I came across THIS VIDEO today and thought it offered a good concise summary of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. I am currently putting together a flier that highlights some of the general provisions of the 2011 tax code and will post it in the next week.
Category: Personal Finance
Unique Perspective on Evaluating Cash-flow
If you’re like most people then you know that your spending habits ultimately determine your ability to generate wealth. If you spend more than you make then you will go into debt which is not a sustainable. If you’re able to spend less than you make then you can set money aside for savings and investment. Do this long enough and you’re almost certainly going to become wealthy. This concept is widely understood yet very few people track their spending. In my opinion it is one of the most important yet overwhelming processes in the financial planning field.
One of my long-term professional goals is to come up with a process for helping households evaluate their cash-flow and provide clarification on the age-old question: Where does my money go each month?
In doing some preliminary reading I came across THIS ARTICLE from the December 2008 “Journal of Financial Planning“. In it the author takes a unique perspective in measuring cash-flow. Most models I see use a fairly simple approach where a person categorizes their spending into different accounts such as “housing”, “groceries”, “entertainment”, etc. With this approach the author views spending in…..
1. The static account is their 30-day
money. This is what it takes to run
their household for a month—the
mortgage, utilities, car payments,
insurance.
2. The control account is their seven-day
money. These are the funds that they
will spend today or within the next
week. These are lifestyle types of
expenses—dining, recreation, hobbies,
groceries, and gas for the car.
3. The dynamic account funds all future
expenses, from trips and gifts, to cars,
education, and retirement.
This perspective is fairly simple and allows the household to see what areas they have control over. I look forward to giving this approach a whirl soon.
Choices, Choices, Choices….
Choices, choices, choices…. that is the subject of THIS ARTICLE in the current issue of The Economist. This is a great read if you have some time over the holiday weekend. The gist of the article is that despite a growing number of choices at the grocery store, mall, bank, internet etc. many consumers feel overwhelmed and decide not to buy at all. In essence, as producers bring increased customization to market they are actually harming their ability to sell product.
This got me thinking about my process with prospective clients. I take great pride in providing my clients with a thorough overview of their loan options based on their individual objectives. However, after reading this article I now feel like I might be overwhelming them.
If you have any suggestions for me please leave them in the comment section below.
Otherwise, here are a few interesting excerpts from the article:
*”The average American supermarket now carries 48,750 items, according to the Food Marketing Institute, more than five times the number in 1975. Britain’s Tesco stocks 91 different shampoos, 93 varieties of toothpaste and 115 of household cleaner.”
*”The University of California, Berkeley, has over 350 degree programs, including Buddhist Studies and Lesbian, Gay, Bisexual and Transgender Studies, each made up of scores of courses.”
*”In one landmark experiment, conducted in an upmarket grocery store in California, researchers set up a sampling table with a display of jams. In the first test they offered a tempting array of 24 different jams to taste; on a different day they displayed just six. Shoppers who took part in the sampling were rewarded with a discount voucher to buy any jam of the same brand in the store. It turned out that more shoppers stopped at the display when there were 24 jams. But when it came to buying afterward, fully 30% of those who stopped at the six-jam table went on to purchase a pot, against merely 3% of those who were faced with the selection of 24.”
*”As options multiply, there may be a point at which the effort required to obtain enough information to be able to distinguish sensibly between alternatives outweighs the benefit to the consumer of the extra choice.”
*”The more that options multiply, the more important brands become. Today, when paralyzed by bewildering choice, a consumer will often turn to a brand that is cleverly marketed to appear to be one that others trust.”
Summary of Tax legislation passed by Congress on December 16, 2010
In case you’re wondering what is embedded in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 here are the highlights thanks to the Financial Planning Assoication:
HIGHLIGHTS
Two-year extension of all current tax rates through 2012
- Rates remain 10, 25, 28, 33, and 35 percent
- 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
- 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)
Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012
- Reunification of estate and gift taxes
- 35% top rate and $5 million exemption for estate, gift and GST
- Alternatively, taxpayer may choose modified carryover basis for 2010
- Unused exemption may be transferred to spouse
- Exemption amount indexed for inflation in 2012
AMT Patch for 2010 and 2011
- Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows the nonrefundable personal credits against the AMT.
