Charitable Giving Tips

I recently read a study by The Center on Philanthropy at Indiana University.  “The 2008 Study of High Net Worth Philanthropy,” sponsored by Bank of America, found that over 90 percent of households surveyed planned to make donations using cash and checks in the near future.  A little over 30 percent planned to donate securities.  

As you probably know, donating appreciated securities has tax advantages.  Sure, it is not as easy as writing a check.  With proper planning and some paperwork, you can lower your tax burden while providing the donation amount you already planned to give.  

It is important to consider the option this year if you had a major tax event.  Perhaps you converted from a traditional IRA to a Roth IRA.  Maybe you have a capital gain from a stock sale.  Donating appreciated securities could minimize the resulting tax burden.      

Such donations can also become part of long-term estate planning.  Do you want to provide a legacy for the charity or charities of your choice?  Do you want to donate a fixed sum every year?  Would you like for your children to be involved in charitable giving decisions? 

Your investment advisor can assist you with both your short-term and long-term charitable giving strategies.  If you are interested in donating securities this tax year, I urge you to contact your advisor soon.  It is best to submit securities donations as early as possible to ensure processing before December 31. 

Cristy Freeman, AAMS
Senior Operations Associate

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Too Much Information?

Too much information running through my brain
Too much information driving me insane
–The Police

The more you trade, the worse you do. This has been demonstrated in repeated academic studies over various time frames. Why does it work this way? Because the human brain is wired to do exactly the wrong thing at the wrong time in the stock market.

As our clients know, a core part of our investment philosophy is keeping a long-term perspective. When we purchase a stock, we intend to hold it. While it is difficult to calculate exactly, our average holding period is probably in the 4-6 year range.

Earlier this year, I chuckled when I saw there is now an iPhone application for mobile trading. As I have told some of my friends, do you really need to be able to place trades from your child’s soccer game? And shouldn’t you be watching the game anyway? Is this the type of logical, well-thought out investment decision that will enable you to select and hold a diversified portfolio of assets to help accomplish your financial goals? No! It caters to short-term thinking, which is often destructive.

So imagine my horror when I saw a commercial last week on CNBC for automated trading. Now you don’t even need to initiate the trade from the soccer field. You can select some strategy from a menu, set up your trades, and then go off to work. When you come home, your email inbox will have your trade confirmations and you can see how you did. While you’re at it, why not add some leverage by way of margin to help get wiped out sooner?

As I see it, the underlying problem is the constant media barrage of information telling us that we need to do something. You can watch financial news 24/7 these days, and every channel is urging some sort of action. But these experts are not talking about things like risk tolerance, what mix of assets is appropriate for a particular situation, how much you need to save in order to retire, and how much you can spend from your portfolio in retirement. Your financial plan is at least as important as your specific investment strategy, and perhaps more so.

There are many strategies out there, some good and some bad. But being able to liquidate your portfolio poolside, or trying to trade your way to riches without knowing anything about the companies you are buying sounds like a disaster waiting to happen.

Bill Hansen, CFA
August 13, 2010

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George, I Can Lie About My Age!!

This year, I celebrate a milestone birthday. Let’s just say I am now officially too old to be George Clooney’s girlfriend.

As often happens with milestone birthdays, you reflect about how you imagined your life would be at this stage. Perhaps you had envisioned retiring at an early age. Maybe you wanted to start your own business. Or save tons of money, quit your job, and travel around the world for a couple of years. (Hey, you can dream.)

Then, life happened. You devoted yourself to a career. You bought a home. You got married and started a family. The years go by. You wake up one day and realize you’re that age.

When you first began your journey with Parsec, your goals were just rough ideas of where you thought you wanted to be in 10, 15, 20 years. Now that time has passed, are those goals still the same? Have you been affected by any of these events:

• Started a family
• Sent a child to college
• Lost your job
• Dealt with aging parents

We would also be remiss if we overlooked the extraordinary market volatility of the last two years.  All of the above events can significantly alter your financial plan.

Do you still have the same goals now that you did before these events occurred? Has your “deadline” for achieving those goals shifted? It is very easy in the day-to-day rush to not think about these things. However, it is important to evaluate your financial situation and goals periodically so you can stay on track.

Your financial advisor is here to help you. Together, he or she can review your financial plan and work to keep it in line with your changing life. Just call him or her anytime.

Cristy Freeman, AAMS
Senior Operations Associate

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How to Save Millions in Two Seconds!

I love headlines like that. Tightening our belts is the topic du jour during this economic disaster. While the leading indicators show an improvement, I am sure you know people who are still unemployed, have lost their homes, or are in serious financial straits. We are hardly out of the woods yet. So, I have compiled a list of my favorite tips for saving money:

Protect your credit score. Why?

o You qualify for better interest rates when your credit score is good, which saves you money in the long run.
o Your credit score impacts your property insurance rates.
o A prospective employer may want to check your credit. A bad score could hurt your chances, depending upon the employer.

Everyone knows you should get the free, annual credit report offered through AnnualCreditReport.com. Identity theft is not the only danger, though. Excessive debt and late payments or defaults can damage your score. All your sacrifices and stringent budgeting can be undone by a lousy credit score.

Be thoughtful about all purchases, not just the big ones. I am not talking about your daily Starbucks habit, although that can add up too. A lot of purchases are driven by a perceived need, rather than an actual need.

Don’t fall victim to the “it’s on sale” syndrome. You are not saving money if you really had no intention of buying the item in the first place.

The Internet is a fabulous tool. You can comparison shop without having to leave the comfort of your home.

Tip if you are considering an appliance purchase: Go to energystar.gov. Look for the Energy Star Appliance Rebate Program button. The “cash for clunkers” program is being offered for certain appliances this year. Each state has a different budget and rollout date. Our dishwasher died here at Parsec about three weeks ago. We waited for this program to start in North Carolina and saved over $100.

Ask about discounts. Some people will give you a discount, but you have to ask. My vet will match heartworm medicine prices offered by a national catalog retailer. I saved about $50.

Yes, it takes extra work to stretch your dollar these days. Hopefully, these tips can assist you in that task.

Cristy Freeman, AAMS
Senior Operations Associate

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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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