Tuesday, March 18, 2014

CHINA, UKRAINE & THE MARKETS

New economic & political concerns are putting stocks to the test.

Dow drops again, analysts wonder. March 13 saw another triple-digit descent for the blue chips - the Dow Jones Industrial Average plummeted more than 230 points, the second market day in less than two weeks to witness a loss of 150 points or greater. The S&P 500's (small) YTD gain was also wiped out by the selloff. As the bull market enters its sixth year, it faces some sudden and potentially stiff headwinds, hopefully short-term.1,2

In Ukraine, the situation is fluid. As the trading week ended, much was unresolved about the nation's future. The parliament of its autonomous Crimea region had announced a March 16 referendum, which gave voters two options: rejoin Russia, or break away from Ukraine and form a new nation.3

Ukraine's government calls the referendum unconstitutional. The United States and key EU members agree and claim it violates international law. Russia welcomes the vote - 60% of the Crimean Peninsula's population is made up of ethnic Russians, and Russian troops more or less control the region now.3

Russia wants the real estate (its Black Sea naval fleet is based on the Crimean Peninsula) and could spread its economic influence further with the annexation of that region. The cost: economic sanctions, probably harsh ones. Should diplomacy fail to stop the secession vote, then Russia can expect "a very serious series of steps Monday in Europe and [the United States]," according to Secretary of State John Kerry.3

So far, the moves have been largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia's entry into the OECD, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine.Additional "serious" steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the EU opting to get more of its energy supplies from other nations.Russia could respond in kind, of course, with similar asset freezesand possible pressure on eurozone companies doing business in Ukraine. The fact that Russia has already staged war games near Ukraine adds another layer of anxiety for global markets.4

Investors see China's growth clearly slowing. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China's industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%. These disappointments bothered Wall Street greatly on Thursday. The news also roiled the metals market - copper fell 1.3% on March 13, its third down day of the week. Besides being the world's top copper user, China also employs the base metal as collateral for bank loans.1,5,6

As Chinese Premier Li Keqiang noted on March 13, the nation's 2014 growth target is 7.5%; the respected (and very bearish) economist Marc Faber told CNBC he suspects China's growth is more like 4%. The upside, Faber commented, is that "4 percent growth in a world that has no growth is actually very good."6

Will the bull market pass the test? It has passed many so far, and it is just several days away from becoming the fifth-longest bull in history (outlasting the 1982-7 advance). Bears wonder how long it can keep going, referencing a P-E ratio of 17 for the S&P 500 right now (rivaling where it was in 2008 before the downturn), and the 1.9% consensus estimate of U.S. Q1 earnings growth in Bloomberg's latest survey of Wall Street analysts (down from a 6.6% forecast when 2014 began).1

Then again, the weather is getting warmer and the new data stateside is encouraging: February saw the first rise in U.S. retail sales in three months, and jobless claims touched a 4-month low last week. Maybe Wall Street (and the world) can keep these signs of the U.S. economic rebound in mind as stocks deal with momentary headwinds.1

Citations.
1 - bloomberg.com/news/2014-03-12/nikkei-futures-fall-before-china-data-while-oil-rebounds.html [3/12/14]
2 - ajc.com/feed/business/stock-market-today-dow-jones-industrial-average/fYjPS/ [3/3/14]
3 - cnn.com/2014/03/13/politics/crimea-referendum-explainer/ [3/13/14]
4 - uk.reuters.com/article/2014/03/13/uk-ukraine-crisis-factbox-idUKBREA2C19L20140313 [3/13/14]
5 - cnbc.com/id/101492226 [3/13/14]
6 - cnbc.com/id/101489500 [3/13/14]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

Tuesday, March 11, 2014

20 THINGS YOU PROBABLY DON'T KNOW ABOUT THE RUSSIAN INCURSION INTO THE UKRAINE

Our hearts and prayers go out to the people of Ukraine, as they undergo both an internal political crisis and what appears to be military intervention from Russia. For people of a certain age, the current events, with tanks rolling across the Russian border into a neighboring nation that wants to exercise its freedom, it feels a bit like the Cold War days all over again.

Whenever we see troop movements and fires raging in the streets of a capitol city the size of Chicago, our instinct is to assume the worst and move our money to the sidelines. But is this really the best strategy? Some commentators see any market downturn as a buying opportunity, since stocks are going on sale simply because of unfounded fear of economic aftershocks.

Here are some facts that you might not know about what has, hitherto, been a relatively quiet new member of the world economic community.

1) The word "Ukraine" means "borderland" in proto-Slavic. It appears to have acquired this name simultaneously from Poland, Austria and Russia, referring to the territory that sits across the border of so many European nations and Russia. In fact, the Polish referred to their troops stationed in this area as Ukranians--that is, borderlanders. Since the country became independent from the Soviet Union, it is no longer referred to internationally as "The Ukraine."

2) Ukraine's currency is the hryvnia, adopted in 1996 after the country suffered the greatest one-year bout of hyperinflation in global economic history. (Zimbabwe has since broken the record.) Today, one dollar will buy 9.6 hryvnias. A euro will buy 13.3 of them.

3) After Russia, Ukraine has the largest military presence in Europe. Ukrainian troops have been deployed as part of international peacekeeping missions in Somalia, Kosovo, Lebanon and Sierra Leone, and has engaged in multinational military exercises with U.S. military forces. NATO has accepted Ukraine as a member pending a national referendum on the matter--which will obviously be delayed until the conflict with Russia has played itself out.

4) Ukraine has one of the world's most active space programs. The National Space Agency of Ukraine has launched six self-made satellites and a total of 101 launch vehicles. The country also manufactures the An-225 aircraft, the largest aircraft ever built.

5) Due to low birth rates, Ukraine's population is declining at the sixth fastest rate in the world, behind the Cook Islands, the Federated States of Micronesia, the Northern Mariana Islands, Niue (an island nation in the South Pacific) and the Eastern European nation of Moldavia, which borders Ukraine.

6) Nevertheless, Ukraine's largest city, Kiev, has a higher population (2.8 million) than Chicago, America's third-largest city. The population of Kharkiv, Ukraine's second-largest city (1.4 million), is greater than San Antonio, San Diego and Dallas, America's seventh, eighth and ninth most populous cities.