Extension of “tax extenders” for 2010 and 2011, including:
- Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
- Above-the-line deduction for qualified tuition and related expenses
- Expanded Coverdell Accounts and definition of education expenses
- American Opportunity Tax Credit for tuition expenses of up to $2,500
- Deduction of state and local general sales taxes
- 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
- Exclusion of qualified small business capital gains (IRC§1202)
Temporary Employee Payroll Tax Cut
- Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.
FULL SUMMARY
Reductions in Individual Income Tax Rates through 2012
- Income brackets remain 10, 25, 28, 33, and 35 percent
- Capital gains and dividend rates remain at 0 or 15 percent
- Repeal of the Personal Exemption Phase-out (PEP)
- Repeal of the itemized deduction limitation (Pease limitation)
- Marriage penalty relief
- Expanded dependent care credit
- Child Tax Credit
- Earned income tax credit
Education Incentives Extended Through 2012
- Expanded Coverdell accounts and definition of education expenses
- Expanded exclusion for employer-provided educational assistance of up to $5,250
- Expanded student loan interest deduction
- Exclusion from income of amounts received under certain scholarship programs
- American Opportunity Tax Credit of up to $2,500 for tuition expenses
Extension of Certain Expiring Provision for Individuals through 2011
- Above-the-line deduction for qualified tuition and related expenses
- Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes. Donors may treat donations made in January 2001 as if made in 2010.
- 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
- Deduction of state and local general sales taxes
- Parity for employer-provided mass transit benefits
- Contributions of capital gain real property for conservation purposes
- Deductibility of mortgage insurance premiums for qualified residence
- Estate tax look-through of certain Regulated Investment Company (RIC) stock held by nonresidents for decedents dying before January 1, 2012
- Above-the-line deduction for certain expenses of elementary and secondary school teachers
Alternative Minimum Tax (AMT) Relief
- The legislation increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). It also allows the nonrefundable personal credits against the AMT.
Temporary Estate Tax Relief and Modification of Gift and Generation-skipping Transfer Taxes
- Higher exemption, lower rate. The legislation sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
- Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption. The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
- Reunification of estate and gift taxes. Prior to the 2001 tax cuts, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
- As noted above. the look-through of RIC stock held by non-resident decedents is extended through 2011
Temporary Extension of Investment Incentives
- Extension of bonus depreciation for taxable years 2011 and 2012
- Small Business Expensing: increase in the maximum amount and phase-out threshold under section 179. Sets the maximum amount and phase-out threshold for taxable years 2012 at $125,000 and $500,000 respectively, indexed for inflation. (Previously-passed legislation raised the 2010 and 2011 max amount and phase-out at $500,000 and $2,000,000 respectively.)
Extension of Certain Expiring Provisions for Businesses through 2011
- Enhanced charitable deduction for corporate contributions of computer equipment for educational purposes
- Enhanced charitable deduction for contributions of food inventory
- Enhanced charitable deduction for contributions of book inventories to public schools
- Special rule for S corporations making charitable contributions of property
- 15-year straight-line cost recovery for qualified leasehold improvements
- Employer wage credit for activated military reservists
- Tax benefits for certain real estate developments
- Extension of expensing of environmental remediation costs
- Treatment of interest-related dividends and short term capital gain dividends of Regulated Investment Companies (RICs)
- Work opportunity tax credit (WOTC)
- 100% Exclusion of qualified small business capital gains held for more than 5 years (IRC§1202)
- Research credit
- Qualified Zone Academy bonds
Extension of Unemployment Insurance
- The unemployment insurance proposal provides a one-year reauthorization of federal UI benefits.
Temporary Employee Payroll Tax Cut
- The legislation creates a payroll/self-employment tax holiday during 2011 of two percentage points. The employer’s share of the payroll tax remains unchanged. This means employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800. The social security trust fund is made whole by transfers from the general fund.
