The Special Tax

April 15th is in the past. The hand wringing and sweating, while glaring glassy-eyed at Turbo Tax is over and you can all breathe a sigh of relief, unless of course you filed an extension!

There are some interesting changes to the tax code that were passed in the healthcare bill. These changes won’t take effect until 2013, so voters won’t feel the hit until after the 2012 elections. In 2013, upper incomers will pay more in Medicare taxes. First there will be 0.9% surtax on single filers that earn over $200,000. If you are happily married filing jointly, the threshold is $250,000. The EMPLOYEE will pay the whole tax.

The second issue to address for 2013 is that there will be a Special Medicare Tax of 3.8%. Singles with adjusted gross income over $200,000 and married filers with $250,000 of adjusted gross income will be affected. The adjusted gross income includes earned income, income from interest, dividends, capital gains, annuity payments, royalties and passive rental income. Still excluded from the special 3.8% tax is municipal bond interest and retirement plan payouts. There will be a few more changes to the tax code that will begin in 2013; however, we feel the Special Medicare Tax has the greatest ability to affect our clients.

The programmers at Turbo Tax will be quite busy for the next several years. Who knows — maybe they are hiring!

Gregory D. James, CFP®

Partner

ParsecFinancial

227 W. Trade Street

Suite 1840

Charlotte, NC 28202

(704) 334-0894 phone

(704) 334-9323 fax

www.parsecfinancial.com

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To Convert or Not to Convert?

I hate paying taxes. I know, I know. The government needs money to provide services and secure the national defense. I just hate paying taxes. You probably share my sentiments.

You will be surprised to know I am actually considering an option that would require me to pay more taxes over the next two years. For 2010, the IRS has changed the rules for conversions of traditional IRAs to Roth IRAs.

In the past, if you converted, you must pay taxes on the value of the distribution when you prepared your tax return the following year. However, for conversions processed in 2010, you can spread the tax liability over two years.

So, why would anyone want to do this? Distributions from traditional IRA accounts are taken at ordinary income tax rates. If you think you will be in a higher tax bracket in retirement, it might make sense to pay taxes now.

Presumably, you would pay less tax now than at retirement, when your IRA account has (hopefully) appreciated in value, and tax rates may be higher. Keep in mind that Roth distributions are tax free if you have had the Roth for at least five years and are over 59 ½.

There are other reasons to consider a conversion:

• Individuals who were previously ineligible to convert to a Roth because of income limits can now take advantage of the conversion option.
• You are not required to take minimum distributions from a Roth account.
• Distributions will be made income tax free to your heirs over their lifetimes.

Still, it may not be the right decision. If you think your tax bracket will be lower in retirement, then why pay more taxes now? If you have a short time horizon to retirement, it might not be worth the tax liability. Do you have cash available to pay the taxes? Using funds from the IRA you are converting or selling taxable assets to raise funds might be defeating the purpose.

Confused?  Your financial advisor would be glad to review your situation and determine if a Roth conversion is the right step for you.  Please give him or her a call.

Cristy Freeman, AAMS
Senior Operations Associate

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The Holidays Are Approaching!

Can you believe it is November already? The holiday season is fast approaching, a time when everyone is frantically looking for gift ideas for loved ones or considering year-end charitable giving. Have you considered giving highly-appreciated stock this year?

I will give you a minute to catch your breath from laughing. Yes, some people still have it, even after the market meltdown. You could certainly sell some of the stock and offset the gains with losses you are carrying over from last year. You might also consider it for gift giving.

A gift of stock to a minor can lead to valuable lessons about investing and financial responsibility. Just ask our founder, Bart, and his wife, Elaine. If their children wanted the hottest sneaker or the latest video game, they had to use funds from dividends on stocks they owned. Mom and Dad were not an ATM. Their children learned good money management skills, which is something everyone could use.

No, I am not trying to score brownie points because year-end reviews are soon. Kids learn a lot when they have a vested interest in the activity.

Also, charities would welcome a gift of stock. You must have owned the stock longer than one year. You can claim a tax deduction on the value of the stock at the time of transfer. You will not incur a capital gain, as long as you give the shares, not the proceeds from a sale. You will incur a capital gain if you sell the shares first.

Of course, there are tax issues, exclusions, and other requirements, depending upon the type of gift. If you have a particular stock you would like to give, please contact your financial advisor.

It is important to process the transaction early. The later you wait in December, the harder it is for brokers to complete the transaction before year end. Besides, with all the chaos that surrounds the holiday season, wouldn’t it be nice to cross off one thing on the to-do list as soon as you can?

Now, let’s all take a deep breath and prepare ourselves for the madness to come. I hope everyone has a safe and happy holiday season.

