Is Too Much Success a Penalty at Tax Time?

Many investors have been so successful they may face a potentially hefty tax bill for 2013.  This bull market we are experiencing in the U.S. has had such strong legs for a long period of time many investors have few, if any, capital losses to harvest to help offset the gains they have accumulated in their equity investments. In some ways this is a great problem to have. 

Tax Increases

This year there were a couple of noteworthy tax increases to keep in mind.  The maximum tax rate on capital gains has increased from 15% to 20%.  Taxpayers with taxable income north of $400,000 ($450,000 for couples) will be affected by this increase.  There is also the new Medicare investment income “surtax” affecting taxpayers with modified adjusted gross income over $200,000 ($250,000 for couples).  This tax is an additional 3.8% on investment income (interest, capital gains, dividends etc.).

Look for Bond Losses

Some taxpayers may still have tax losses from 2008-2009 to help offset gains, but for many these have run out during the successful run the markets have enjoyed for the past 4 ½ years.  One place to look for some losses this year may be in the bond portion of your portfolio (if applicable).  There may be an opportunity to swap to a similar investment for a short period of time, at least 31 days, to harvest those losses to help offset other gains you may have. 

Harvesting Losses

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Bond losses were at their peak during late summer and into the fall, but if you wait until December to harvest those losses, they could be much diminished from what they were.  The end of the year is rarely the best time of the year to harvest tax losses.  Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor today to prepare for the risk of higher taxes in your future.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

Oil Trends Could Free U.S.

 Have you noticed the price at the pump lately? The cost of gas has gone down and we very well could be at an energy cost plateau for some time.  This stability in energy prices removes one of the many potential shocks that can combat the economic system.

According to the Energy Information Administration, the United States will consume total of 7 billion barrels a year (22 Million barrels a day) -- about 22% of total world petroleum consumption -- in 2013. An analyst that I spoke with recently, who has spent his entire career of over 40 years in the energy space, believes that America could be energy independent by 2020 and prices could remain fairly stable until 2040.  But there are so many moving parts it’s really too difficult to tell exactly.   

On the supply side of the equation, at current market prices the US (in blue below) has just become the second largest global producer surpassing Russia (tracked in brown) for total liquid fuel production in the world.

Consider some other positive outcomes:

1. Chemical plants are being built in the US again for the first time in 25 years because of oil shale.  They are building them with cheap financing, cheap energy and cheap labor right near the shale. US Chemical companies are the low cost producers in the world now. 
2. The International Energy Agency said recently that the US is on track to becoming the leading global producer within the next decade.  
3. Demand has waned as well due to higher prices and efficiencies as people grow more conscientious.
4. The best outcome of all would be if the US becomes less dependent on OPEC and their “Oil Weapon” which has been dangled ominously over us for 3 decades.  We very well could be in greater control of our supply shocks for a decade or two, maybe much longer if we use this time to develop alternative energy sources that could sustain us after the shale runs out.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James.  Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

Energy's Shock Absorbers to the Economy

 Know much about the natural gas trapped in shale? You don’t need to, but the abundance of this natural resource may be one of the things our economy needs. The US economy could very well have shock absorbers for a while.  These colored areas on the map below are energy resources that could lead to our energy independence for decades to come.

None of us at The Center are environmentalist, geologist or oil experts; we are also are not economists.  But we’ve been doing our homework on shale as we try to understand what is going on in the economy. With oil prices at much higher levels than most of history, shale gas can allow for a less conventional technology to be used to recover energy. 

Horizontal drilling and hydrofracking technology breaks open shale rock by pumping high-pressure fluids into the ground, making shale gas abundantly accessible. According to some experts, the United States alone has over a 100-year supply of this unconventional energy source.

Remember all of the buzz about running out of natural resources on the planet? Just a decade ago we were consumed by the fact that we would be out of energy to move us around the planet and heat our homes in the not too distant future.  But when you move the dial in price up a few notches all kinds of things came on line meeting demand with new supply.     