7) According to the World Bank, Ukraine's economy is the 51st largest in the world, ranking just behind Peru and the Czech Republic, and just ahead of Romania and New Zealand. But its $7,295 (US) per-capita income (a rough measure of a nation's wealth) ranks 106th in the world, behind Namibia and El Salvador and ahead of Algeria, Micronesia and Iraq.

8) Ukraine co-hosted the Euro 2012 football (soccer) tournament (with Poland), which is one of the major sporting events in Europe.

9) Even though the Chernobyl nuclear disaster occurred in Kiev, Ukraine operates the largest nuclear power plant in Europe.

10) Despite comments that Ukraine is divided between ethnic Ukrainians and Russia, 77.8% of the population is ethnic Ukraine, and only 17.3% is Russian.

11) Ukraine is known as the "breadbasket of Europe" for good reason. The country is the world's fourth largest producer of barley, 5th largest producer of rye, 11th largest producer of wheat, the 6th largest producer of oats and the 9th largest producer of soybeans.

12) Russia sells approximately 80% of its oil and gas exports to the European Union through pipelines that pass directly through Ukraine. The European Union receives 25% of its oil and gas from Russian sources through these conduits.

13) Ukraine also happens to be Russia's second-largest customer of petro-fuels.

14) Russia is drilling for oil in the shallow waters of the Black Sea near the Crimean Peninsula, which shows promise of having significant reserves.

15) Among others drilling in the same area: Chevron and Shell Oil. If they begin production under the Ukrainian flag, it would significantly undercut Russia's oil and gas market share and prices, simultaneously boosting Ukraine's economy.

16) When the Russians (as the Soviet Union) invaded Afghanistan in 1979, the U.S. and many Western nations boycotted the 1980 Olympic games, which were hosted in Russia. Is it interesting that Russia decided to move forces into Ukraine immediately AFTER the Sochi Olympics were finished?

17) Among the most likely responses to the Russian/Ukrainian crisis is the cancellation of the upcoming G8 summit in Sochi. Another possible response might remove Russia from the G8 club. This would embarrass Russian strongman Vladimir Putin at home and isolate him (and Russia's economy) abroad.

18) Russia's economy could be the big loser in the aftermath of the Ukrainian crisis. Share prices for companies based in Russia declined by 10 percent the day after mysterious soldiers took over the Crimean peninsula, also triggering an outflow of domestic currency that Russia desperately needs to invest in modernizing an economy largely (today) based on selling abroad what is pumped or mined out of the ground.

19) The threat of disruption of trade between Western nations and Russia (either due to sanctions or reluctance to deal with a country that doesn't seem to be focused on following international law) cost the Russian economy $60 billion in a matter of days--more than the total cost to stage the Sochi Olympics.

20 (BONUS) Let's assume that we are not headed toward a world war. Several commentators have unhelpfully pointed out that the Crimea became the flashpoint for World War I, but the world is somewhat different today. There could be some impact from higher energy prices in Europe if the Ukraine pipelines are disrupted temporarily, but Russia needs to sell its oil and gas as much as Europe needs to buy it. Unless someone is heavily invested in Russian stocks, the crisis will likely be seen as a portfolio non-event.

Sources:
http://www.cnbc.com/id/101458530
http://redmoneyupdate.com/tag/ukranian-crisis-and-how-it-may-impact-investments/
http://www.fool.com/investing/general/2013/12/10/growing-uncertaintly-in-the-ukraine-could-impact-l.aspx
http://en.wikipedia.org/wiki/List_of_largest_producing_countries_of_agricultural_commodities
http://en.wikipedia.org/wiki/Ukrainehttp://www.reuters.com/article/2014/03/03/us-urkaine-crisis-russia-economy-analysi-idUSBREA221D020140303

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

Monday, March 3, 2014

WHAT ABOUT myRA?

Chances are, you've heard about the new myRA retirement savings program that was proposed by President Obama during his State of the Union speech. But what is it, and how does it relate to the array of other retirement savings options you already have--including, of course, traditional and Roth IRAs, 401(k) and/or 403(b) plans? Is this something you need to be looking at in addition to, or instead of one of these other options?

The new account, which is scheduled to be introduced later this year, will be offered to workers who currently don't have access to any kind of retirement program through their employers. Remarkably, this underserved population is actually about half of all workers, mostly those who work for small companies which have trouble affording the cost of creating and administering a 401(k) plan. The idea is that a myRA would be so easy to install and implement (employers don't have to administer the invested assets), and cost so little (virtually nothing), that all of these smaller companies would immediately give their employees this savings option.

Only some of the employees would be eligible, however. Married couples earning more than $191,000, or singles earning more than $129,000, would be excluded from making myRA contributions. And there is currently no law which says that employers would be required to offer these plans.

So the first thing to understand is that people who already have a retirement plan at work, or who earn more than the thresholds, shouldn't give the myRA option a second thought.

Nor, frankly, would those people want to shift over to this option. Why? myRA functions like a Roth IRA, which means that contributions are taxed before they go into the account just like the rest of a person's salary, but the money will come out tax-free. Anybody can make annual contributions to a Roth IRA; the 2014 maximum is $5,500 for persons under age 50; $6,500 if you're 50 or older--and these are the same limits that will be imposed on the myRA. BUT--and this is a big issue--the myRA is not really an investment account. Any funds that are contributed to a myRA account earns interest from the federal government at the same rate that federal employees earn through the Thrift Savings Plan Government Securities Investment Fund--which is another way of saying that the money will be invested in government bonds.

Why does that matter? Retirement accounts that invested in the stock market earned close to 30% from their stock investments last year. The government bond investments that would have gone into a myRA earned 1.89% last year--which is below the inflation rate. In real dollars, that was a losing investment.

Another big issue is the employer match. Many workers who have a traditional 401(k) account get some of their contributions matched by their company, which effectively boosts their earnings. myRA accounts will get no such match.

The Obama Administration clearly understands the difference between saving in a government bond account and actual investing; there is a provision that whenever a myRA account reaches $15,000, it has to be rolled into a Roth IRA, where the money can be deployed in stocks, bonds or anywhere else the account holder chooses. The program seems to be designed to encourage younger workers to start saving much earlier than they currently do. Statistics show that the median retirement account for American workers age 25-32 is just $12,000, and 37% have less than $5,000.