Cristy Freeman, AAMS
Senior Operations Associate

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The Uncertain Future of the Estate Tax

Although it isn’t a pleasant subject, estate taxation will probably begin to seep into media coverage.  Why?  Because currently it is set to disappear entirely in 2010 only to return in 2011 with a 55% rate on the portion of estates over $1 million.  

In 2009 the value of an inheritance shielded from taxation is $3.5 million with the excess taxed at a 45% rate. This is the next to last year of President George W. Bush’s 10-year $1.35 trillion across-the-board tax cut effecting estate taxation.  

Politically speaking, President Obama has proposed permanently locking in the exclusion of $3.5 million and the current tax rate of 45%.  Congressional Republicans favor a full repeal.  The central players on estate tax policy are currently preoccupied with the health care debate: Senate Finance Chairman Max Baucus (D, Mont.) and House Ways and Means Chairman Charles B. Rangel (D, N.Y.).  So, you can imagine that many different scenarios could play out. 

Given all the issues facing our lawmakers and demanding their time, I would suspect the simplest route would be to fall back on a one year extension of the current rate and exemption.  Then, it could be more adequately addressed next year.   

Although I personally favor repeal, I’m reminded of the quote from Mark Bloomfield, president of the American Council for Capital Formation, “Those people who believe repeal of the estate tax will happen are probably more delirious than Ralph Nader thinking he could be president of the United States.”    

Michael E. Bruder, CFP®, CTFA

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Reporting Qualified Charitable Distributions (QCD’s)

Clients will be relieved to know that this option, first effective in 2005, has been extended for 2009.   It was designed to allow an IRA owner to take all or part of their required minimum distribution (RMD) as a distribution payable to a qualified charity and not be included in the account owner’s income.  Recall, RMDs have been suspended for 2009.

Some of the QCD requirements are: the IRA owner must be at least 70 ½ at the time of the transfer; it must be a direct transfer to the charity; it is capped at $100,000 per account owner per year; there is no charitable deduction, and the charitable substantiation rules apply. 

I’m sure a lot of you have heard about the QCD.  However, most are confused as to who reports it and how.  Make no mistake; reporting is the taxpayers’ responsibility!   On your Form 1040 tax return line 15 refers to IRA distributions.  On 15a, list the amount for the QCD.   Since line 15b refers to the amount of an IRA distribution that will be taxed, you would enter -0-.    If you want you can also add the words “qualified charitable distribution” or “QCD”. 

Hopefully, this brings some clarity to the reporting procedure!

Michael E. Bruder, CFP®, CTFA

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Let Them Know You Care

Let Them Know You Care

I have always enjoyed being around positive people and listening to them converse. Only one time will I take issue with their positive words: when the conversation starts with “If I die.” I politely inform them it’s a “when,” not an “if,” conversation which usually brings laughter followed by reflective thought. Think about it, and I’m sure that you will catch yourself saying “if I die” instead of “when I die.”

One of the most important things you could ever do, difficult as it may be, is to have a frank family discussion about your wishes at death. I’ve watched families do this with surprising results. Conversations begin to revolve around what is important instead of what someone thought was important. Brothers and sisters begin to connect in a way they haven’t in years and the difficult issues that surface are navigated properly. While you thought all the kids wanted to be treated equally, you find that siblings would rather their share go to their brother or sister, for a variety of reasons. No more are loved ones confused and left guessing about motives when the Will is read. Instead, there is clarity, reasoning and often times, harmony.

Set aside a specific date, time and place-preferably a neutral one. Let your loved ones know your intention is to discuss your final wishes and request that they be open-minded. Establish some ground rules: one person speaks at a time; all will get a chance to speak; respect is paramount; etc. Then openly and honestly, share your thoughts. The feedback you receive might have you alter your plans in a way that brings you the closure you had struggled to achieve. Or, it may suggest that your plan mirrors what your family had hoped. Either way, you now have definitive answers to help guide you should you believe changes are warranted.

Yes, you are taking a risk. But, haven’t you been taking measured risks your entire life?
Why not let them know you care!

Michael E. Bruder, CFP®, CTFA
Senior Financial Advisor
Senior Trust Advisor

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Watch Out For That Tree!

Recently, I took a week off for a stay-at-home vacation. The Friday before the beginning of my vacation, I was in a big hurry to get to work. As I eased my car down my driveway, my mind was focused more on work than on the tree at the bottom of my driveway. The loud bang when my car hit the tree certainly redirected my attention.

I exited the car and was stunned at the damage caused by a small tree. Back in the old days, if your car hit a tree, you might knock off the dust on your car. You certainly would not cause major damage.

I was even more shocked when I learned how much the repair will cost. In a flash, I realized how important it is to have an emergency fund.

