PAYING FOR COLLEGE WHILE SAVING FOR RETIREMENT
These two objectives are not mutually exclusive.
It can be done. All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative.
First, make sure the priorities are in the right order.
Strange as it may sound, your retirement may need to take precedence over your child’s college education.
Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they will have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt.
The following are some short-term and long-term ideas you may want to consider if you have college costs on your mind:
Save for college the DCA way.
While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or …
Consider a tax-advantaged college savings plan.
Contribute to a 529 plan, which features tax-advantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.1,2
Exploit your credit card.
No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise.
Keep your income as low as possible in the base income year.
That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will.
However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.1
Let the college know if your financial situation has changed.
Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing to review these developments and may be able to adjust aid for your student accordingly.
Make it a family affair.
In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing.
In short, hunting for every scholarship or alumni connection you can and finding a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.
Citations
1 – articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/financial-aid-101-how-to-get-more-cash.aspx [7/16/10]
2 - money.usnews.com/money/blogs/On-Retirement/2010/07/23/how-to-pay-for-college-without-sacrificing-your-retirement [7/23/10]
Monday, July 26, 2010
Friday, July 23, 2010
Chronicle of the Quarter
Anybody looking at the zig-zag course of the stock market can see that the more closely you look, the more you miss what is actually happening. Daily price movements jump around in what appears to be a totally random pattern; up one day, down the next--and it's only when you step back and look at the year or multiple years can you see whether actual money is being made or lost.
But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish. This quarter, I decided to immerse myself in the white noise and see of there are any conclusions one might plausibly draw from the bouncings of the tape. In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter. But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.
Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP. The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February. Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.
April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing. And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason... Something called the regional manufacturing index was up 20.2 in April, which sounds bullish. Still plenty of time between now and midnight to start filling out my tax forms...
April 16-30: Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week. Consumer sentiment is down. Darn consumers! Also worries that Greece may default on its debt. Darn Greeks! The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market. Darn government! Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th. Maybe the bad news is finally over.
May 1-7: What the hell was that!? Omigod... Omigod... The S&P 500 fell, like, 9% in an HOUR!?! That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits. Is Goldman behind this somehow? Why isn't the government investigating those bastards? Okay, let's see, calm down. How bad can it get? If I project that hourly return out over the eight years until retirement--Omigod! The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh... Remember to keep breathing... At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire. And so will everybody else! I wonder who we'll have to write that check to...?
May 10-May 12: What a silly goose I was! Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized. The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.
May 13-May 20: Did I say go up? The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar. I thought a strong dollar was a GOOD thing, but apparently not... Also Germany banned short selling, which spooked American investors. Why? Now the markets are below where they were at the worst of that flash crash thing. Darn Germans! They're just killing my net worth.
May 21-June 7: What the hell? Friday: Market up, financials are healthy. Did the government stop investigating Goldman? Monday: market down because we're all apparently still worried about Greece. I'M not worried about Greece; why is everybody else? I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something. Tuesday: a lot of see-sawing, but down again. Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks? The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something. Thursday, back up, which means maybe people realized good economic news is good after all. Also China came to the rescue and said it wasn't going to dump its European bonds on the market. Apparently that Acropolis deal isn't panning out... Friday: another down day, this time with something about Spain defaulting on ITS debts. Whose next? Portugal? Italy? Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico. Does that affect IBM's business prospects? Or General Electric's? Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen? Tuesday: up slightly. Wednesday: the Dow is below 10,000. Now we're worried about HUNGARY'S economy. Thursday: A tiny bit of sunshine. Friday: bad. Monday: Awful. Dow at 9,800. Time to get back out?
June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April. Has it really been that long? Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy. Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news. Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment. If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio. Friday was down because of Greece, and Monday saw nice gains, including shares of BP. Go figure! Wednesday: flat, thanks to something about Spain not needing a bailout. Thursday: up, thanks to Spain selling some kind of bond issue without incident. Friday: up slightly. For the week: up 2.2%. Why can't every week be like that?
June 19-June 30: Maybe I should just shoot myself. Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe. Darn Europe! Darn Federal Reserve! Monday was down too, and on Tuesday, the markets hit their lowest level for the year. The Dow is under 10,000, about where it was last November. Why? Get this: China's economic growth is slowing down. Am I the only person who thinks that less economic growth in China could mean more for US? That is how it works, isn't it? Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%.
What an awful week! But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse. Maybe I should be giving up hope sooner! Like, right now I'm thinking maybe I should shoot myself and end all this misery. Right after I answer the phone. Hello? Yes. Yes. I'm too busy right now to answer any polling quest--what? What did you say? My sentiment? I'm giddy! Ecstatic! Overjoyed! Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body! On a scale of 1-100? At least a 104! No, make that 110. Whatever it takes to offset those depressed people you usually call. Yes. You're welcome. Call back any time. I'll be here tomorrow. Yes. Okay. Goodbye.
I can hardly wait to see how THAT plays out in the markets tomorrow morning.
But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish. This quarter, I decided to immerse myself in the white noise and see of there are any conclusions one might plausibly draw from the bouncings of the tape. In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter. But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.
Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP. The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February. Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.
April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing. And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason... Something called the regional manufacturing index was up 20.2 in April, which sounds bullish. Still plenty of time between now and midnight to start filling out my tax forms...
April 16-30: Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week. Consumer sentiment is down. Darn consumers! Also worries that Greece may default on its debt. Darn Greeks! The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market. Darn government! Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th. Maybe the bad news is finally over.
May 1-7: What the hell was that!? Omigod... Omigod... The S&P 500 fell, like, 9% in an HOUR!?! That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits. Is Goldman behind this somehow? Why isn't the government investigating those bastards? Okay, let's see, calm down. How bad can it get? If I project that hourly return out over the eight years until retirement--Omigod! The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh... Remember to keep breathing... At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire. And so will everybody else! I wonder who we'll have to write that check to...?
May 10-May 12: What a silly goose I was! Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized. The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.
May 13-May 20: Did I say go up? The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar. I thought a strong dollar was a GOOD thing, but apparently not... Also Germany banned short selling, which spooked American investors. Why? Now the markets are below where they were at the worst of that flash crash thing. Darn Germans! They're just killing my net worth.
May 21-June 7: What the hell? Friday: Market up, financials are healthy. Did the government stop investigating Goldman? Monday: market down because we're all apparently still worried about Greece. I'M not worried about Greece; why is everybody else? I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something. Tuesday: a lot of see-sawing, but down again. Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks? The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something. Thursday, back up, which means maybe people realized good economic news is good after all. Also China came to the rescue and said it wasn't going to dump its European bonds on the market. Apparently that Acropolis deal isn't panning out... Friday: another down day, this time with something about Spain defaulting on ITS debts. Whose next? Portugal? Italy? Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico. Does that affect IBM's business prospects? Or General Electric's? Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen? Tuesday: up slightly. Wednesday: the Dow is below 10,000. Now we're worried about HUNGARY'S economy. Thursday: A tiny bit of sunshine. Friday: bad. Monday: Awful. Dow at 9,800. Time to get back out?