Will they be motivated to save when myRAs roll out at the end of the year? Some commentators have noted that the money can be taken out of the account, for any reason, at any time, with no tax consequences. That is not a great formula for long-term savings. But it does make the myRA account a convenient way for a worker just starting out to build up a cash reserve which could serve as a cushion against job loss or unexpected expenses like car repairs. If it is not needed, the account could eventually grow into a retirement nest egg.

Sources:
http://www.dailyfinance.com/2012/11/14/retirement-savings-by-age-how-do-you-compare/
http://www.marketwatch.com/story/the-trouble-with-obamas-myra-plan-2014-01-31
http://www.foxbusiness.com/personal-finance/2014/02/12/what-all-fuss-about-myra-accounts/

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

Monday, February 24, 2014

WISE DECISIONS WITH RETIREMENT IN MIND

Certain financial & lifestyle choices may lead you toward a better future.

Some retirees succeed at realizing the life they want, others don't. Fate aside, it isn't merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don'ts - some less apparent than others - that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don't know how much they don't know. They end their careers with inadequate financial knowledge, and yet feel that they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire knowing that you'll have to assume some risk. Growth investing is increasingly seen as a necessity for retirees who want to keep ahead of inflation.

According to data and research compiled by the Social Security Administration, the average 65-year-old man will live to be 84 and the average 65-year-old woman will live to be 86. So that's a 20-year retirement. The SSA also notes that roughly a quarter of today's 65-year-olds will live past 90, and about 10% of them will live beyond age 95.1

If these seniors rely on fixed-income investments for the balance of their lives, they may end up with reduced retirement income potential, and in turn a reduced standard of living. Look at the Rule of 72: if an investment is yielding 2%, it will take about 36 years to double your money. Yes, interest rates are rising - but inflation should rise with them.2

A generation ago, mature Americans were urged to gradually shift their portfolio assets out of stocks and into fixed-income investments. One old rule of thumb was to subtract your age from 100, with the resulting number being the percentage of your portfolio you should assign to equities.3

Today, retirees and retirement planners are reconsidering this thinking. As the Wall Street Journal reported recently, one study of retirement money and longevity risk concluded that retirement funds may last longer if a retiree gradually increases the stock allocation within a portfolio about 1% per year from an initial range of between 20-50% to between 40-80%. The concept here is that a retiree's stock allocation should be lowest when their retirement nest egg is largest.3

Retire debt-free, or close to debt-free. Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.

Retire with purpose. There's a difference between retiring and quitting. Some people can't wait to quit their job at 62 or 65 - their work is "killing" them, or boring them senseless. If only they could escape and just relax and do nothing for a few years - wouldn't that be a nice reward? Relaxation can lead to inertia, however - and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other's dreams are in a good place.

The bottom line? Retirees who know what they want to do - and go out and do it - are contributing to their mental health and possibly their physical health. If they do something that is not only vital to them but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity - all these can take a toll on your capacity to live fully and enjoy retirement. It is never "too late" to quit smoking, quit drinking or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place hundreds or thousands of miles away where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then "find your tribe" - look for ways to connect with people who share your experiences, interests and passions, and who encourage you and welcome you. This social interaction is one of the great intangible retirement benefits.

Citations.
1 - ssa.gov/planners/lifeexpectancy.htm [2/6/14]
2 - investopedia.com/terms/r/ruleof72.asp [2/6/14]
3 - tinyurl.com/m8akefj [2/3/14]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

Tuesday, February 18, 2014

THE OPTIMISTIC DATA YOU NEVER SEE

If you want to feel depressed about the economy and the outlook for the investment markets, there are always pundits and media outlets to oblige you. I'm sure you're still seeing sober forecasts that the world is running out of oil and food, the U.S. economy was still mired in a painful hangover from the recession, that manufacturing jobs are fleeing America in droves, and the federal government is on a fast track to a Greece-like fiscal bankruptcy.

What sane person would invest in a world that is rapidly going to hell in a handbasket?

Before you buy your gun and cabin in the woods, before you stuff gold Krugerrands under the floorboards and a few years worth of canned food and bottled water in the pantry, you might consider some of the facts and figures that we aren't hearing about from the doomsayers.

Let's start with oil--specifically, the oft-quoted prediction that the world has experienced "peak oil," that we are using up our oil reserves, which will trigger a collapse of the global energy economy. Google "peak oil" and you can still read the doomsaying reports. But according to Wikipedia's latest entries, the OPEC countries actually have dramatically MORE reserves today than they did in 1980, and the numbers have been going up year-by-year. In 1980, Saudi Arabia reported 168 billion barrels of reserves, and the assumption was that most of its oil had been found and would be used up within 20 years. After 30 years of pumping oil and selling it to the world, Saudi Arabia is now estimated to have more than 264 billion barrels of oil in the ground. In 1980, Kuwait had an estimated 68 billion barrels of reserves. After thirty years of diligently pumping oil out of the ground, the country now has an estimated 101.5 billion barrels in the ground. Iraq's reserves have grown from 30 billion to 143 billion, the biggest jump of any OPEC nation except Venezuela, which had 19.5 billion barrels of proven reserves in the ground in 1980, and now is estimated to have more than 296 billion.

But the biggest oil and gas story in the world, by far, is the U.S. Fracking technology is controversial, but there is no controversy about its impact on the supply of oil and gas that is flowing into the U.S. economy at an ever-faster rate. In the ten years between 2001 and 2010, recoverable crude oil in the ground has risen from 144 billion barrels in the U.S. to 219 billion, and recoverable natural gas has risen from 1.28 trillion cubit feet to 2.54 trillion.

This impacts the economy in several ways. First, it provides American manufacturers and consumers with a steady supply of reliable, cheap energy. Second, it reduces imports of foreign oil, helping our economy balance its trade deficit. In fact, the U.S. has become one of the world's largest exporters of natural gas.

This leads to another gloom and doom issue: the alleged decline of America's manufacturing industry. One of the untold stories is that the combination of wage increases in China and elsewhere, plus the availability of cheap energy, has made it more attractive for American companies to bring their manufacturing plants back home--and for foreign-based companies to relocate their plants here, convenient to a huge market for the things they manufacture. Economists have even coined a new term for this trend. They call it "reshoring."

