Thomas Scanlon | Manchester, CT

4 Reasons Why the Deleveraging Will Likely Continue

Americans have been deleveraging (paying off debt) for some time now. Here are 4 Reasons Why Deleveraging Will Continue:

1) The Decline of Home Prices

Real estate was one of the key drivers of the economy the past 20 years. This has changed. Just a little bit. Many people were using their home as their own private ATM. Want a boat? Write a check from the home equity line of credit. Want a new in ground pool? Refinance the house to make this happen. These days are long gone. Some areas of the country have really been hit very hard, others less so.

2) Credit Scores are Generally Down

When unemployment was rising and home prices were declining many Americans fell behind. And it showed up in their credit scores. Although unemployment remains stubbornly high, it has come down somewhat. It’s going to take many people a long time to get their credit score back up. With poor credit scores it’s difficult to borrow.

3) Someone Called an Underwriter

The underwriter is the person who reviews all of your financial information to determine if they will grant you a mortgage. This term might not be familiar to you if you are under the age of 40. Recently underwriters have been very good at declining mortgages. It’s strange, they want you to have a job, show good credit scores and provide a down payment. Imagine that.

4) It’s no longer chic to “Keep Up With the Jones’s”

There’s an often cited statistic that the consumer accounts for about two thirds of the economy. The consumer is tapped out. Finally. I though the consumer would have been tapped out years ago. Boy was I wrong. All it took was a pen to sign your name and buy a house, lease a car and go on a nice European vacation. Times have changed.

I don’t think everyone will be brown bagging it for lunch, but they will definitely be more cautious. Why? Not necessarily because they want to …..but because they have to…

ACTION ITEM: Investors need to understand the implications for the continued deleveraging of America.

Thomas F. Scanlon, CPA, CFP®

The information contained in this report does not purport to be a complete description of the developments referred to in this material. Any opinions are those of Thomas F. Scanlon and not necessarily those of RJSF or Raymond James.

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3 Reasons Why I Believe Limiting Stretch IRA’s to 5 Years is a Very Bad Idea

A Stretch IRA allows an IRA beneficiary the option to stretch the distributions from the IRA over their life expectancy. Recent legislation was proposed to limit stretch IRA distributions to 5 years. This proposal was part of a Senate Finance Committee Bill*. It was not included in House bill. This proposal was scheduled to be effective for people that die after 2012.

There were some limited exceptions to this. A surviving spouse, a child with special needs and a beneficiary that is no more than 10 years younger than the original account holder would not be subject to this proposal.

Here are 3 Reasons Why I Believe Limiting Stretch IRA’s to 5 Years is a Very Bad Idea:

1) Squander an Inheritance

By forcing beneficiaries to take distributions over only 5 years they may quickly go through this money. This is not how an inheritance is typically designed to work. Most people worked hard and saved to accumulate assets in their IRA. If they hadn’t used them up during their lifetime, they were often left for their children or grandchildren.

2) Paying Income Tax in Higher Tax Brackets

By making the distributions only over 5 years, it’s likely the income tax brackets will be higher because the distributions will be greater. Higher income tax brackets results in less cash to the beneficiaries. Having the ability to defer the distributions over your life expectancy will likely result in lower tax brackets through the years.

3) Far Fewer Pension Plans

Many corporations terminated their pension plans years ago. Many were replaced with defined contribution plans, the most common one being a 401(k) plan. Now the majority of people covered by a pension plan are predominately limited to federal, state and municipal employees. Without a pension plan, many people will generally rely on their savings, 401(k) plan, IRA’s and Social Security. Without a pension plan, people are trying to create an income stream that they won’t outlive. Having the option of doing a stretch on an inherited IRA is a wonderful choice to have.

Are the rules for inherited IRA’s too complicated? Yes, I believe they are. Forcing beneficiaries to take distributions over 5 years is not the solution however.