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

Compartmentalize Your Finances

 Love Starbucks? A lot of us do, but try answering this question I recently heard posed by a behavioral finance professor:  “Would you be more inclined to order a latte that was advertised as 95% fat free, or one labeled 5% fat?”  The two $5 drinks are the exact same, however, I would venture to say 99.9% of people (including me) would choose the drink that was advertised as 95% fat free.  Perception is as powerful force in the coffee world as it is in the investment world. Perception can work against you when it comes to savings or it can fuel you. Much of that depends on how you compartmentalize.

The Behavioral Finance of Compartmentalizing

So what does it mean to compartmentalize?  Simply put it is separating two or more things from each other.  In personal finance, separating certain accounts to have individual goals can have a tremendous effect on the likelihood of savings and overall success of the individual’s financial plan.  For instance, one of the most important pieces of a financial plan is maintaining an adequate emergency fund for the dreaded unknowns – such as job loss, unexpected home improvements, medical expenses, etc. (The Center team usually recommends that clients maintain 3 – 12 months of living expenses in a cash account that is not subject to market risk). 

Establish Separate Accounts

If you find yourself constantly transferring funds from your savings to your checking account each month because they are at the same institution and the ease of the transfer is just to easy to resist, consider making a change!  Why not open a savings account at a completely different financial institution and maintain your emergency fund there, knowing this money cannot be touched except for an emergency. 

Give it a Label

Many banks now allow you to name an account and personalize it.  So instead of seeing your account being titled as “Savings” each time you log in, it would read “Emergency fund – don’t touch!”  Adding that “name” or “purpose” to the account has been proven to dramatically increase savings levels and decrease the likelihood of spending out of the account. 

Keep it Simple

Separating accounts for each individual goal in retirement, however, is pretty unrealistic.  Who wants to have 20 different IRA accounts?  At The Center, we like to keep things simple to stay organized and on track.  However, our advisors do encourage clients to compartmentalize in their minds when looking at their overall stock/bond/cash allocation to stay focused and not lose track of the purpose of each type of asset that is held within the portfolio.  Each “bucket” of funds has a purpose and impact on the total portfolio and it is The Center’s job as your trusted advisor team to help you fill each one and utilize them to their maximum potential.  

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Deducting Investment Management Fees & Medicare Surtax: Note for Higher Income Earners

 High earners beware! Thanks to the new Medicare Surtax deducting investment management fees becomes even more complicated.

This potentially applies if you are:

• Single earning more than $200,000
• Married filing jointly earning more than $250,000

In a blog last year I explained the grey area of deductibility of investment management fees. In general, investment management fees paid in taxable accounts (such as single, joint or living trust accounts) are a tax deductible expense and reported as a Miscellaneous Itemized deduction on Schedule A of Form 1040. However, this only benefits taxpayers whose Miscellaneous Itemized deductions exceed 2% of their Adjusted Gross Income.

But the new Medicare Surtax further fogs up this grey area. The basic rule is that investment management fees are deductible against the 3.8% Medicare surtax on net investment income.  However, the 2% “rule” still applies, and to further complicate the issue, the deduction amount must be prorated if you have other miscellaneous deductions. 

The good news is that for those working with a professional tax preparer you may not even notice the fog. You will want to continue to provide your tax preparer your yearend tax report from your brokerage firm (such as Raymond James) which contains the necessary information on investment management fees. For those preparing their own tax return, the IRS has stated that they will be providing special IRS forms to assist in the calculation early next year.

As always, if you need help getting through the maze, give us a call. 

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws may occur at any time and could have substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.

Is This What A Secular Bull Market Feels Like?

 Fall is a wonderful time in Michigan.  The leaves are turning, the Tigers gave us some playoff excitement and football season is in full swing.  Economists and money managers must agree as many have been visiting the state giving us the opportunity to sit down with various experts over the past couple of weeks here at the Center.  One theme kept coming up while I was listening to a couple of these individuals and it was a welcome distraction from the typical debt ceiling/government shutdown conversations…the secular bull market.

The chart below shows the long-term secular trends for the Dow Jones over the past 100 or so years.  You can see that the markets go through long periods of stagnation, in essence going nowhere fast; followed by periods of steady increases.  These periods of stedily rising markets (indicated below in green) are referred to as secular bull markets.  You can see that this year the Dow has finally broken out of the sideways trading range of the past 12 years. 