Some recent examples: General Electric moved the manufacturing of washing machines, refrigerators and heaters from a China factory to a Kentucky factory that had been rumored to be on the verge of closing. Apple has recently moved the production of its existing Macintosh lines from China to the U.S.

According to the Boston Consulting Group, December 2013 marked the 53rd consecutive month of expansion for U.S. manufacturers--a statistic you will never see in the newspapers. To find out what was going on, the organization surveyed decision makers at larger companies, and found that 48% were either strongly considering relocating manufacturing jobs back to the U.S or had actually done it.

So why is the U.S. still mired in a recessionary economy? Because it isn't. If you look at a graph of the monthly percent changes in the American gross domestic product, you see frightening declines in 2008 and 2009--a drop of 8.3% in the fourth quarter of 2008 alone, when (as you may remember) Wall Street nearly wrecked the global economy. From 2010 forward, however, growth has been steady quarter over quarter, with only a brief decline in 2011 when certain members of Congress decided it might be a good idea to default on America's debt obligations. Last year's growth rate was positive even though the two-week government shutdown cost the economy some $55 billion in lost productivity.

But what does all this matter if the government is on the fast track to bankruptcy?

This may be the most underreported story of all. According to the Congressional Budget Office, our nation's federal deficit shrank 37% in 2013, in part because revenues are up as the economy expands, in part because of the drawdown of U.S. military involvement in Afghanistan, in part because of the automatic spending cuts known as the sequester. Total U.S. government revenue exceeded spending by $53.2 billion last December, compared with a $1.19 trillion deficit in December 2012. In the past two fiscal years, government outlays have dropped from 22% of GDP to 20.8%, and some respected economists are now actually expressing concerns that the deficit is falling too quickly.

If you add all these trends up, our total economic picture is not nearly as gloomy as most people seem to believe. That doesn't, of course, mean that there are no challenges ahead; there are always challenges ahead. It doesn't mean that investments are going to go up; the short-term swings of the investment markets are largely determined by emotions, and few investors have access to the information that you have just read.

But the positive trends might give us hope that, despite all the negative reporting and self-serving forecasts of doom, the American economy is actually moving forward with some confidence. You might not need that refuge in the woods after all.

Sources:
http://en.wikipedia.org/wiki/Oil_reserves
http://oilindependents.org/oil-and-natural-gas-reserves-definitions-matter/
http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united
http://www.questia.com/library/journal/1G1-302110425/u-s-manufacturers-coming-home
http://www.telegraph.co.uk/technology/news/10092271/Forget-China-technology-manufacturing-is-coming-home.html
http://www.ft.com/cms/s/0/e14d6cae-249d-11e3-8905-00144feab7de.html#axzz2tJt3TE82
http://www.tradingeconomics.com/united-states/gdp-growth
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/30/congratulations-america-your-deficit-fell-37-percent-in-2013/
http://www.bloomberg.com/news/2014-01-16/shrinking-u-s-budget-deficit-is-credit-positive-moody-s-says.html

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

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Wednesday, February 12, 2014

A GUIDE TO 2014 TAX LAW CHANGES (& MORE)

While 2014 has not brought momentous changes to federal tax laws, there are many alterations and COLAs worth noting. In particular, the Affordable Care Act has prompted a few significant changes.

Additionally, a host of tax provisions created during the recession expired at the end of last year. Some were scheduled to sunset at the end of 2012, but were extended. Their reinstatement for 2014 is left to Congress.
_______________________________________________________________________

The 2013 federal government shutdown affected the start of the 2014 tax season.

* On January 13, the IRS began accepting Form 1120/1120S, Form 1065, and payroll and excise tax returns (Form 720, Form 940, Form 941 and Form 2290) from corporations and partnerships.

* On January 31, the IRS will begin accepting Form 1040 and Form 1041 from individuals, unincorporated small businesses, and estates and trusts.1
_______________________________________________________________________

A reminder: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.

Tax Changes Related to Health Care Reform

1. U.S. citizens & legal residents will face a tax penalty if they go without health insurance coverage for 2014 (with some exceptions).

This 2014 penalty is minor, and its impact will be felt in 2015.

This year, American citizens and legal U.S. residents who can afford health care coverage but elect not to buy it will be hit with a tax penalty called the individual shared responsibility payment. No one will have to make this payment until April 2015.2

For 2014, the penalty for uninsured adults is $95 per person or 1% of your yearly income, whichever is greater. The penalty for uninsured children in your household is $47.50. The total household penalty is capped at $285 in 2014 (or 300% of the individual adult penalty).2,3

Next year, the adult penalty rises to $325 per person or 2.0% of yearly income; it is supposed to max out at $695/2.5% in 2016.2,3

If you are a very wealthy individual who doesn’t buy health insurance in 2014, you get something of a break when it comes to the percentage-of-income penalty, which is calculated using your modified adjusted gross income (MAGI): the maximum individual penalty cannot surpass the national average annual premium for a bronze plan. That amount will be calculated this year, but will likely be in the vicinity of $4,500-5,000.3

How will the federal government know if you lack health care coverage? You will let them know as you file your federal taxes next year. The plan is for taxpayers to send in a supplemental form with their 1040s, indicating whether or not they were insured for 2014. If you weren’t insured for 2014, the IRS will deduct the penalty amount from your federal tax refund. If you don’t get a federal tax refund for TY 2014, then the IRS will reduce your TY 2015 refund by that amount, or your TY 2016 refund if you don’t get a TY 2015 refund, and so forth.2,3

At this juncture, it appears this is the only way the IRS can assess the penalty. It can’t put a lien on the money to collect payment.4

Could you be exempt from the penalty? To see if you are, visit healthcare.gov/exemptions. The list of exemptions is quite long.2

A reminder: if you are still uninsured and want to buy health insurance for 2014, you must do so before April. March 31 is the deadline for this year’s open enrollment period. If you miss that deadline, you will have to wait until October 7 for the chance to buy coverage.2,4

2. Some enrollees in qualified health plans offered through the Health Insurance Marketplace will get tax credits.

These rules apply to 2014 & subsequent tax years.

If you enroll in a qualified health plan through the federal health insurance exchange or a state health insurance exchange, you might be eligible for the Advance Premium Tax Credit – a credit that can be applied to reduce the cost of monthly health insurance premiums.