June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April. Has it really been that long? Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy. Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news. Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment. If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio. Friday was down because of Greece, and Monday saw nice gains, including shares of BP. Go figure! Wednesday: flat, thanks to something about Spain not needing a bailout. Thursday: up, thanks to Spain selling some kind of bond issue without incident. Friday: up slightly. For the week: up 2.2%. Why can't every week be like that?
June 19-June 30: Maybe I should just shoot myself. Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe. Darn Europe! Darn Federal Reserve! Monday was down too, and on Tuesday, the markets hit their lowest level for the year. The Dow is under 10,000, about where it was last November. Why? Get this: China's economic growth is slowing down. Am I the only person who thinks that less economic growth in China could mean more for US? That is how it works, isn't it? Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%.
What an awful week! But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse. Maybe I should be giving up hope sooner! Like, right now I'm thinking maybe I should shoot myself and end all this misery. Right after I answer the phone. Hello? Yes. Yes. I'm too busy right now to answer any polling quest--what? What did you say? My sentiment? I'm giddy! Ecstatic! Overjoyed! Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body! On a scale of 1-100? At least a 104! No, make that 110. Whatever it takes to offset those depressed people you usually call. Yes. You're welcome. Call back any time. I'll be here tomorrow. Yes. Okay. Goodbye.
I can hardly wait to see how THAT plays out in the markets tomorrow morning.
Wednesday, July 21, 2010
FINANCIAL REFORM ROLLS OUT
Much is hazy about the Dodd-Frank bill, even though it has passed.
Will the goals of the reform bill really be met?
On July 15, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed 60-39 in the Senate. Next week, President Obama is expected to sign it into law.1
"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," the President said in mid-July. "There will be no more taxpayer-funded bailouts, period."
Will his words prove true? Some doubt it, while the bill's adherents think this is a great and necessary step to prevent another Wall Street crisis.
However, the step is still being taken - it remains to be seen how the reforms passed will be implemented, and some may be implemented to a lesser degree than intended. (And there is nothing about Fannie Mae or Freddie Mac in the 2,300 pages of legislation.)
Goal 1: No replay of TARP.
In brief, the bill gives federal regulators added power to ward off possible bank collapses. In the near future, these regulators could make too-big-to-fail determinations, set bank capital ratios and ceilings on financial industry CEO compensation, and rule on the types of proprietary investments allowable for banks. The idea is keep financial giants from turning into houses of cards. However, conservatives warn that too much regulation could prompt U.S. financial firms to conduct increasing amounts of business in nations with less-regulated financial markets.2
One of the most vocal opponents of the bill was
House Minority Leader John A. Boehner (R-OH), who likened the legislation to "killing an ant with a nuclear weapon." Boehner thinks that the bill "institutionalizes" the too-big-to-fail notion.1 Other conservatives agree and think that the federal government might keep the bailout option around for big banks when it should be throwing it away.
Goal 2: Consumer education and protection.
The bill creates a Consumer Financial Protection Agency within the Federal Reserve - a new bureau to watch over mortgage lenders, credit card companies and consumer banking practices. The idea is to prevent things like "liar loans" and specious fees. Detractors think the CFPA and its regulations will actually bear a negative byproduct - they think businesses and individuals will have a tougher time getting credit. How big a reach will the CFPA have? How much autonomy will it have? That hasn't been defined.
Goal 3: Transparent derivatives trading.
Most of the trading in the derivatives market happens out of the public eye. No more, according to this reform bill: it will take place on public exchanges, the better to pinpoint systemic risks. Almost everyone applauds this measure.2
Goal 4: Identifying bubbles.
No just stock or commodity bubbles, but also real estate bubbles and bubbles in any economic sector.A new agency, the Financial Stability Oversight Council, will seek to find them. No one knows its regulatory scope yet.2
Goal 5: Double-checking credit ratings.
Why did Wall Street fall in love with derivatives? Didn't the credit ratings agencies warn banks about the peril of such investments? Allegedly not. So an Office of Credit Ratings will be created as part of the Securities & Exchange Commission. The OCR will monitor the big Wall Street credit ratings firms and watch out for possible conflicts of interest affecting ratings.3
Interesting minutiae.
When President Obama signs off on the Dodd-Frank bill, it will kill the Office of Thrift Supervision - that's the office that was supposed to prevent bank collapses. As we can tell by the failure of Washington Mutual and IndyMac, the "supervision" may not have been all that focused. The Office of the Comptroller of the Currency will pick up its duties. (The Dodd-Frank bill also has a nice wrinkle for former IndyMac accountholders: it boosts the FDIC coverage on those accounts to $250,000, retroactive to before IndyMac went bust.)1
Another consequence of the Dodd-Frank bill: all TARP payments will end immediately. And don't look for a new futures market in the offing based on Hollywood box office receipts - the big movie studios wanted to try and make that a reality, but the reform bill won't allow it.1
Citations
1 - latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]
2 - articles.moneycentral.msn.com/Investing/Extra/what-financial-reform-does-and-does-not-do.aspx [7/15/10]
3 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
Will the goals of the reform bill really be met?
On July 15, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed 60-39 in the Senate. Next week, President Obama is expected to sign it into law.1
"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," the President said in mid-July. "There will be no more taxpayer-funded bailouts, period."
Will his words prove true? Some doubt it, while the bill's adherents think this is a great and necessary step to prevent another Wall Street crisis.
However, the step is still being taken - it remains to be seen how the reforms passed will be implemented, and some may be implemented to a lesser degree than intended. (And there is nothing about Fannie Mae or Freddie Mac in the 2,300 pages of legislation.)
Goal 1: No replay of TARP.
In brief, the bill gives federal regulators added power to ward off possible bank collapses. In the near future, these regulators could make too-big-to-fail determinations, set bank capital ratios and ceilings on financial industry CEO compensation, and rule on the types of proprietary investments allowable for banks. The idea is keep financial giants from turning into houses of cards. However, conservatives warn that too much regulation could prompt U.S. financial firms to conduct increasing amounts of business in nations with less-regulated financial markets.2
One of the most vocal opponents of the bill was
House Minority Leader John A. Boehner (R-OH), who likened the legislation to "killing an ant with a nuclear weapon." Boehner thinks that the bill "institutionalizes" the too-big-to-fail notion.1 Other conservatives agree and think that the federal government might keep the bailout option around for big banks when it should be throwing it away.
Goal 2: Consumer education and protection.
The bill creates a Consumer Financial Protection Agency within the Federal Reserve - a new bureau to watch over mortgage lenders, credit card companies and consumer banking practices. The idea is to prevent things like "liar loans" and specious fees. Detractors think the CFPA and its regulations will actually bear a negative byproduct - they think businesses and individuals will have a tougher time getting credit. How big a reach will the CFPA have? How much autonomy will it have? That hasn't been defined.