We have all read that you should have enough money to cover six months of expenses. Saving such a large sum can be a daunting task. You can understand why some people never bother, choosing instead to rely on retirement funds or credit cards for emergency expenses. It costs more in lost savings in a retirement account for an early withdrawal or exorbitant interest rates and fees from charges to your credit card, depending upon your emergency source.

I started small as I began building my emergency fund. As do most brokers and banks, Charles Schwab, Fidelity, and T.D. Ameritrade offer automatic debit programs. I have a fixed sum withdrawn from my checking account every pay period. I found that I would never “pay myself first” if I had to manually sweep the funds.

You can start an emergency fund too. Just call your Parsec investment advisor and ask about setting up an automatic debit program. The service is free and requires minimal paperwork. Even if you set aside just $10 per week, at year’s end you will have $520 that would have otherwise disappeared in your budget. It is a start!

Now, if you will excuse me, I need to surf eBay’s site. Perhaps a vintage Caddy could survive an attack from a malevolent maple.

Cristy Freeman, AAMS®
Senior Operations Associate

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Roth Conversions

Currently, you can convert your traditional IRA to a Roth IRA if your adjusted gross income is less than $100,000.  In 2010 the income limitation is being lifted for one year only, so now is the time to start thinking if a conversion is right for you. 

 

When you reach age 70 ½ you can no longer contribute to a traditional IRA.  In fact, you must start required minimum distributions at that time.   There are no required minimum distributions with a Roth account and you can continue to contribute as long as you have earned income.   A contribution to a traditional IRA is tax deductible if you meet the eligibility rules on income; a contribution to a Roth is not tax deductible.  However, all withdrawals from a traditional IRA are taxed like ordinary income; Roth withdrawals are not taxed. 

 

The downside for the conversion is that you must pay taxes on the amount you convert, but taxes on 2010 conversions can be spread out over 2010 and 2011.  Of course, we don’t know what the future will bring but I’m fairly sure it will still include taxes.  In retirement it would be a benefit to have several sources of income — taxable accounts billed at the capital gains rate, retirement money taxed at your ordinary income tax rate, and Roth money that is tax free.   Or, you could leave the Roth account to your children and they could enjoy tax free withdrawals for their lifetime. 

 

Please contact your advisor if you are interested in the Roth conversion.

 

 

Barbara Gray, CFP®

Partner

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Budgeting and Saving in Uncertain Times

The lower real estate and stock prices brought on by the economic recession has all Americans re-examining their spending priorities. The increased savings rate comes on the back of a long-period of over spending by most households in America. Everyone should have a basic household budget or cash flow statement. Keeping track of all inflows and outflows is useful exercise. Budgeting creates awareness about spending and forces consumers to prioritize the importance behind their consumption. Identifying a shortfall in inflows early on is imperative to then take corrective actions to get back on a sustainable budget.

There are many account strategies to consider when saving money. After establishing a comfortable emergency reserve, an obvious choice is to increase your savings rate to work sponsored retirement plans (401k and 403b), IRAs and Roth IRAs. Using a taxable securities portfolio should be considered once tax advantaged accounts have been maxed out. Section 529 education accounts and Roth conversion strategies are a little less known. Your advisor at Parsec Financial can guide you through the many account strategies to determine which makes the most sense, taking into consideration your unique goals and objectives.

Rick Manske, CFP
Managing Partner

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Living Trusts

You’ve heard you might need a Living Trust and have no idea what it is or how it could be of benefit. Relax; you are not alone.

The trust world can be very intimidating and complex with its own confusing acronyms. So instead of delving deep into that world, I’ll speak to three benefits of a Living Trust. Please know that your advisor can work individually with you to help determine if you and your family can benefit from one.

First, it provides continuity. Initially, you control and manage the assets in your trust. Should you become incompetent, incapacitated or die, your Successor Trustee can step in immediately to manage the assets as you have instructed. This prevents unnecessary court involvement, saving time and expense. And, it allows for quick intervention, minimizing interruption of asset management for you or your heirs.

Second, it provides privacy. At the time of your death the assets will be managed or distributed as you have directed and are shielded from public view. This is different from a will which at death is probated and becomes a public document. Therefore, anyone can go to the courthouse, pay a fee and get a copy of a probated will. A Living Trust will never become a public document.

Third, it avoids probate. This saves time, court expense and involvement, and shields it from public view as discussed. Since a trust never “dies,” it isn’t subject to probate and the associated time consuming court involvement and expense.

Although these are not the only reasons to utilize a Living Trust, they are important ones. Please call us if you would like more information.

Michael E. Bruder, CFP®, CTFA
Senior Financial Advisor
Senior Trust Advisor

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