You can choose how much of the advance credit payments you want to apply to your premiums per month. If your advance payments for a year exceed the amount of the credit you are given for the year, you are looking at a refund. If they exceed the cost of the premiums, you will have to repay the excess payments made on your behalf when you file your 2014 federal taxes.5

Generally speaking, you qualify for a credit if your household income falls into one of these per-household-size ranges, which were 2013 estimates and may be adjusted slightly north this year:

$11,490-45,960 for individuals
$15,510-62,040 for a family of 2
$19,530-78,120 for a family of 3
$23,550-94,200 for a family of 4
$27,570-110,280 for a family of 5
$31,590-126,360 for a family of 6
$35,610-142,440 for a family of 7
$39,630-158,520 for a family of 8

Consumers learned whether or not they were eligible for a credit at the website of the health insurance exchange applicable to their state (or by speaking to its personnel via phone).5

By the way, if you have enrolled in a qualified health plan through a health insurance exchange, the reimbursement or direct payment of the plan premiums counts as a qualified benefit under a cafeteria plan in 2014 and years that follow.6

3 It is now possible to carry over some FSA funds to the next year.

An exception to the use-it-or-lose-it rule has been created.

If you participate in an employer-sponsored flexible spending account (FSA) plan, you know the drill: use the money in the FSA for qualifying medical expenses by the end of the plan year, because it will be gone next year.

IRS Notice 2013-71 creates a new wrinkle. Employers sponsoring FSA programs may now allow as much as $500 in unused FSA funds to be carried over to a subsequent year by a plan participant. Whatever amount is carried over doesn’t cut into the $2,500 contribution limit for the subsequent year.

Some FSA plans have allowed participants an extra 2½ months after the end of a plan year to spend their FSA money. The new carryover rule renders this “grace period” obsolete.7

4. Large-employer reporting & responsibility requirements of the Affordable Care Act will not take effect until January 1, 2015.

Big businesses & insurers get a 1-year reprieve from these mandates.

Much has been written about this already, but here’s a brief recap. Most large employers with at least 50 full-time employees would have been required to provide basic health care coverage to FTEs or pay penalties starting in 2014, but this requirement has been delayed until January 1, 2015.

There was also an information reporting mandate scheduled for 2014, by which these employers (and by extension, insurers) would have needed to supply details of the coverage to the IRS and individuals. This, too, has been delayed until January 1, 2015.

There was no 1-year postponement of the W-2 reporting requirements linked to the ACA; these are already in effect.7

5. A new excise tax is hitting insurers.

There will almost certainly be consumer impact.

The federal government is now charging health insurance providers an aggregate flat fee each year. The fee – estimated to start at $8 billion for 2014, estimated to climb to $14.3 billion by 2018 – will be broken down per health care provider based on their premium trend. The Congressional Budget Office thinks the tariff will be “largely passed through to consumers in the form of higher premiums,” and larger deductibles may result as well.7,8

6. Owners of MSAs & HSAs should note new deductible and out-of-pocket expenses requirements for qualifying HDHPs.

The adjustments are small, but worth noting.

If you have a Health Savings Account (HSA) or Medical Savings Account (MSA), you must also be enrolled in a high deductible health plan (HDHP). You should be aware of the following requirements with regard to deductible limits on HDHPs this year.9

MSAs                                    Annual Deductible                   Annual Limit, Out-of Pocket Expenses

Self-only coverage                      $2,200-$3,250                        $4,350
Family coverage                          $4,350-$6,550                        $8,000

HSAs                                     Annual Deductible                   Annual Limit, Out-of Pocket Expenses

Self-only coverage                     $1,250 or greater                      $6,350
Family coverage                         $2,500 or greater                      $12,700

Tax Changes Affecting Businesses

7. Section 179 expensing is reduced; bonus depreciation is gone.

Here is why business owners bought more capital equipment before 2013 ended.

In 2014, the Section 179 expense deduction for equipment purchases is capped at just $25,000 of the initial $200,000 of business property put into service this year. The 50% bonus depreciation companies took advantage of in recent years is no more, and the accelerated deduction for qualified real property in the year of purchase is gone too.9,10

8. No more Work Opportunity Tax Credit.

This was an incentive for companies to hire.

The WOTC (and its variants) gave employers a credit for hiring veterans, recipients of supplemental Social Security benefits and Americans receiving select types of government aid. The credit varied per hire, but it was as large as 40% of allowable wages for an employee (25% of allowable wages for employees who had worked less than 400 hours for the business).10

9. Gratuities must now be treated as taxable wages.

Automatic tips may be history at many eateries.

When a large party eats at a restaurant, a gratuity is often built into the check. Prior to 2014, automatic gratuities were classified as tips. In 2012, IRS guidance let the service industry know that would soon change. Beginning this year, automatic gratuities are defined as service charges by the IRS, so they are taxable income. Practically speaking, this means a change for wait staff: instead of getting that money at the end of the night, they will get it as part of their paycheck. Darden Restaurants and Texas Roadhouse are among the players in the dining industry who have eliminated automatic gratuities this year, replacing them with suggested tip amounts on the bill.6,11

10. S-corporation relief has been extended.

The summer 2013 decision applies to many varieties of S corps.

In August, the IRS rolled out Revenue Procedure 2013-30, which unifies late-relief methods for many S-corp, ESBT, QSST, QSub and corporate classification elections. Starting this year, S-corps have up to 3 years and 75 days to request relief for eligible late elections after the intended start date of a late election.7

11. Mass transit & carpool allowances for employees have been roughly halved for 2014.

Other qualified transportation fringe benefit limits remain the same, however.

In 2013, employers could provide up to $245 a month to an employee to subsidize their commutes to work via carpools, vanpools or mass transit, and get a tax deduction as a result. In 2014, the maximum monthly subsidy is $130.

Employers may still offer employees up to $250 a month in qualified parking benefits, and reimburse workers up to $20 per month for qualified bicycle commuting.12

Tax Changes Affecting Individuals & Households

12. Two major mortgage-related tax breaks are gone.

Underwater homeowners could face major tax burdens if they sell.

The twice-extended Mortgage Forgiveness Debt Relief Act of 2007 expired at the end of 2013. It gave struggling homeowners the chance to exclude up to $2 million of forgiven home loan debt from their taxable incomes – a tax break that isn’t normally available for cancelled debts.