Thomas F. Scanlon, CPA, CFP®

*Highway Investment, Job Creation and Economic Growth Act of 2012

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When Investors With Offshore Accounts Must File IRS Form 8938

Many investors with offshore accounts will have additional reporting responsibility with the filing of their 2011 income tax return.

IRS Form 8938, Statement of Specified Foreign Assets

Due to the abuse of offshore accounts in the past, Congress has decided more disclosure is needed. The result is that certain taxpayers with offshore accounts will need to complete Form 8938 and include it with the filing of their individual income tax returns beginning in 2011.

The filing requirements for married taxpayers filing jointly living in the United States if the value of the foreign assets was more than $100,000 on the last day of the year or more than $150,000 anytime during the year. The filing requirements for unmarried taxpayers are half of this amount, $50,000 and $75,000 respectively.

Financial Assets that are subject to this form are: A Financial Account maintained by a foreign institution and the following assets not held in an account with a foreign institution:

· Stock or security issued by a foreign person

· Financial instrument where the issuer is not a U.S. Person

· And any interest in a foreign entity

The penalty for failure to file this form starts at $10,000 and the maximum is $50,000. Either way, it’s a big penalty.

FBAR

IRS Form 8938 does NOT REPLACE THE FBAR. This is formally known as Form TD F 90-22.1, Report of Foreign Bank and Financial Account (“FBAR”).

Taxpayers with more than $10,000 in a foreign account must file this report. It is due at the Treasury Department, not the IRS by June 30. There is no extension of time to file this report.

Will they eliminate the FBAR in the future? Who knows? For now we have to comply with it.

ACTION ITEM: Investors with offshore accounts must be aware and compliant with IRS Form 8938.

Thomas F. Scanlon, CPA, CFP®

Source: IRS Instructions

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decisions and does not constitute a recommendation. You should discuss any tax matters with the appropriate professional.

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4 Reasons High Income Earners Should Take Capital Gains in 2012

Are you a high income earner with capital gains you have not taken yet? Here are 4 Reasons you should consider taking the capital gains in 2012:

1) Increase in Capital Gains Tax

The long term capital gains rate is currently 15%. Short term capital gains are taxed as ordinary income up to 35%. Long term capital gains are capital assets held longer than a year. Short term capital gains are held less than a year. Capital assets include stocks, bonds and mutual funds. The long term capital gains rate will increase to 20% in 2013.

2) New Medicare Tax Applied to Capital Gains

Beginning in 2013 a new Medicare tax will apply to capital gains and unearned income of high income tax payers. This tax is 3.8% and will apply to married couples with incomes over $250,000 and singles over $200,000. By adding the long term capital gains tax of 20% with the Medicare tax of 3.8% results in a combined 23.8% tax rate. This is a 58.6% increase in capital gains taxes!

3) You May Already be Subject to the Alternative Minimum Tax (“AMT”)

Taxpayers must compute their tax under two methods. First using the regular method and then under the AMT. You have the privilege of paying the higher of the two taxes. The AMT makes certain adjustments and disallows certain deductions. For most taxpayers in the AMT, they may be better served to recognize more income.

4) Step up in Cost Basis

There are restrictions with selling stocks at a loss. If a stock or fund is sold at a loss, you can’t buy back that share for at least 30 days. If you do buy it back during this time, the loss is not allowed. This is what is known as the ‘wash sale’ rule. There are no restrictions on buying back shares that were sold for a gain. If you wanted to you could buy them right back. If you have a stock (or mutual fund) in your portfolio that you don’t want to sell because you inherited it from your grandmother and it has a really low cost basis, no problem. You can sell the stock and buy it right back. This will give you a step up in cost basis. Just be sure you have cash from another source to pay the taxes.

ACTION ITEM: Investors with capital gains should take a hard look at recognizing capital gains in 2012. As always however, remember not to let the tax tail wag the dog.

Thomas F. Scanlon, CPA, CFP®

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6 Taxes That Can Damage Your Financial Plan

A Financial Plan can provide a road map for where you want to go. One of the biggest challenges can be with addressing taxes. Here are 6 Taxes That Can Damage Your Financial Plan:

1) Federal Income Tax- The federal income tax is assessed with graduated tax brackets. Currently the highest ordinary income tax bracket is 35%.

