Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Wednesday, December 14, 2011

Last Minute Tax Planning: Low Taxable Income

If your 2011 taxable income (line 43 IRS 1040) is going to be below $69,000 married or $34,500 single then you need to look at your taxable investment accounts and maybe sell and buy back (if prudent) to enable you to “recognize” long term gains this year. (This is not about short term, less than one year, gains.)

Why? No long term capital gains tax is due if your taxable income puts you in the 10 or 15 percent tax bracket. The law changed in 2008 and expires at the end of 2012 when long term gains tax rates go back to 20%.  This will increase your “basis” in the holding and allow for fewer taxes on future gains than if you just continued holding these securities (assets).  This does suppose they continue to go up in value.

At this time of year we advisers are looking to “harvest” long term gains and offsetting losses to increase the “basis” of holdings. This is good tax planning in most years.  It may not be that good this year, but for reasons not germane to this missive. Call or write to ask about this.

For the past couple of years and for the next year (2012), those taxpayers finding themselves in lower brackets should take advantage of this incentive to sell long term holdings that have increased in value.  If prudent, they can buy them back immediately without a waiting period which involves selling long term capital losses (wash-sale rule).

Your tax advisor or financial planner should always be consulted before implementing this kind of strategy. Why? Just selling for tax reasons, may not be the best strategic move for your portfolio. That’s why this discussion is for education and not actual advice. “Your mileage may vary” YMMV as they say in the text world.

A special thank you to Michael Kitces, author of the Kitces Report, for reminding us planners to highlight this issue again this year.

Wednesday, December 7, 2011

Our Predictions for 2012

It’s that time of year again - prediction time.

What’s going to happen next year?  As usual, I don’t know.  How about you?  I just finished reading Forbes Magazine’s end of year Investment Issue and it didn’t help me come to any new conclusions. Rats.
Now for some breaking news. For the first time this year, I’ll be sending out a separate survey to those that frequently open my emails to see what you (they) say to some speculative questions I intend to offer for their response.  Of course, I’ll publish the results.

As we finish up this year going over many of our clients investment portfolios for the second or more frequent times, we have come to the conclusion, as we often do, that less is better -  less changes, less explanation, less understanding, and less acknowledgement that we can predict the future. Less is better. How unique?

So how are our clients, collectively doing?  Not bad.  Our clients are putting away more money since the two great dips of 2001-2 and 2008-early 2009.  They are also lamenting the continued softness of the stock and bond markets and the continued sinking of housing values. I feel the same emotions. 

By the way, our current favorite economic guru, Anirban Basu of the Sage Group, says that housing deleveraging will take a decade, until 2017.  (Sigh)

On the other hand, as a group our clients remain optimistic for the long run.  They are optimistic that we can do it – whatever “it” might be. (Mr. Minick, my 8th grade English teacher, please forgive the dangling participle.)

This is the point that I should now report that our clients who retired during 2008-2010 have stated that they are doing “OK”.  That surpassed our expectations.  But the way, we can’t recall one client having told us it was mistake to retire when they did these past three years. (However, we acknowledge if they do regret it they may not have told us.)

It’s an election year coming up – surprise! You think 2011 was an up and down year?  You just wait.  The media loves a horse race and we will be having lots of them.  We have some international horse races going on too.  We predict the markets will over react in both directions. Don’t pay much attention.
What can a long term saver and investor do?  As I said in my first ever (August 2011) urgent email, “turn off the TV”.  You might recall this was the first time in 9 years I felt compelled to send out an “all hands on deck” email.

If you do want to ponder some thoughtful ideas and research on the subject of why we do what we do and why we make so many mistakes, I’d recommend Jason Zwieg’s “Your Money and Your Brain”, and Meir Statman’s “What Investors Really Want”.  Both of these books have to do with our behavior as investors.  

Many of you will recall, I’ve been recommending Charles Ellis’ “Winning the Loser’s Game” 5th edition, for the past year or so. If you buy, borrow or beg one of these books and don’t think it’s of value after reading it, I’ll reimburse you whatever it cost. No time limit on this offer to regular readers of this blog.

So that brings me to my list of concepts I’d like you to consider exploring as we enter 2012:
·        The illusion of control
·        Confirmation
·        Hind sightedness
·        Patterns
·        Availability

You’ll find these concepts and more in the three books we’ve just recommended.

So for 2012, we suggest you follow Warren Buffet’s advice to just invest in index funds as much as you can.  I think John Bogle, founder of Vanguard, said that too.  If you must invest in a limited number of active funds in your work retirement plan, then try to find low cost and diversity.

My wish for this holiday season is for both you and me to have more family time and count our blessings each day. Thanksgiving was a good start. Keep it up. I predict it will improve our year 2012.