Mortgage debts incurred after Jan. 1, 2007 and not after Dec. 31, 2012 were eligible as long as they were secured by the taxpayer's principal residence. Debt reduced because of mortgage restructuring qualified along with forgiven debt from foreclosures and short sales. It was a great tax break, and many are calling for the MFDRA to be restored.10,13

Another housing tax break disappeared in 2014. In 2013, homeowners paying for private mortgage insurance (PMI) who chose to itemize their deductions could write off the cost of PMI premiums plus related interest and taxes. That isn’t possible now.10

13. No more above-the-line tuition & fees deduction.

Students & families lose a prime tax break.

For 2013, an eligible taxpayer could take an above-the-line deduction for qualified educational expenses paid during the tax year. That deduction ranged from $2,000-$4,000. The opportunity is gone in 2014, though the American Opportunity Credit and the Lifetime Learning Credit remain.10,14

14. No more educator expense deduction.

Classroom teachers will miss this one.

Last year, educators employed by eligible primary or secondary institutions could take an above-the-line tax deduction of up to $250 for unreimbursed expenses for school and classroom-related supplies. (The deduction limit was $500 for married taxpayers filing jointly.) In 2014, it is no longer around.10,14

15. Tax-free IRA distributions to 501(c)(3)s are no longer permitted.

Wealthy IRA owners, hospitals, universities & charities are already missing this one.

The IRA charitable rollover was initially set to disappear at the end of 2011, but it was brought back by Congress in both 2012 and 2013. Some legislators called for making it permanent. This year, it is absent. The move allowed IRA owners aged 70½ or older to avoid taxation on as much as $100,000 of their Required Minimum Distributions (RMDs) if the money was transferred directly from the IRA custodian to a qualified non-profit organization.10,14

16. Two major energy-efficient home improvement credits are gone.

One was designed for homeowners, another for contractors & builders.

In 2013, taxpayers who made certain energy-saving improvements to their residences could claim a tax credit of as much as $500 to offset the cost of the upgrades. Contractors could also claim a credit for building energy-efficient homes for their clients (up to $2,000 per home). Neither perk is around for 2014.10,14

17. The electric vehicle credit is now absent.

Will this dent electric & hybrid vehicle sales?

If you bought or leased a plug-in electric car in 2013, you likely knew about the tax credit of up to $7,500 for such vehicles. (The size of the credit depended on make, model and battery pack size.) Taxpayers won’t have this option in 2014.10

18. A big tax break on donated real estate has expired.

The Enhanced Easement Tax Incentive was a boon to conservationist groups.

During the years 2006-13, individual taxpayers that donated real capital gain property or property easements to a qualified conservationist organization could take a resulting deduction as large as 50% of their adjusted gross incomes. (Qualifying farmers and ranchers could deduct up to 100% of their incomes, and S-corps and C-corps could take advantage of the tax break as well.) In addition, donors of such real estate could keep taking the deduction for an additional 15 years, up to the fair market value of the property.

In 2014, the incentive to make such real property donations is less compelling: the deduction a donor can take reverts to 30% of their AGI in the year of the donation, and the carry-forward period reverts to 5 years in addition to the year of donation.10,15

19. Less favorable rules for small business stock gains.

The basic exclusion shrinks.

As a result of the American Taxpayer Relief Act of 2012, any taxpayer besides a corporation could exclude 100% of the gain from the sale or exchange of qualified small business stock acquired between September 27, 2010 and January 1, 2014 and held for more than 5 years. In 2014, the basic exclusion reverts back to 50%; it is 60% in empowerment zones. The gain that is eligible to be taken into account for purposes of this exclusion is limited to the greater of $10,000,000 or 10 times the taxpayer’s basis in the stock (see IRS Sec. 1202(b)(1)). The limitation is computed on a per-issuer basis, with lower limits ($5,000,000) applying to married individuals filing separately.16,22

20. Depreciation caps on “executive” vehicles have diminished.

Businesses with fleets are looking at less of a tax break.

In 2013, a business that put a car, truck or SUV into service could claim $11,160 in depreciation. But, as bonus depreciation is no longer allowed in 2014, the first-year depreciation cap allowed by IRC Section § 280F is now back to $3,160.17,18

21. The standard mileage rate has fallen to $0.56.

The decline is minimal, however.

In 2014, the optional mileage allowance for business use of owned or leased vehicles is $0.56 per mile, down half a cent from 2013.9

COLAs for 2014

22. Income tax brackets receive the usual minor adjustment.

These income thresholds define the 2014 federal income tax brackets.19

Bracket    Single Filers                     Married Filing Jointly       Married Filing                Head of Household
                                                       or Qualifying Survivor      Separately

10%         Up to $9,075                   Up to $18,150                Up to $9,075              Up to $12,950
15%         $9,076-$36,900               $18,151-$73,800           $9,076-$36,900         $12,951-$49,400
25%         $36,901-$89,350             $73,801-$148,850         $36,901-$74,425       $49,401-$127,550
28%         $89,351-$186,350           $148,851-$226,850       $74,426-$113,425     $127,551-$206,600
33%         $186,351-$405,100         $226,851-$405,100       $113,426-$202,550   $206,601-$405,100
35%         $405,101-$406,750         $405,101-$457,600       $202,551-$228,800   $405,101-$432,200
39.6%      $406,751 or more             $457,601 or more          $228,801 or more       $432,201 or more

23. The individual estate tax exemption rises to $5.34 million.

It was $5.25 million in 2013. Any unused portion of the $5.34 million individual exemption may be transferred to a surviving spouse upon the death of the first deceased spouse through a timely filing of IRS Form 706.

In the big picture, the lifetime federal estate tax exemption and the lifetime federal gift tax exemption are unified, so an individual can also elect to use some or all of a $5.25 million individual exemption on gifts made during his or her lifetime (though that will lower the amount of his or her estate that may be excluded from inheritance taxes).

