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Monday, February 24, 2014

Not a Myth- What's New for 2013 Tax Filers

Here's a list of significant and/or interesting changes handed down by IRS.  This is by no means a complete list.  Please consult with your tax expert or at least Publication 17.

  • Additional Medicare Tax- In a nutshell, an extra 0.9% on earned income exceeding $250k for couples, $200k for individuals.
  • Net Investment Income Tax-  3.8% of net investment income or MAGI over $250k for a couple, $200k for individual filers.  Tea Partiers went nuts over this but hey, should we tax poor working stiffs or passive (i.e. nonworking) income?
  • Top tax rate is now 39.6%- Put the guns away.  This applies only to taxable income over $450,000 for a couple.  And is still a far cry from the highest historical marginal rates >90%.  I only have two clients who are affected by this and I guarantee you it will not affect the kind of breakfast cereal they eat.
  • Capital Gains & Dividends- for some folks the top rate will increase from 15 to 20%.  Why isn't this passive income taxed at the same rates as earned income???
  • Medical Deductions- unless you or or spouse are 65 or older, the hurdle for deductibility is increased from 7.5 to 10%.  But corporations, which the Supreme court has affirmed are people, can deduct every penny.  I see.
  • Yay, Person Exemptions!- increased to $3900, with exceptions.
  • Itemized Deductions Restricted- if you make over $250k &  are single & other details.
  • Same Sex Couples- Can file as married if legally married in a state, even if no longer living there.
  • FSAs- Can't divert more than $2500/yr into these.
  • Plug-in vehicle Credit expired in 2012, thankyou big oil.
  • Home office deduction- simplified
  • Standard Mileage Rate- 56 cents for business, 24 cents for medical care or moving.

Friday, February 14, 2014

IRS is never helpful

Just a reminder, these headings are Financial Myths unless otherwise noted.  IRS can actually be very helpful, if you know where to look.  And it should get better, thanks to TAP, the new Taxpayer Advocacy Panel made up of 73 volunteers around the country.  I applied for this panel but they ended up selecting no one from Oregon, probably because of me;  my three suggestions for improving IRS customer service were:

  1. Leave
  2. Me
  3. Alone
No doubt they assumed everyone here is nuts and passed us over entirely.  Here's the link to the announcement, if you're interested in sending comments to TAP:

Another recent sort of friendly gesture is Publication 910, "IRS Guide to Free Tax Services".  To save you the effort of looking at all 27 pages, here are the sweet spots, in my opinion:
  • pp. 1-3-  Yes, their website is easy to navigate and full of robustness.
  • p. 6 - tax advice for seniors.  Free.
  • p. 9 -FreeFile, the online tax return preparation and filing system which, they claim, 40 million taxpayers have used thus far.
  • This is cool.  At you can search for the hundreds of potential benefits programs that might apply to you.
  • p.12 -Guide to free tax services
  • p.18 -Nonprofit and Small Business resources.  I've used this extensively in my Treasurer roles at nonprofits.
So yes, Matilda, even the IRS can be warm and fuzzy.

Tuesday, February 4, 2014

One of the greatest financial tools available in Oregon is going away on 2/24

In a fascinating January 28 interview with James Montier (of Grantham Mayo van Otterloo [GMO] with $10 mil. account minmums!), Robert Huebscher teases out some thoughts & facts that warrant further study, if you would like to take the time to read it. (see What Worries Me Now)  But I'll save you some time with this bullet-point list:

  • At the bottom of the market in 2009 "accounting authorities suspended FASB rule 157 . . . all of a sudden, financial institutions could lie with impuity" about their declining asset values.  Is this one factor in the market run up?  Possibly.  But FASB157 was replaced by ASC820 which, by my reading, uses very reasonable asset valuation formulas.  And won't financial institutions continue to lie with impunity anyway as long as they remain almost entirely self-regulating?  This is an important issue because the techniques used to assign a market value to assets and income streams directly affect stock prices and, therefore, your retirement account balances.
  • He acknowledges the economic fact that government austerity is "likely to drag down profits and that remains a major source of concern".  The prevailing notion that taxes vanish into a black hole is so tired and, well, stupid that I'm glad to see a major fund manager dispel it.  Government belt tightening- just for the sake of belt tightening, I might add -slows the circulation of money & hurts the economy.
  • Montier recognizes that "this is the purgatory of low returns".  He goes on to say that "the perfect dry-powder asset would . . . give you liquidity, protect you from inflation, and it might generate a little bit of return".  And then, "Right now, of course, there is nothing that generates all three of those characteristics".
It is this last assertion with which I heartily disagree.  What if there were an asset which:
  1. Was principal guaranteed, every year.  Not ever losing money enhances long term returns.
  2. Allowed you to use a "5% rule" or greater, depending on your age, (instead of the traditional "4% rule"* which is now considered excessive) for withdrawals
  3. Every year that you delay taking withdrawals, for up to 20 years, your income amount would increase by 7.2%
  4. You have 10-20% liquidity annually
  5. 100% liquidity of principal plus interest in the event of death or 10 years.
Those features would tend to meet Montier's criteria, wouldn't they?  And the account minimum is $5000 as opposed to GMO's $10 mil.  Unfortunately, this particular product is going away on 2/24/2014.
*The lifetime retirement account withdrawal rate that assures you won't run out of money before your life expectancy.  It has recently been revised to 3%.