The U.S. equity markets have been in a positive trend for four years now, yet one expert stated this is the least trusted, least believed bull market he has ever witnessed.  Most investors erroneously believe that the environment has to feel good before it is the right time to invest.   Unfortunately, once it feels good to invest it is usually the wrong time, think buying technology stocks in 1999.

Whether or not we are in a secular bull market remains to be seen, but once we can say for certain that we are it is usually too late.  Having a financial plan and staying disciplined with your investments, I think, is the most important key to successfully meeting your goals.  

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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The information contained in this report does not purport to be a complete dexcription of the securities, markets, or developments referred to in this material.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  Past performance may not be indicative of future results.  Holding stocks for the long-term does not insure a profitable outcome.  Investing in stocks always involves risk, including the possibility of losing one’s entire investment.

Step Up in Basis Part 2

In Part 1, we covered a “step up in cost basis” principles with regards to real estate. In this post we will address step up in basis rules pertaining to marketable securities such as stocks, bonds, and mutual funds.

Your cost basis in a security is what you initially purchased it for plus any reinvested dividends.  So if mom bought 1,000 shares of Ford Motor Company back in 1980 when it was trading at $1.00 a share her cost basis is exactly $1,000 (trading costs such as commissions can also be included).   As of 10/25/2013 Ford was trading at $17.60 a share so if mom sold it today she would receive $17,600 from the sale of the Ford stock.  She would be able to subtract her basis for tax purposes ($1,000) and she would have a long term realized capital gain of $16,600.  At today’s long-term capital gains rates mom would owe Uncle Sam as much as 20% of that gain or $3,320.  However, let’s say mom never sold her Ford stock and left it to you after her death.  If mom died on October 25th 2013 your new inherited basis would be the closing market price of Ford on the date of death ($17.60).  Assuming you sold Ford stock at $17.60 you would owe nothing in capital gains thanks to the step up in basis rule.  Please remember that this analysis is only relevant if you are inheriting assets in a taxable account. If you are inheriting Ford stock inside of an IRA (or other similar tax deferred account) then the cost basis is irrelevant – at least for income tax purposes. 

What if mom is feeling generous and decides she wants to gift you the shares of Ford Stock while she is alive?  In this instance you would also receive mom’s cost basis of $1.00 rather than the higher step up in basis at death. 

As always, income tax consequences alone should not dictate financial decisions.  However, care should be taken to maximize both gifts and inheritances. Please speak with a financial advisor about cost basis and other tax-related issues.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.  The illustration is hypothetical.  Individual results will vary.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Individual results will vary.   This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Center for Financial Planning, Inc., Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the course of business have a position in any securities mentioned in this report.

A Bond Market Doomsday – Part 2

 With the bond bear potentially rearing its’ ugly head, it is important to understand what a bond bear market looks like to properly prepare a portfolio for it. 

Only one in five investors know how interest rates affect bond prices

In a 2009 study on financial capability, only 21% of respondents knew that prices on existing bonds generally go down when interest rates go up (National Financial Capability Study, 2009 National Survey, Financial Industry Regulatory Authority).   Prices and rates typically move inversely because older bonds with lower rates are less attractive to buyers than newly issued bonds that offer higher rates.

If bond prices have been at all-time lows this stands to reason that bond prices have a long way to fall and indeed they began this fall earlier this year.

When rates go up, prices go down

Take a look at the examples below, illustrating the effect of rising rates on a 5‑year US Treasury bond.

Source: MFS

This is a hypothetical example that represents the effect a rise in the interest rate of a new issue bond may have on the price of existing bond issues.  Although bond prices and interest rates typically move inversely, a change in interest rates is only one factor determining the price of a bond security.

However, what bond bear markets lack in depth, they make up for in length.  In Part 1 I suggested we are in a time similar to the early 1950’s when rates bottomed out at similar levels to where we are today.  Below is a table of returns for the 10 years following rates bottoming taken from the Federal Reserve database in St. Louis. 

*Stock represented by the S&P 500, Treasury bill rate is a 3-month rate and the Treasury bond is the constant maturity 10-year bond, but the Treasury bond return includes coupon and price appreciation

Rising rates historically means rising income and total returns.  If rates rise slowly, interest has a chance to outweigh loss of principal over time as you can see in the chart above.  Devastating returns are not seen on the bond side of the ledger, but rather slow returns that tend not to keep up with long term inflation rates. 