Incidentally, the annual gift tax exclusion amount remains at $14,000 this year.20

24. The standard deduction is slightly greater.

Here are the amounts for 2014.19

Single filers, married filing separately: $6,200 (up $100 from 2013)
Head of household: $9,100 (up $150 from 2013)
Married filing jointly/qualifying survivor: $12,400 (up $200 from 2013)

25. The personal exemption rises by $50.

In 2013, it was $3,900; in 2014, it is $3,950. Here are the 2014 phase-out ranges...19,21

Single filers, married filing separately: $254,200-$376,700
Head of household: $279,650-$402,150
Married filing jointly/qualifying survivor: $305,050-$427,550

26. The AMT exemption amount has risen for 2014.

As the Alternative Minimum Tax was at last indexed for inflation at the start of 2013, exemption amounts are set as follows:

Single filers: $52,800
Married filing separately: $41,050
Married filing jointly/qualifying survivor: $82,100

These amounts are a few hundred dollars higher than in 2013.19,21

27. Social Security’s taxable wage base is $3,300 higher in 2014.

This year, the FICA tax rate is 6.2% on the first $117,000 of wages paid to an employee. So an employee whose 2014 wages total $117,000 will pay $7,254 to Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program this year with the employer contributing an equivalent amount. (This tax rate is 12.4% for self-employed individuals).22

28. Phase-outs of itemized deductions get a COLA.

The Pease limitations returned in 2013 after a 2-year absence. These are thresholds that cut into the value of most itemized deductions above a certain AGI level. Here is where the Pease limitations are set for 2014.19,21

Single filers: $254,200
Head of household: $279,650
Married filing jointly/qualifying survivor: $305,050

29. Phase-out ranges for the above-the-line student loan interest deduction have been adjusted.

The deduction limit remains at $2,500 this year; the phase-out ranges are $5,000 north of where they were in 2013.17

Single filers, heads of household: $65,000-80,000
Married filing jointly/qualifying survivor: $130,000-160,000

30. Earned Income Tax Credit limits rise.

This tax break is designed to help low-wage filers. The credit varies based on a) your taxable income, b) the number of dependents you support. For 2014, you are eligible to receive it providing your earned income and your AGI each fall below the following limits:

$46,997 ($52,427 married filing jointly) with 3 or more qualifying children
$43,756 ($49,186 married filing jointly) with 2 qualifying children
$38,511 ($43,941 married filing jointly) with 1 qualifying child
$14,590 ($20,020 married filing jointly) with no qualifying children

The corresponding EITC for TY 2014:

$6,143 with 3 or more qualifying children
$5,460 with 2 qualifying children
$3,305 with 1 qualifying child
$496 with no qualifying children

If you have investment income exceeding $3,350 for 2014, you can’t qualify for the EITC.23

31. Some minor COLAs affect traditional & Roth IRA contributions.

While the amount you can contribute to a single traditional or Roth IRA or across multiple IRAs in 2014 is unchanged from last year – $5,500, $6,500 for those 50 and older – some other changes have occurred pertaining to the ability to contribute to a Roth or take a tax deduction from a “regular” IRA.

Phase-out ranges affecting the tax deduction for traditional IRA contributions (AGI).

Single or head of household, contributing to workplace retirement plan & traditional IRA: $60,000-70,000
Married couple both contributing to workplace retirement plan & traditional IRA: $96,000-116,000
Married individual contributing to traditional IRA, spouse in workplace retirement plan: $181,000-191,000

These phase-out ranges are $3,000 higher for investors who don't have a workplace retirement plan but are married to someone who does, and $1,000 higher for the others.24

Phase-out ranges affecting the chance to make a Roth IRA contribution (AGI).

Single or head of household: $114,000-129,000
Married couples: $181,000-191,000

These phase-out ranges have increased by $2,000 for single filers and by $3,000 for couples.24

32. New COLAs pertaining to SEPs, ESOPs, top-heavy plans & defined contribution plans.

Slight 2014 adjustments have been made to some thresholds for these plans.25

SEPs --- Maximum compensation of $260,000 (up $5,000 from 2013)

ESOPs --- 5-year distribution threshold of $1,050,000 (up $15,000 from 2013); Additional year threshold of $210,000 (up $5,000 from 2013)

Top-heavy plans --- $ limit defining key employee rises to $170,000 (up $5,000 from 2013)

415(c)(1)(a) plans --- Maximum annual benefit of $52,000 (up $1,000 from 2013) (defined contribution plans)

33. Saver’s credit thresholds are a bit higher.

The saver’s credit available to IRA and 401(k) account holders whose AGI falls underneath a certain limit, and millions of people claim it each year. It can be as large as $1,000 for single filers and as large as $2,000 for married couples. For 2014, the AGI limits for claiming the saver’s credit are:

Single filers: ≤ $30,000 (up $500 from 2013)
Head of household: ≤ $45,000 (up $750 from 2013)
Married filing jointly/qualifying survivor: ≤ $60,000 (up $1,000 from 2013)

Saver’s credits seldom approach the $1,000/$2,000 maximums, but they are certainly welcomed by low-income and moderate-income pre-retirees.24

34. The adoption tax credit has increased.

This very large credit is available to anyone who adopts a child under 18 years of age or a physically or mentally disabled child of any age. The child can be a U.S. citizen, a “resident alien,” or a “nonresident alien” as defined by the IRS. To claim the credit, you must demonstrate personal expenses as part of the adoption process (but see the exception below). The credit is commonly claimed by families in the year an adoption is finalized.

In 2014, the adoption tax credit is $13,190 per child, up from $12,970 last year. While the credit is subject to phase-outs (the MAGI phase-out range for 2014 is $197,880-237,880), any family that adopts a special needs child (as defined in the IRC) will qualify for the full amount of the credit even if no personal expenses are incurred in doing so.26

35. Retirement earnings test amounts for Social Security have risen.

If you receive Social Security benefits and you will be younger than full retirement age at the end of 2014, $1 of your benefits will be withheld for every $2 that you earn above $15,480 (a $360 increase from 2013).

If you receive Social Security benefits and reach full retirement age during 2014, $1 of your benefits will be withheld for every $3 that you earn above $41,400 – but that restriction applies only to earnings in the months prior to attaining full retirement age. (The applicable 2014 limit was $40,080.) There is no limit on earnings starting the month an individual attains full retirement age.