Goal 3: Transparent derivatives trading.
Most of the trading in the derivatives market happens out of the public eye. No more, according to this reform bill: it will take place on public exchanges, the better to pinpoint systemic risks. Almost everyone applauds this measure.2
Goal 4: Identifying bubbles.
No just stock or commodity bubbles, but also real estate bubbles and bubbles in any economic sector.A new agency, the Financial Stability Oversight Council, will seek to find them. No one knows its regulatory scope yet.2
Goal 5: Double-checking credit ratings.
Why did Wall Street fall in love with derivatives? Didn't the credit ratings agencies warn banks about the peril of such investments? Allegedly not. So an Office of Credit Ratings will be created as part of the Securities & Exchange Commission. The OCR will monitor the big Wall Street credit ratings firms and watch out for possible conflicts of interest affecting ratings.3
Interesting minutiae.
When President Obama signs off on the Dodd-Frank bill, it will kill the Office of Thrift Supervision - that's the office that was supposed to prevent bank collapses. As we can tell by the failure of Washington Mutual and IndyMac, the "supervision" may not have been all that focused. The Office of the Comptroller of the Currency will pick up its duties. (The Dodd-Frank bill also has a nice wrinkle for former IndyMac accountholders: it boosts the FDIC coverage on those accounts to $250,000, retroactive to before IndyMac went bust.)1
Another consequence of the Dodd-Frank bill: all TARP payments will end immediately. And don't look for a new futures market in the offing based on Hollywood box office receipts - the big movie studios wanted to try and make that a reality, but the reform bill won't allow it.1
Citations
1 - latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]
2 - articles.moneycentral.msn.com/Investing/Extra/what-financial-reform-does-and-does-not-do.aspx [7/15/10]
3 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
Thursday, July 1, 2010
FINANCIAL REFORM: THE TABLE IS SET
Next month, President Obama will likely sign a bill into law ordering changes in the ways banks, credit card issuers and mortgage lenders interface with consumers. Here are the key features of the financial reform agreement that the Senate and House of Representatives came to on June 24, with a vote pending.
#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn't be regulated by the BCFP - but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.1,2
#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can't see your actual score.1,2
#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for "liar loans". Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.1,2
#4: Retail minimums for the use of credit cards. Score one for retailers, who don't want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.1,2
Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn't be able to vary the discounts for different debit cards.)2
Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.2
#5: Brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers - that is, investment brokers would have to put a client's best interest first and not simply recommend a "suitable" investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.3
#6: The "Volcker Rule" would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted - they could provide up to 3% of a fund's equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.4
The big banks got another key concession from Congress: they don't have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.5
#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.1
#8: The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.2
Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.5
Citations
1 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
2 - cnbc.com/id/37921188 [6/25/10]
3 - nytimes.com/2010/06/26/your-money/26money.html?pagewanted=2 [6/26/10]
4 - businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-rules.html [6/25/10]
5 - cnbc.com/id/37927853 [6/25/10]
6 - reuters.com/article/idUSTRE65O1BK20100625 [6/25/10]
#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn't be regulated by the BCFP - but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.1,2
#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can't see your actual score.1,2
#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for "liar loans". Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.1,2
#4: Retail minimums for the use of credit cards. Score one for retailers, who don't want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.1,2
Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn't be able to vary the discounts for different debit cards.)2
Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.2
#5: Brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers - that is, investment brokers would have to put a client's best interest first and not simply recommend a "suitable" investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.3
#6: The "Volcker Rule" would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted - they could provide up to 3% of a fund's equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.4
The big banks got another key concession from Congress: they don't have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.5
#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.1
#8: The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.2
Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.5
Citations
1 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
2 - cnbc.com/id/37921188 [6/25/10]
3 - nytimes.com/2010/06/26/your-money/26money.html?pagewanted=2 [6/26/10]
4 - businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-rules.html [6/25/10]
5 - cnbc.com/id/37927853 [6/25/10]
6 - reuters.com/article/idUSTRE65O1BK20100625 [6/25/10]
Tuesday, June 29, 2010
"July 4, 1776 - Nothing of importance this day." - Diary of King George III of England
Little did he know ...
It's easy to get caught up in our plans for the 4th of July - backyard barbeques, a mini-vacation, time with family and friends ... but let's not forget what we're celebrating.
On July 4th, 1776, a mixed bunch of mostly soft-spoken, hard-working men signed the Declaration of Independence. It was bold, it was rebellious, and it was treason. At the time, those 56 men were subjects of King George, and they knew that signing that Declaration could cost them their lives. But they felt so strongly that their America should be free, they took that risk.
"We hold these truths to be self-evident,
that all men are created equal,
that they are endowed by their Creator
with certain unalienable Rights,
that among these are Life, Liberty and the pursuit of Happiness."
- John Adams, 1776
Let's not forget this beautifully-crafted document, the bold courage it took to sign it and the freedoms we now enjoy because of it.
Happy Independence Day!
It's easy to get caught up in our plans for the 4th of July - backyard barbeques, a mini-vacation, time with family and friends ... but let's not forget what we're celebrating.
On July 4th, 1776, a mixed bunch of mostly soft-spoken, hard-working men signed the Declaration of Independence. It was bold, it was rebellious, and it was treason. At the time, those 56 men were subjects of King George, and they knew that signing that Declaration could cost them their lives. But they felt so strongly that their America should be free, they took that risk.
"We hold these truths to be self-evident,
that all men are created equal,
that they are endowed by their Creator
with certain unalienable Rights,
that among these are Life, Liberty and the pursuit of Happiness."
- John Adams, 1776
Let's not forget this beautifully-crafted document, the bold courage it took to sign it and the freedoms we now enjoy because of it.
Happy Independence Day!
Friday, June 25, 2010
2010 Tax Laws: A Mid-Year Update
2010 has been one strange year for the U.S. tax code.
We have a huge tax issue that is still not fully resolved, the usual annual array of tweaks and changes to the Internal Revenue Code ... and a chance that some tax breaks from 2009 could yet be extended for 2010, if an abbreviated version of the American Jobs and Closing Tax Loopholes Act (H.R. 4213) becomes law. This bill was passed by the House of Representatives in late May, with a June vote expected in the Senate. 1 Many analysts think it will be signed by President Obama this summer.
It's the middle of the year, so let's take a look at where things stand for TY 2010 in terms of changes, amendments, additions and question marks. If you see an asterisk, you are seeing an expired 2009 tax break that might come back for 2010. At the end of this document, you'll see a summary of the tax breaks that could be extended into 2010 if H.R. 4213 passes.
And by the way, if you are a contractor, a real estate developer or a partner in an investment or venture capital firm, be sure to take a look at the very last item.
