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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Thursday, October 4, 2012

Scary time this year

We are now in October, with nine months of the year behind us.  That’s a scary thought even though Halloween isn’t here yet.  The good news first:
First quarter 2012 saw the US, Europe and Emerging Markets up big time: +13%/+11%/+14%.
Second quarter 2012 saw them down:  US -3%/ Europe -7%/ Emerg Mkts -9%
Third quarter 2012 was good:  US +6%/ Europe +9%/ Emerg Mkts +8%
Cumulative Year to Date:  US +16%/ Europe +16%/ Emerg Mkts +12%

Naturally, looking in the rear view mirror is the easy part and things are looking good.  But that’s only stock market investments. Bonds are at low historic rates. Since we believe the stock market is forward looking, we have no idea where it will end up on December 31st.  The signals are mixed.  Staying fully invested is still our thought for right now.  However, that’s always been our thought.

We had a do-nothing congress this year so we remain in tax limbo until very late this year or early next year depending on how far the can is kicked down the road.

Capital Gains Fever

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of current lower rates.  If we haven’t helped you before then you might not be familiar with this “harvest” term or technique of taking advantage of lower tax rates or losses to offset gains.  On the other hand, if you will be passing on assets and are in the 15% tax bracket or lower, then you might want to hold on for the stepped-up basis upon death.  We are sorry it’s so complicated, but we will point our finger at those 535 down in Washington, DC.

Medicare Surtax: 3.8%

Now we all have to understand where we will be on our 2013 tax return when it comes to Modified Adjusted Gross Income (MAGI) and Net Investment Income (NII).  For couples with over $250,000 in income filing jointly; married filing separately, $125,000; and all other taxpayers, $200,000; we will need to be open to strategies to reduce or eliminate the impact of this additional tax on certain income above these levels.

Other Tax Strategies for 2012

If we need to see more income this year we can explore converting some or all of an IRA to a Roth IRA.  The conversion will be taxed at today’s lower rates if we believe rates go up in 2013.  There also might be an opportunity to unwind this conversion up until fall of 2013.  We can also consider exercising non-qualified stock options if 2012 if we’re lucky enough to have some.

Don’t forget about Estate Taxes

The rules are set to lower the federal limits of individual exemption (and some states that are tied to the federal number) from the current $5,120,000 to $1,000,000 come January 1st, 2013 unless the you-know-who’s do something. Fat chance. The President wants a $3,500,000 individual limit and the opposition party wants to eliminate the tax altogether. Who knows when and where we will end up.
OK. That was the bad news.

Good news, bad news, and now great news: Jennifer Ventola has joined MainStreet as our new Client Services Manager. You’ll be hearing a lot more from her if you’re an ongoing MainStreet client.

We sincerely thank you for using our services in the past. If you are an ongoing client we encourage you to get your statements and questionnaires to us in a timely manner now that they are starting to show up in your mailbox or email inbox.  Scary means we will be working harder for you than ever before.

All the best, Jim and Anna    goes to both of us