December 8, 2012

MAKING CENTS: Active or passive investing requires attention

When building an investment portfolio, there are two considerations regarding how you may construct and monitor that portfolio. One is with active management and the other is passive management. Neither is right or wrong, and the current condition of financial markets may favor one over the other from time to time, yet some investors are passionate about their methodology to a fault.

Receiving a lot of attention over the past decade or so is passive investing. The primary argument that indexers raise is that few investors actually outperform indices and they are often a lower cost alternative than their actively managed counterparts.

The premise with passive investing is kind of like a set it and forget it style. Passive investors typically invest in index based products. Some are broad based indices such as the Standard and Poor’s 500 index while others may represent a specific sector, industry or region. Within the indexed investment product of your choice, the manager will frequently own literally every single stock that makes up the particular index.

This means that you will participate in the gains from that index as well as the losses. This feels great in good times, but when your index is not performing, you’ll also receive 100 percent of the down side of that index.

When a passive approach is utilized, most investors would benefit from actively managing their basket of indices held in the portfolio. Your active management may be as simple as regular re-balancing or as sophisticated as altering your allocations based on market conditions within the particular market, sector or region that you hold. This is particularly important if your index selection has you owning very specific and volatile sectors such as energy or emerging markets.

Active management, on the other hand, is when you or a fund manager is actively trying to manage the holdings within a portfolio to select what the manager feels are the best choices for appreciation and the least probability of losses. While the statistics for individual investors do indicate that do it yourselfers have not often fared well with their actively managed choices, the same is true for passive do it yourselfers.

In any economic environment, some choices will win and some will lose. Even during tough economic times, certain companies will out compete others, and gain market share and profitability – the underpinnings of value. Consequently, one would expect these out-competers to also out-perform over the long haul.

What investors should care about is net results. Are your net results meeting your needs and goals? Do you even know what you need to earn on your investments to meet your life’s goals and dreams? Managing your investments to meet your required rate of return is what you should be focused on and not benchmarking to a specific index. In fact, benchmarking to a broad index such as the S & P 500 or the Dow 30 is inappropriate for most investors because most investors do not, and should not own all U. S. large cap stocks.

Wednesday, December 5, 2012

Market Outlook 2013

In 2013, many different forces will combine to influence the direction of the markets to follow the path of least resistance leading to modest single-digit returns in the U.S. stock and bond markets.* The path for the year may be set at the end of 2012, or in early 2013, as critical decisions are implemented: Details here.

(Produced by LPL Research)

Outlook 2013 from JP Marketing