Here we go ...
1 The estate tax and GSTT have been repealed for 2010, and they probably won't be enforced retroactively.
Even though the Obama administration preferred having an estate tax in 2010, Congress was preoccupied with other matters as 2009 drew to a close. So no action was taken, and as EGGTRA stipulated in 2001, the estate tax is 0% in 2010. 2
So far, anyway. The longer we go with no action taken, the harder it gets for Congress to take action and put a retroactive estate tax in place. (You could easily argue that a retroactive estate tax would be unconstitutional.)
Of course, the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to return in 2011. Most estate planners think that Congress will restore things to 2009 levels ($3.5 million exemption for estate tax and GSTT with 45% estate, GSTT, and gift tax rates). Alternately, estate taxes would reset to pre-EGGTRA levels in 2011 (the exemption level at just $1 million with 55% estate, GSTT, and gift tax rates). 2
2 With no estate tax in place for 2010, the step-up basis rules have been replaced by carryover basis rules.
This year, assets in an estate are subject to capital gains taxes when sold based on the original price paid for the asset. This could mean some big problems for heirs if an asset was bought by Mom or Dad 20 or 30 years ago. Let's say the asset is a stock. If Mom or Dad purchased shares off and on through the years, you'll have quite an assignment to find that paper trail, and you may end up paying capital gains tax on the appreciation if the estate is really large. Fortunately, each estate can exempt $1.3 million of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse - so as much as $4.3 million of an estate can retain the step-up in 2010. 3
3 The federal gift tax rate is 35% for 2010, not 45%.
Yes, there is still a gift tax in 2010 on gifts above the lifetime exemption amount of $1 million. However, the tax bite is just 35% for 2010. Of course, if you end up gifting less than $1 million during your lifetime, you won't have to worry about the gift tax at all. 4
For the record, IRS Publication 950 (issued 12/09) states: "In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse." 5
4 No income limits on Roth IRA conversions.
To recap, anyone can convert a traditional IRA to a Roth IRA in 2010 - the old income limits that were in the way have been repealed. Anyone who does this also has the option of paying the taxes resulting from the conversion over two tax years - 2011 and 2012. 6
There are still income limits preventing certain taxpayers from actively contributing to a Roth IRA, but there is no stopping those taxpayers from contributing to their traditional IRAs one more time in 2010 and then converting them to Roth IRAs. 7
5 You can no longer opt to deduct state and local sales taxes on your federal return (for the moment).*
Prior to 2010, you could choose to deduct state sales tax payments instead of state and local income taxes. Congress let this option expire at the start of this year. However, Sen. Maria Cantwell (D-WA) has been spearheading a provision to extend the state and local sales tax deduction - so we have a chance that this option may return for tax year 2010. 7,8
6 Tax brackets have been (barely) adjusted for (minimal) inflation.
The adjustments are very minor (for single filers, for example, they are as little as $50 for the 25% bracket and $700 for the 35% bracket). Here are the ordinary taxable income brackets in TY 2010:
· Single Taxpayers:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $82,401
o 33% bracket starts @ $171,851
o 35% bracket starts @ $373,651
· Married Filing Jointly or Qualifying Widow/Widower:
o 10% bracket has a ceiling of $16,750
o 15% bracket starts @ $16,751
o 25% bracket starts @ $68,001
o 28% bracket starts @ $137,301
o 33% bracket starts @ $209,251
o 35% bracket starts @ $373,651
· Married Filing Separately:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $68,651
o 33% bracket starts @ $104,626
o 35% bracket starts @ $186,826
· Head of Household:
o 10% bracket has a ceiling of $11,950
o 15% bracket starts @ $11,951
o 25% bracket starts @ $45,551
o 28% bracket starts @ $117,651
o 33% bracket starts @ $190,551
o 35% bracket starts @ $373,651 9
This isn't a change, but it is worth noting: for the first year in who knows when, there is no COLA adjustment to the personal exemption ($3,650) and the standard deduction for most taxpayers ($5,700/$11,400, except for a $50 increase for heads of household). 10
7 AMT exemption amounts drop way below 2009 levels.
Last year's levels were adjusted for the economic stimulus arranged by the Obama administration. In all probability, Congress will patch the tax before the end of 2010 and set AMT exemption amounts much higher. Currently, AMT amounts are set as follows for tax year 2010:
· Single/Head of Household: $33,750
· Married Filing Separately: $22,500
· Married Filing Jointly: $45,000 6
8 Business mileage deduction rates have gone down.
If you are using a personal vehicle for business, the business mileage deduction is 50¢ a mile in 2010. That's about 9% below the 2009 deduction of 55¢ per mile. You can chalk it up to reduced transportation costs. If you use a personal vehicle for medical reasons or to move in 2010, well that deduction is also reduced - it was 24¢ per mile in 2009, and it is just 16.5¢ a mile this year. If you use a personal vehicle for charitable purposes (driving it for the purpose of working for a charity), the deduction is 14¢ a mile - same as in 2009. 11
9 The foreign earned income exclusion rises by $100.
The exclusion was $91,400 in 2009, now it is $91,500 for 2010. 6
10 The domestic production activities deduction is now 9%.
That's a notable leap from 6% in 2009, though it comes with one asterisk. What types of businesses can take advantage of this? Construction and architectural firms, film production companies, engineering firms, or businesses that rent, lease or sell equipment they build. The asterisk? The deduction is still 6% this year for oil and gas companies. 6
11 The IRA distribution to charity option expired after December 31, 2009.*
Will it come back? Some tax analysts think it might. It was great while it lasted, and it was a real boon to universities and assorted non-profits. Yet Congress did not extend the provision allowing IRA distributions to charity into 2010. Here's hoping they restore it. 6
12 No additional standard deduction for property taxes.*
In 2010, you can't boost a standard federal deduction by up to $1,000 of state or local property taxes you have paid. There is the possibility that Congress will get around to reinstating this perk designed to encourage home sales. But so far in 2010, you can't increase your standard deduction in this way. 6
13 No more excluding jobless benefits from your taxable income.
In 2009, you could exclude up to $2,400 of unemployment benefits. The way it is now, you get no such break for 2010. 7
14 Changes to the Earned Income Credit (EIC).
This tax break is primarily designed for low- and middle-income families. In 2010, the maximum EIC for working families with three or more children was set at $5,666, subject to phase-outs when AGI surpasses $43,352 ($48,362 if married filing jointly). Total advance EIC payments for 2010 are limited to $1,880. By the way, you can earn $3,100 in investment income during 2010 and still claim the credit in 2010. 12
15 Non-taxable combat pay can't be used to figure earned income for the Earned Income Credit.
That was the case in 2009, but combat pay can't be used in the calculation for 2010. 6