Will some of your Social Security income be taxable this year? That depends on your “combined income,” which Social Security calculates using this formula:

Adjusted gross income + non-taxable interest + 50% of Social Security benefits = combined income

If your combined income is between the following amounts, you may have to pay federal income tax on up to 50% of your benefits:

Single filers (“individuals”): $25,000-34,000
Joint filers: $32,000-44,000

If it exceeds the following amounts, you may have to pay federal income tax on up to 85% of your benefits:

Single filers (“individuals”): $34,000
Joint filers: $44,000

Marrieds who file separately will “probably” have their Social Security benefits taxed, according to the program’s website. The above dollar thresholds, incidentally, have never been inflation-indexed.27,28

What Hasn’t Changed in 2014

As annualized inflation has been tame, the IRS has left some yearly limits and thresholds unaltered for 2014. Here is a list of key unchanged items...9,19,24,29

Traditional/Roth IRA Contribution Limit --- $5,500 ($6,500 if 50 or older this year)
401(k), 403(b), TSP Contribution Limit* --- $17,500 ($23,000 if 50 or older this year)
SIMPLE Plan Contribution Limit --- $12,000 ($14,500 if 50 or older this year)
SEP Eligibility Threshold (minimum compensation amount) --- $550
FSA Contribution Limit ---$2,500
Maximum Federal Estate Tax Rate --- 40%
Federal Gift Tax Exclusion --- $14,000
“Kiddie” Tax Standard Deduction --- $1,000
“Kiddie” Tax Threshold (unearned income of a child) --- $2,000
hild Tax Credit Eligibility Threshold (earned income) --- $3,000
American Opportunity Tax Credit --- $2,500
Lifetime Learning Credit --- $2,000
Student Loan Interest Deduction* --- $2,500

Also applies to most 457 plans

**No longer limited to interest paid during first 60 months of repayment

Citations.

1 - irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns [1/9/14]
2 - healthcare.gov/exemptions/ [1/14/14]
3- kiplinger.com/article/insurance/T027-C001-S003-the-lowdown-on-the-health-insurance-penalty.html [11/22/13]
4 - washingtonpost.com/blogs/wonkblog/wp/2014/01/01/everything-you-need-to-know-about-life-under-obamacare-2/ [1/1/14]
5 - healthcare.gov/will-i-qualify-to-save-on-monthly-premiums/ [1/14/14]
6 - pselaw.com/2014/01/08/federal-income-tax-changes-in-2014/ [1/8/14]
7 - bkd.com/articles/2013/significant-tax-changes-for-2013-and-2014.htm [12/13]
8 - ahipcoverage.com/2013/11/26/irs-releases-final-rule-on-the-health-insurance-tax/ [11/26/13]
9 - tirereview.com/Article/122585/reviewing_2014_tax_changes.aspx [1/13/14]
10 - investopedia.com/articles/personal-finance/121913/major-tax-credits-expiring-2013.asp [12/19/13]
11 - news4jax.com/news/restaurants-changing-tip-procedure-due-to-new-tax-law/-/475880/23728894/-/10qlxejz/-/index.html [1/1/14]
12 - nctr.usf.edu/programs/clearinghouse/commutebenefits/ [1/2/13]
13 - recordnet.com/apps/pbcs.dll/article?AID=/20140110/A_BIZ0202/401100315/-1/a_biz [1/10/14]
14 - cbsnews.com/news/as-year-ends-congress-again-lets-55-tax-breaks-expire/ [12/31/13]
15 - landtrustalliance.org/policy/tax-matters/campaigns/incentive-faqs [1/15/14]
16 - jonesday.com/update_on_qualified/ [3/13]
17 - lindsayandbrownell.com/individuals/changes-for-20132014-tax-year.aspx [11/25/13]
18 - kfmr.com/tax-alerts/december2013/depreciation-limits-vehicles-2014 [12/13]
19 - forbes.com/sites/kellyphillipserb/2013/10/31/irs-announces-2014-tax-brackets-standard-deduction-amounts-and-more/ [10/31/13]
20 - bankrate.com/finance/taxes/estate-tax-and-gift-tax-amounts.aspx [1/6/14]
21 - taxfoundation.org/article/2014-tax-brackets [11/27/13]
22 - ssa.gov/OACT/cola/cbb.html [1/16/14]
23 - irs.gov/Individuals/Preview-of-2012-EITC-Income-Limits,-Maximum-Credit--Amounts-and-Tax-Law-Updates [12/30/13]
24 - money.usnews.com/money/retirement/articles/2013/11/04/modest-401k-and-ira-changes-coming-in-2014 [11/4/13]
25 - irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11//4/13]
26 - washingtonadoptionattorney.com/adoption-tax-credit-for-2014/ [11/8/13]
27 - ssa.gov/OACT/cola/rtea.html [1/16/14]
28 - ssa.gov/planners/taxes.htm [1/16/14]
29 - irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-SIMPLE-IRA-Contribution-Limits [10/31/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

Monday, February 3, 2014

ORGANIZING YOUR PAPERWORK FOR TAX SEASON

If you haven't done it, now's the time.

How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you) this winter. Here are some tips to help you get ready:

As a first step, look at your 2012 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2012 return. You should receive the tax year 2013 versions of everything you need by early February at the latest.

How much documentation is needed? If you don't freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on.1

In totaling receipts, don't forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.1

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn't reimburse you, and any medical bills that came your way last year.

If you're turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person's federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don't have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.1,3

While we're on the subject of taxes, some other questions are worth examining...

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some CPAs and tax advisors will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.2

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for "Electronic Accounting Software Records FAQs." The IRS page should be the top result.4

How do you calculate cost basis for an investment? A whole article could be written about this, and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 - the $3,900 you wind up with falls $200 short of your $4,100 cost basis.5

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be "stepped up" when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.5

P.S.: This tax season is off to a late start. Business filers were able to send in federal tax returns starting January 13, but the start date for processing 1040 and 1041 forms was pushed back to January 31. Per federal law, the April 15 deadline for federal tax returns remains in place, as does the 6-month extension available for those who file IRS Form 4868.6,7

Citations.
1 - bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [1/6/14]
2 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [8/8/13]
3 - irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [1/17/14]
4 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [5/22/13]
5 - turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis--Tracking-Your-Tax-Basis/INF12037.html [1/23/14]
6 - irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns [1/9/14]
7 - irs.gov/taxtopics/tc301.html [1/22/14]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.