Diversification rather than Doomsday

While we are not at doom’s doorstep, diversification is certainly the key, as it always is.  Most likely, not all areas of the bond market will suffer at all times over the coming years.  Investors must be careful of certain investments with characteristics similar to that of bonds (i.e. “bond proxies”) though.  Investing in something like dividend paying stocks in place of your bonds could add a lot of potential risk to the portfolio.  These types of positions will not support a portfolio in times of a stock market correction like bonds generally do.  It is important now more than ever to work with your financial planner to make sure you have a well-diversified portfolio and are making decisions with your overall financial goals in mind.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Diversification does not ensure a profit or guarantee against a loss.  The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  This information is not intended as a solicitation or an offer to buy or sell any investment referred to herein.  Investments mentioned may not be suitable for all investors.  Investing involves risk and investors may incur a profit or a loss.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  Past performance is not a guarantee of future results.

A Bond Market Doomsday – Part 1

 Eye-catching headlines like this are great ratings boosters right now.  Phrases like “Surviving financial annihilation” or “Devastating losses” have been en vogue lately because investors are becoming more aware that bonds may not be the pillar of our portfolios as we have come to rely on them over the past 30 years.  Yields on bonds have been kept artificially low due to the Federal Reserve’s intervention over the past several years with the Quantitative Easing (QE) programs.  However, now that it looks as though the FED will be backing off of their QE programs, since it looks like the economy will be able to stand on its own two legs, we are left with a bond market with yields at nearly all-time lows. 

Does this mean that the bond bear is finally out of hibernation? 

The chart below gives us a history lesson on the last time we headed into a bond bear market (early 1950’s).  Rates on the 10-Year U.S. Treasury bond were at similar levels to where they are today.

From what we have seen already this year, it does seem that rates have nowhere to go but up.  According to the above chart, it will be important to temper our return expectations coming from this bond portion of a portfolio.  The average return we have come to expect from bonds will likely be drastically reduced going forward.  If expectations are properly tempered, this need not “annihilate” our portfolios going forward.  In my next blog I will go into more detail of what a bond bear market has looked like in the past.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Risk vs. Reward: Finding the Right Asset Balance for You

There are inherent risks in investing (you can’t control the market) but there are potential payoffs that help people tolerate that risk (like funding retirement). To better understand your own tolerance for risk, you need to first get the gist of asset allocation.  Asset allocation is a technique used to spread your investment dollars across different asset classes.  Stocks, bonds, and cash or cash alternatives, among others, are generally the most common components of an asset allocation strategy. 

Determining risk tolerance

Deciding on an appropriate allocation is an important exercise because it may be the most important investment decision you make due to the impact it can have on your overall return.  Your financial goals, time frame and personal resources all contribute to the equation. A risk profile questionnaire is a widely accepted method to help advisors and investors make asset allocation decisions.  

However, there are two significant limitations to relying solely on a risk questionnaire to make the asset allocation decision.  First, the way people think about risk is not stable and very often varies with market conditions.  Behavioral science research tells us that when the market goes up, the pain of past plunges typically fades as investors feel they can accept more risk.  The dynamic reverses when markets correct or go down.  Suddenly, the market elicits fear in the hearts of investors and tolerance for risk diminishes.

The second limitation with risk questionnaires is they don’t measure an individual’s need to take risk.  The purpose of an investment portfolio is to support the financial planning objectives or desired lifestyle. The plan will articulate the why as well as the how.  It helps answer questions like, “So, can I retire?” or, “Do I have enough to feel confident?”  The specific goals and time frames are the determinants of how much risk to take, even if there is a willingness to take on additional risk.

Committing to an asset allocation

Picking an asset allocation is important, but committing to it is even more important; especially in light of our changing attitudes about risk and reward.  Don't hesitate to get professional help if you need it. And be sure to periodically review your portfolio to ensure that your chosen mix of investments continues to serve your investment needs as your circumstances change over time.

Laurie Renchik, CFP®, MBA is a Lead Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Asset allocation does not ensure a profit or guarantee against a loss.