16 A cap on farm losses used to offset non-farm income.
In 2010, the limit on farm losses you can take is either a) $300,000 or b) your net farm income over the past five years, whichever is greater. And yes, this limit goes for S corporation owners and partners as well. However, it will only apply if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You may take suspended losses in subsequent tax years. 6
17 No sales tax breaks if you buy a new car.
You could deduct sales tax on a new car purchase from your 2009 federal return. You can't get such a tax benefit in 2010, unless Congress gives you back the chance to deduct sales taxes instead of state income taxes (see #5 above). 7
18 No higher education tuition deduction for 2010.*
In 2009, some qualifying taxpayers could take an above-the-line deduction for college tuition and expenses. If your AGI was $65,000 or less ($130,000 for joint filers), the limit of the deduction was $4,000. Taxpayers with AGI up to $80,000 ($160,000 for joint filers) could take a reduced deduction of as much as $2,000. But not in 2010 ... not so far, anyway. 13
19 No classroom supplies deduction for teachers.*
In 2009, K-12 teachers, principals, guidance counselors and other education professionals could take a $250 above-the-line deduction to offset out-of-pocket classroom expenses. That deduction expired at the end of 2009, but it may return if H.R. 4213 is made law. 13
*Now, if H.R. 4213 becomes law:
5a The state and local sales tax deduction option would be restored for 2010.
This would help you if you live in a state that doesn't levy state income tax. Taxpayers would have the option of taking an itemized deduction for either state and local income taxes, or state and local general sales taxes. 13
11a The IRA distribution to charity option would come back.
If it does, individuals age 70½ or older could once again distribute as much as $100,000 from their IRAs to charitable organizations through the end of 2010, and the money would not be characterized as income or be subject to itemization rules. (By the way, you would not be able to do this with an inherited IRA if you, the beneficiary, turn age 70 1/2 before such a charitable rollover. That was also true before 2010.) 13,14
12a The additional standard deduction for property taxes would be extended through 2010.
The limit would be $500 for single filers and $1,000 for joint filers. This deduction would not lower your AGI; you would add it to the standard deduction. 13
18a The higher education tuition deduction would return for 2010.
A reminder: this is for higher education tuition and expenses only, not elementary or secondary school costs. If your AGI is $65,000 or less ($130,000 for joint filers), the limit of the deduction would be $4,000. If it is between $65,000-80,000 ($135,000-160,000 for joint filers) you could be eligible for a deduction of as much as $2,000. 13
19a The classroom expenses deduction would be restored.
The $250 above-the-line deduction to help K-12 teachers/educators would return for 2010. 13
Additionally, if H.R. 4213 passes in its current form:
· Tax breaks for land donations would be extended.
That is, the special rules and provisions under the "4-H Act" (the Heartland, Habitat, Harvest, and Horticulture Act of 2008) would be extended through 2010 to help qualifying farmers and ranchers donate land to organizations such as the Nature Conservancy. The 2010 tax break could be as large as 100% of the excess of the taxpayer's contribution base over the total of all other allowable charitable contributions. 13,14
· All hybrid vehicle tax credits would be in place until the end of 2010.
Some of these credits expired in 2009, and others sunset this year and in 2014 (there are different credits for different classes of hybrids). H.R. 4213 would forward the expiration dates on all three classes of credits ahead by one year. 13,14
· The provisions of the National Disaster Relief Act of 2008 would be extended.
Prior to this law, Congress and the IRS pretty much issued tax breaks for taxpayers affected by disasters on a case-by-case basis. H.R. 4213 would extend the Act through the end of 2010, allowing higher loss limits on personal casualty losses from natural disasters, a special depreciation allowance for property that rehabilitates or replaces qualified business property, and current deductions for disaster repair and clean-up expenses. 13
· Tax credits for alternative fuels and energy-efficient windows would remain in place.
In 2009, the IRS offered a biodiesel credit, a biodiesel small producer credit and a biodiesel excise credit. H.R. 4213 would restore them for 2010. It would also revise the language concerning tax credits for energy-efficient windows to recognize different climate patterns in different regions of the country. 13,14
· We would see a "carried interest" tax hike.
Real estate investors know the concept of "carried interest" well. Let's say a real estate partnership buys a forlorn shopping center and hires a contractor to pretty it up. Those real estate investors may offer the contractor a 15% or 20% cut of their future net when they sell the center. That's called "carried interest", and this income is usually taxed as a capital gain.
But on January 1, 2011, that could change. In a phase-in provision included in the House version of H.R. 4213, 50% of the amounts paid on the carried interests of individual partners would initially be taxed as ordinary income. So would the gain on the sale or exchange of a carried interest.
So instead of carried interest being taxed as capital gains at rates up to 15% or 20%, carried interest would be taxed at ordinary income rates up to 35% or even 39.6% in 2011. (And if you are a real estate developer, venture capitalist or entrepreneur, you may find yourself in one of the two highest tax brackets.)
CCH, the tax research firm, projects this as the biggest revenue generator from H.R. 4213 over the next decade if the bill becomes law. Congress hopes that hiking taxes on carried interest would raise $1.7 billion for the federal government annually. 13,15
Citations.
1 investmentadvisor.com/News/2010/6/Pages/Tax-Extenders-Bill-Passes-House-Heads-for-Senate.aspx [6/1/10]
2 moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/ [1/5/10]
3 articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5bigMythsAboutTheEstateTax.aspx [4/14/10]
4 moneywatch.bnet.com/retirement-planning/blog/financial-independence/why-is-everyone-afraid-of-the-gift-tax/843/ [4/14/10]
5 irs.gov/pub/irs-pdf/p950.pdf [12/09]
6 turbotax.intuit.com/tax-tools/tax-tips/irs-tax-return/5519.html#2010 [4/19/10]
7 boston.com/business/personalfinance/managingyourmoney/archives/2009/12/summary_of_tax.html [12/4/09]
8 cantwell.senate.gov/issues/sales_tax.cfm [4/19/09]
9 bankrate.com/finance/taxes/2010-tax-bracket-rates.aspx [1/5/10]
10 online.wsj.com/article/SB125322006352820593.html [9/17/09]
11 bloomberg.com/apps/news?pid=20603037&sid=aHY2qdL6oTsM [12/3/09]
12 irs.gov/formspubs/article/0,,id=180803,00.html [12/4/09]
13 tax.cchgroup.com/legislation/Tax-extenders-bill.pdf [6/1/10]
14 usnews.com/money/blogs/the-best-life/2010/05/24/10-tax-breaks-likely-to-be-extended [5/24/10]
15 lvrj.com/opinion/-carried-interest--95678939.html [6/5/10]
We have a huge tax issue that is still not fully resolved, the usual annual array of tweaks and changes to the Internal Revenue Code ... and a chance that some tax breaks from 2009 could yet be extended for 2010, if an abbreviated version of the American Jobs and Closing Tax Loopholes Act (H.R. 4213) becomes law. This bill was passed by the House of Representatives in late May, with a June vote expected in the Senate. 1 Many analysts think it will be signed by President Obama this summer.