The emotion of financial decision making
I’ve recently become very interested in the field of neuroeconomics. The word “neuroeconomics” is a scientific-sounding word that basically describes the field of psychology that studies how we make decisions about money. The reason I find this so interesting is because as a financial professional and educator I am always dumbfounded when I see people make poor financial decisions (including myself) even though they know better. For example, everyone knows that they need to spend less than they make yet for a few months in 2006 households collectively in the United States were spending more than they made. Even grade school students know this isn’t wise yet again and again households find themselves in difficult financial circumstances. But why? For the longest time I blamed the lack of a comprehensive financial curriculum in our school systems but after reading into the field of neuroeconomics I’m beginning to think that emotion has more to do with it than lack of education.
So, I’ve added a category to devote to this topic and plan to write more about it in the future. If you have any experiences or resources that you’d like share please comment below.
What is title insurance?
Whenever I am going through an estimate of settlement charges with a client I always describe title insurance as being “one of the most widely held and least understood” insurance policies out there. In a real estate transaction, title insurance protects the buyer and the lender from any deficiencies to the title of the collateral property. In this week’s Economist magazine this article appears in the finance & economics section and explains how title insurance works for a piece of art. If you want to better understand title insurance I would recommend you read it.
Becoming financially literate means knowing yourself
If you have been a follower of this blog then you know that I am passionate about empowering consumers with financial literacy. When consumers understand their choices and can make informed decisions then it leads to better outcomes for them as well as the financial service firms who are serving them. The traditional approach to financial literacy is to teach students about budgets, banking, investing, credit, etc. In today’s WSJ however, they run an article (see HERE) about a gentleman by the name of Yuval Bar-Or who is taking a different approach. He argues that making intelligent financial decisions is as much about understanding your emotional make-up as it is about knowing the ins & outs of financial products. I tend to agree. Consumers make decisions about their mortgages based on emotion and not necessarily about what the numbers signal. I plan to look into this guys work.
Can QE2 overcome history?
The WSJ’s marketbeat blog pointed me to THIS POST on visualizingeconomics.com. The chart shows the inflation adjusted S&P 500 stock index back to 1871 and tracks it against the regression line. This analysis reminds me a lot of Dr. Jeremy Siegel’s presentation that I attended here in Portland back in November 2009. According to this chart the Fed’s efforts to ease monetary policy might help in the short run but it looks like the S&P has 20% to fall before it gets back to its historical regression line which you would assume will happen at some point.
Trends in Retirement Planning
The Employee Benefit Research Institute just released a report on employee-sponsored retirement plans and employee participation for 2009. One would expect that during a recession fewer people would participate in their employer-sponsored retirement plans but I found some of the findings downright scary. HERE is a link to to download the full report. Here are some highlights:
- Among full-time, full-year wage and salary workers ages 21–64 (those with the strongest connection to the work force), 61.8 percent worked for an employer or union that sponsors a plan. This is down almost a percentage point from 2008 and almost 8 percentage points lower than the sponsorship high point of 69.4 percent measured in 1999.
- Among full-time, full-year wage and salary workers ages 21–64, 54.4 percent participated in a retirement plan in 2009….down almost 6 percentage points from the high of 60.4 percent measured in 1999.
For most households employee-sponsored retirement plans play a significant role in providing post-retirement income since social security benefits will only replace a small portion of pre-retirement income. Lower participation can only result in fewer people being able to retire or more people relying on public assistance once they hit retirement age.
Tyler Bollhorn provides 30 trading rules
I came across THIS POST earlier today. I don’t consider myself a “trader” in the stock market (I prefer the term “investor”) but no matter what you call yourself there are some pearls of wisdom. I’ll post a couple of the rules here but would encourage you to visit the post and read them all for yourself.
3. Never trust a person more than the market. People lie, the market does not.
5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
9. The market is usually efficient and can not be beat. Exploit inefficiencies.
15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
18. Don’t worry about the trades that you miss, there will always be another.