It's the middle of the year, so let's take a look at where things stand for TY 2010 in terms of changes, amendments, additions and question marks. If you see an asterisk, you are seeing an expired 2009 tax break that might come back for 2010. At the end of this document, you'll see a summary of the tax breaks that could be extended into 2010 if H.R. 4213 passes.
And by the way, if you are a contractor, a real estate developer or a partner in an investment or venture capital firm, be sure to take a look at the very last item.
Here we go ...
1 The estate tax and GSTT have been repealed for 2010, and they probably won't be enforced retroactively.
Even though the Obama administration preferred having an estate tax in 2010, Congress was preoccupied with other matters as 2009 drew to a close. So no action was taken, and as EGGTRA stipulated in 2001, the estate tax is 0% in 2010. 2
So far, anyway. The longer we go with no action taken, the harder it gets for Congress to take action and put a retroactive estate tax in place. (You could easily argue that a retroactive estate tax would be unconstitutional.)
Of course, the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to return in 2011. Most estate planners think that Congress will restore things to 2009 levels ($3.5 million exemption for estate tax and GSTT with 45% estate, GSTT, and gift tax rates). Alternately, estate taxes would reset to pre-EGGTRA levels in 2011 (the exemption level at just $1 million with 55% estate, GSTT, and gift tax rates). 2
2 With no estate tax in place for 2010, the step-up basis rules have been replaced by carryover basis rules.
This year, assets in an estate are subject to capital gains taxes when sold based on the original price paid for the asset. This could mean some big problems for heirs if an asset was bought by Mom or Dad 20 or 30 years ago. Let's say the asset is a stock. If Mom or Dad purchased shares off and on through the years, you'll have quite an assignment to find that paper trail, and you may end up paying capital gains tax on the appreciation if the estate is really large. Fortunately, each estate can exempt $1.3 million of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse - so as much as $4.3 million of an estate can retain the step-up in 2010. 3
3 The federal gift tax rate is 35% for 2010, not 45%.
Yes, there is still a gift tax in 2010 on gifts above the lifetime exemption amount of $1 million. However, the tax bite is just 35% for 2010. Of course, if you end up gifting less than $1 million during your lifetime, you won't have to worry about the gift tax at all. 4
For the record, IRS Publication 950 (issued 12/09) states: "In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse." 5
4 No income limits on Roth IRA conversions.
To recap, anyone can convert a traditional IRA to a Roth IRA in 2010 - the old income limits that were in the way have been repealed. Anyone who does this also has the option of paying the taxes resulting from the conversion over two tax years - 2011 and 2012. 6
There are still income limits preventing certain taxpayers from actively contributing to a Roth IRA, but there is no stopping those taxpayers from contributing to their traditional IRAs one more time in 2010 and then converting them to Roth IRAs. 7
5 You can no longer opt to deduct state and local sales taxes on your federal return (for the moment).*
Prior to 2010, you could choose to deduct state sales tax payments instead of state and local income taxes. Congress let this option expire at the start of this year. However, Sen. Maria Cantwell (D-WA) has been spearheading a provision to extend the state and local sales tax deduction - so we have a chance that this option may return for tax year 2010. 7,8
6 Tax brackets have been (barely) adjusted for (minimal) inflation.
The adjustments are very minor (for single filers, for example, they are as little as $50 for the 25% bracket and $700 for the 35% bracket). Here are the ordinary taxable income brackets in TY 2010:
· Single Taxpayers:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $82,401
o 33% bracket starts @ $171,851
o 35% bracket starts @ $373,651
· Married Filing Jointly or Qualifying Widow/Widower:
o 10% bracket has a ceiling of $16,750
o 15% bracket starts @ $16,751
o 25% bracket starts @ $68,001
o 28% bracket starts @ $137,301
o 33% bracket starts @ $209,251
o 35% bracket starts @ $373,651
· Married Filing Separately:
o 10% bracket has a ceiling of $8,375
o 15% bracket starts @ $8,376
o 25% bracket starts @ $34,001
o 28% bracket starts @ $68,651
o 33% bracket starts @ $104,626
o 35% bracket starts @ $186,826
· Head of Household:
o 10% bracket has a ceiling of $11,950
o 15% bracket starts @ $11,951
o 25% bracket starts @ $45,551
o 28% bracket starts @ $117,651
o 33% bracket starts @ $190,551
o 35% bracket starts @ $373,651 9
This isn't a change, but it is worth noting: for the first year in who knows when, there is no COLA adjustment to the personal exemption ($3,650) and the standard deduction for most taxpayers ($5,700/$11,400, except for a $50 increase for heads of household). 10
7 AMT exemption amounts drop way below 2009 levels.
Last year's levels were adjusted for the economic stimulus arranged by the Obama administration. In all probability, Congress will patch the tax before the end of 2010 and set AMT exemption amounts much higher. Currently, AMT amounts are set as follows for tax year 2010:
· Single/Head of Household: $33,750
· Married Filing Separately: $22,500
· Married Filing Jointly: $45,000 6
8 Business mileage deduction rates have gone down.
If you are using a personal vehicle for business, the business mileage deduction is 50¢ a mile in 2010. That's about 9% below the 2009 deduction of 55¢ per mile. You can chalk it up to reduced transportation costs. If you use a personal vehicle for medical reasons or to move in 2010, well that deduction is also reduced - it was 24¢ per mile in 2009, and it is just 16.5¢ a mile this year. If you use a personal vehicle for charitable purposes (driving it for the purpose of working for a charity), the deduction is 14¢ a mile - same as in 2009. 11
9 The foreign earned income exclusion rises by $100.
The exclusion was $91,400 in 2009, now it is $91,500 for 2010. 6
10 The domestic production activities deduction is now 9%.
That's a notable leap from 6% in 2009, though it comes with one asterisk. What types of businesses can take advantage of this? Construction and architectural firms, film production companies, engineering firms, or businesses that rent, lease or sell equipment they build. The asterisk? The deduction is still 6% this year for oil and gas companies. 6
11 The IRA distribution to charity option expired after December 31, 2009.*
Will it come back? Some tax analysts think it might. It was great while it lasted, and it was a real boon to universities and assorted non-profits. Yet Congress did not extend the provision allowing IRA distributions to charity into 2010. Here's hoping they restore it. 6
12 No additional standard deduction for property taxes.*
In 2010, you can't boost a standard federal deduction by up to $1,000 of state or local property taxes you have paid. There is the possibility that Congress will get around to reinstating this perk designed to encourage home sales. But so far in 2010, you can't increase your standard deduction in this way. 6
13 No more excluding jobless benefits from your taxable income.
In 2009, you could exclude up to $2,400 of unemployment benefits. The way it is now, you get no such break for 2010. 7
14 Changes to the Earned Income Credit (EIC).
This tax break is primarily designed for low- and middle-income families. In 2010, the maximum EIC for working families with three or more children was set at $5,666, subject to phase-outs when AGI surpasses $43,352 ($48,362 if married filing jointly). Total advance EIC payments for 2010 are limited to $1,880. By the way, you can earn $3,100 in investment income during 2010 and still claim the credit in 2010. 12
15 Non-taxable combat pay can't be used to figure earned income for the Earned Income Credit.
That was the case in 2009, but combat pay can't be used in the calculation for 2010. 6
16 A cap on farm losses used to offset non-farm income.
In 2010, the limit on farm losses you can take is either a) $300,000 or b) your net farm income over the past five years, whichever is greater. And yes, this limit goes for S corporation owners and partners as well. However, it will only apply if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You may take suspended losses in subsequent tax years. 6
17 No sales tax breaks if you buy a new car.
You could deduct sales tax on a new car purchase from your 2009 federal return. You can't get such a tax benefit in 2010, unless Congress gives you back the chance to deduct sales taxes instead of state income taxes (see #5 above). 7
18 No higher education tuition deduction for 2010.*
In 2009, some qualifying taxpayers could take an above-the-line deduction for college tuition and expenses. If your AGI was $65,000 or less ($130,000 for joint filers), the limit of the deduction was $4,000. Taxpayers with AGI up to $80,000 ($160,000 for joint filers) could take a reduced deduction of as much as $2,000. But not in 2010 ... not so far, anyway. 13
19 No classroom supplies deduction for teachers.*
In 2009, K-12 teachers, principals, guidance counselors and other education professionals could take a $250 above-the-line deduction to offset out-of-pocket classroom expenses. That deduction expired at the end of 2009, but it may return if H.R. 4213 is made law. 13
*Now, if H.R. 4213 becomes law:
5a The state and local sales tax deduction option would be restored for 2010.
This would help you if you live in a state that doesn't levy state income tax. Taxpayers would have the option of taking an itemized deduction for either state and local income taxes, or state and local general sales taxes. 13
11a The IRA distribution to charity option would come back.
If it does, individuals age 70½ or older could once again distribute as much as $100,000 from their IRAs to charitable organizations through the end of 2010, and the money would not be characterized as income or be subject to itemization rules. (By the way, you would not be able to do this with an inherited IRA if you, the beneficiary, turn age 70 1/2 before such a charitable rollover. That was also true before 2010.) 13,14
12a The additional standard deduction for property taxes would be extended through 2010.
The limit would be $500 for single filers and $1,000 for joint filers. This deduction would not lower your AGI; you would add it to the standard deduction. 13
18a The higher education tuition deduction would return for 2010.
A reminder: this is for higher education tuition and expenses only, not elementary or secondary school costs. If your AGI is $65,000 or less ($130,000 for joint filers), the limit of the deduction would be $4,000. If it is between $65,000-80,000 ($135,000-160,000 for joint filers) you could be eligible for a deduction of as much as $2,000. 13
19a The classroom expenses deduction would be restored.
The $250 above-the-line deduction to help K-12 teachers/educators would return for 2010. 13
Additionally, if H.R. 4213 passes in its current form:
· Tax breaks for land donations would be extended.
That is, the special rules and provisions under the "4-H Act" (the Heartland, Habitat, Harvest, and Horticulture Act of 2008) would be extended through 2010 to help qualifying farmers and ranchers donate land to organizations such as the Nature Conservancy. The 2010 tax break could be as large as 100% of the excess of the taxpayer's contribution base over the total of all other allowable charitable contributions. 13,14
· All hybrid vehicle tax credits would be in place until the end of 2010.
Some of these credits expired in 2009, and others sunset this year and in 2014 (there are different credits for different classes of hybrids). H.R. 4213 would forward the expiration dates on all three classes of credits ahead by one year. 13,14
· The provisions of the National Disaster Relief Act of 2008 would be extended.
Prior to this law, Congress and the IRS pretty much issued tax breaks for taxpayers affected by disasters on a case-by-case basis. H.R. 4213 would extend the Act through the end of 2010, allowing higher loss limits on personal casualty losses from natural disasters, a special depreciation allowance for property that rehabilitates or replaces qualified business property, and current deductions for disaster repair and clean-up expenses. 13
· Tax credits for alternative fuels and energy-efficient windows would remain in place.
In 2009, the IRS offered a biodiesel credit, a biodiesel small producer credit and a biodiesel excise credit. H.R. 4213 would restore them for 2010. It would also revise the language concerning tax credits for energy-efficient windows to recognize different climate patterns in different regions of the country. 13,14
· We would see a "carried interest" tax hike.
Real estate investors know the concept of "carried interest" well. Let's say a real estate partnership buys a forlorn shopping center and hires a contractor to pretty it up. Those real estate investors may offer the contractor a 15% or 20% cut of their future net when they sell the center. That's called "carried interest", and this income is usually taxed as a capital gain.
But on January 1, 2011, that could change. In a phase-in provision included in the House version of H.R. 4213, 50% of the amounts paid on the carried interests of individual partners would initially be taxed as ordinary income. So would the gain on the sale or exchange of a carried interest.
So instead of carried interest being taxed as capital gains at rates up to 15% or 20%, carried interest would be taxed at ordinary income rates up to 35% or even 39.6% in 2011. (And if you are a real estate developer, venture capitalist or entrepreneur, you may find yourself in one of the two highest tax brackets.)
CCH, the tax research firm, projects this as the biggest revenue generator from H.R. 4213 over the next decade if the bill becomes law. Congress hopes that hiking taxes on carried interest would raise $1.7 billion for the federal government annually. 13,15
Citations.
1 investmentadvisor.com/News/2010/6/Pages/Tax-Extenders-Bill-Passes-House-Heads-for-Senate.aspx [6/1/10]
2 moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/ [1/5/10]
3 articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5bigMythsAboutTheEstateTax.aspx [4/14/10]
4 moneywatch.bnet.com/retirement-planning/blog/financial-independence/why-is-everyone-afraid-of-the-gift-tax/843/ [4/14/10]
5 irs.gov/pub/irs-pdf/p950.pdf [12/09]
6 turbotax.intuit.com/tax-tools/tax-tips/irs-tax-return/5519.html#2010 [4/19/10]
7 boston.com/business/personalfinance/managingyourmoney/archives/2009/12/summary_of_tax.html [12/4/09]
8 cantwell.senate.gov/issues/sales_tax.cfm [4/19/09]
9 bankrate.com/finance/taxes/2010-tax-bracket-rates.aspx [1/5/10]
10 online.wsj.com/article/SB125322006352820593.html [9/17/09]
11 bloomberg.com/apps/news?pid=20603037&sid=aHY2qdL6oTsM [12/3/09]
12 irs.gov/formspubs/article/0,,id=180803,00.html [12/4/09]
13 tax.cchgroup.com/legislation/Tax-extenders-bill.pdf [6/1/10]
14 usnews.com/money/blogs/the-best-life/2010/05/24/10-tax-breaks-likely-to-be-extended [5/24/10]
15 lvrj.com/opinion/-carried-interest--95678939.html [6/5/10]
Tuesday, June 15, 2010
The Hidden Source of Returns
The biggest problem with investment returns is that they're posted daily--or, in the case of the recent "flash crash," every hour or so.
Why is this a problem? Because it implies that what happened yesterday or the day before is meaningful to your financial life, and is important information for future investment decisions. People all over the world struggle with figuring out the relevance of last week's or last month's or last quarter's investment returns, and the cable investing channels and newspapers feed the confusion by trying to explain yesterday's downturn in terms of housing or unemployment data, and project tomorrow's returns based on interest rates and earnings reports.
If you're one of those people who checks the market regularly and can't quite find the meaning of all this short-term information, then this is a good time to relax. Because there IS no meaning to be found there.
At all times, there are three forces guiding the markets. The first is long-term economic growth. Global businesses are gradually expanding their operations, opening up new markets, learning to manufacture and service their customers more efficiently, creating new products. With billions of new customers emerging in India, China, Indonesia and elsewhere, and new technology improving the efficiency of building, tracking, servicing, managing and everything else, this trend has been generally upward since people first squatted in caves around a wonderful new invention called the campfire.
The industrial revolution, the information revolution, and whatever new revolution the Internet and iPhone are a part of are accelerating this long-term business trend, which is invisibly making you money in your portfolio every day you stay invested.
The second force is the economic cycle, which moves from robust growth back to recession back to robust growth in a round-trip gyration which can last anywhere from months to years. Economists have felled whole forests trying to explain the hows and whys of these fluctuations, but most of us instinctively understand what it means to become overextended, pulling back, tightening our belts and then moving forward again. No human activity can be graphed as a flat line.
The only important thing to realize about economic cycles is that they are generally subservient to the longer-term cycle. Throughout all the ups and downs and sidewayses, the world economy has experienced net long-term growth ever since those first campfires.
The third force is investor emotions, which are by far the most volatile element of investment returns, and can change hourly, daily, weekly, monthly. You know these on a personal level; it's what you feel when you see the market go into the "flash crash" freefall, or a year and a half ago when the markets suddenly realized that the demise of Lehman Brothers--a company which helped finance the Civil War--was a scary event. That urge you feel to sell everything and make the anxiety go away is shared by roughly a billion other investors around the globe, who conspire, unconsciously but powerfully, to rock the markets like the ocean waves in a storm. Even on good days, these waves are rolling around powerfully enough to make TV analysts think they can find meaning in them.
But that's the point: studying the waves, studying what happened yesterday or last quarter, tells you nothing at all about the long-term viability, health or growth of the companies in your investment portfolio--despite what Jim Cramer happens to be screaming today. You might get equally-valid information looking at the patterns of tea leaves or the markings on the back of tortoise shells.
That doesn't mean the waves have no impact on investments, however. The great investors, like Warren Buffett, look for those times when a billion investors are pushing the panic button, and take advantage of stocks selling at bargain prices. Thousands, perhaps millions of investors had to sell during a lot of panics to make Warren Buffett a billionaire, and in his annual shareholder meetings, he acknowledges this. The waves go in the opposite direction as well, taking prices well out of the bargain zone.
Through it all, the long-term trend is quietly making you money, moving us toward a future day when people will look back at us the way we look back at people who lived at the dawn of the Industrial Revolution. They will wonder how we could get so excited about (or scream on TV about) all these little ups and downs while the economy was steadily, visibly, reliably carrying us to a better place
Why is this a problem? Because it implies that what happened yesterday or the day before is meaningful to your financial life, and is important information for future investment decisions. People all over the world struggle with figuring out the relevance of last week's or last month's or last quarter's investment returns, and the cable investing channels and newspapers feed the confusion by trying to explain yesterday's downturn in terms of housing or unemployment data, and project tomorrow's returns based on interest rates and earnings reports.
If you're one of those people who checks the market regularly and can't quite find the meaning of all this short-term information, then this is a good time to relax. Because there IS no meaning to be found there.
At all times, there are three forces guiding the markets. The first is long-term economic growth. Global businesses are gradually expanding their operations, opening up new markets, learning to manufacture and service their customers more efficiently, creating new products. With billions of new customers emerging in India, China, Indonesia and elsewhere, and new technology improving the efficiency of building, tracking, servicing, managing and everything else, this trend has been generally upward since people first squatted in caves around a wonderful new invention called the campfire.
The industrial revolution, the information revolution, and whatever new revolution the Internet and iPhone are a part of are accelerating this long-term business trend, which is invisibly making you money in your portfolio every day you stay invested.
The second force is the economic cycle, which moves from robust growth back to recession back to robust growth in a round-trip gyration which can last anywhere from months to years. Economists have felled whole forests trying to explain the hows and whys of these fluctuations, but most of us instinctively understand what it means to become overextended, pulling back, tightening our belts and then moving forward again. No human activity can be graphed as a flat line.
The only important thing to realize about economic cycles is that they are generally subservient to the longer-term cycle. Throughout all the ups and downs and sidewayses, the world economy has experienced net long-term growth ever since those first campfires.
The third force is investor emotions, which are by far the most volatile element of investment returns, and can change hourly, daily, weekly, monthly. You know these on a personal level; it's what you feel when you see the market go into the "flash crash" freefall, or a year and a half ago when the markets suddenly realized that the demise of Lehman Brothers--a company which helped finance the Civil War--was a scary event. That urge you feel to sell everything and make the anxiety go away is shared by roughly a billion other investors around the globe, who conspire, unconsciously but powerfully, to rock the markets like the ocean waves in a storm. Even on good days, these waves are rolling around powerfully enough to make TV analysts think they can find meaning in them.
But that's the point: studying the waves, studying what happened yesterday or last quarter, tells you nothing at all about the long-term viability, health or growth of the companies in your investment portfolio--despite what Jim Cramer happens to be screaming today. You might get equally-valid information looking at the patterns of tea leaves or the markings on the back of tortoise shells.
That doesn't mean the waves have no impact on investments, however. The great investors, like Warren Buffett, look for those times when a billion investors are pushing the panic button, and take advantage of stocks selling at bargain prices. Thousands, perhaps millions of investors had to sell during a lot of panics to make Warren Buffett a billionaire, and in his annual shareholder meetings, he acknowledges this. The waves go in the opposite direction as well, taking prices well out of the bargain zone.
Through it all, the long-term trend is quietly making you money, moving us toward a future day when people will look back at us the way we look back at people who lived at the dawn of the Industrial Revolution. They will wonder how we could get so excited about (or scream on TV about) all these little ups and downs while the economy was steadily, visibly, reliably carrying us to a better place
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