2) Alternative Minimum Tax- The Alternative Minimum Tax (“AMT”) has been getting a lot more press recently. This is a nasty back door tax that can catch taxpayers by surprise. Taxpayers must calculate their tax under the regular method and then under the AMT method. Then the pay the higher of the two taxes. The stated rate of the AMT can be either 26% or 28%.

3) Capital Gains Tax- The Capital Gains Tax is a hot button thanks to Mitt Romney recently releasing his income tax returns. Long term capital gains are generally taxed at 15%. Short term capital gains are taxes as ordinary income.

4) State Income Tax- Most states have an income tax. Connecticut recently increased their income tax rate substantially on higher income earners.

5) Social Security and Medicare Tax- This tax is assessed against earned income. The social security tax is 6.2% on up to $110,100 in 2012. The Medicare tax is 1.45% on all earned income. Employers must match these amounts. For the self-employed they are treated as both the employer and employee and pay both of these taxes twice. The social security tax is 12.4% on their first $110,000 of earnings and their Medicare tax is 2.9% on all of their earnings.

6) Estate Tax- Many investors have taken their eye off of estate taxes. Recent legislation has made the federal estate tax exclusion $5.2 million dollars. If a married couple uses a Credit Shelter Trust, they can exclude twice this amount or $10.4 million dollars. While many investors may no longer be subject to a federal estate tax, they may still have a state estate or inheritance tax.

ACTION ITEM: Affluent investors need to be aware of these taxes and the damage it can inflict on their financial plan and net-worth.

Thomas F. Scanlon, CPA, CFP®

Source: IRS Code

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein: as Financial Advisors of RJFS, we are not qualified to render advise on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

7 Things Every Investor Should Know

Know Your Goals

Every investor needs to know their goals. This may sound easy to say but perhaps a bit more challenging to really understand. What are your primary investment (life) goals? Do you want to retire by a certain age? Do you want your children to attend college and not have any student loans when they get out? Perhaps it’s to buy a second home down at the shore. Whatever it is, your goals need to be written down. Otherwise, they are just dreams. Dreams are fine, but to make your dreams a reality, write them down. By having your goals written down and then periodically checking in with them, this will assure you stay on track. Remember, your goals will likely change over time. When you accomplish some of your goals, celebrate! Then move on to your next goal.

Know Your Biggest Risks

Every investor faces risks. Some are obvious…like premature death or long-term disability. Other risks may occur to your property such as flood or hurricane damage to your home. One of the larger risks now facing many investors is the risk of running out of money. This is a very real risk. It is important that investors understand what their biggest risks are and take appropriate steps to protect themselves against them. Life, disability, property and umbrella insurance policies are some of the tools used. Find a good insurance agent and work with them closely. Building up your net-worth and seeing it all evaporate because the necessary coverage was not in place is insane.

Know Your Annual Living Expenses

How much does it cost you a year to live? Don’t know this number? Well, it’s time to go through your checkbook and bank statements for the past few months. This should give you a good idea approximately what it costs you to live a year. This number is very important. It will tell you how much (hopefully) you can save every year. If you are not in position to save, then it really is time to analyze your expenses and figure out what you can do without.

Know Your Risk Tolerance

Ah yes, risk tolerance. Everyone seems to have a very high risk tolerance when the stock market is headed up. When stocks are declining, many of these same investors are now “conservative”. Hmmm…sounds like Jekyll and Hyde. The reality is many investors get caught up with two of the more common emotions—greed and fear. Investors become greedy when stocks are rising and fearful when they are falling. It’s natural. You will need to develop the discipline to avoid getting caught up with these emotions.

Know Your Tax Bracket

Every investor needs to know their tax bracket. Why? This will help you decide when to take capital gains and losses, if you should invest in tax-free investments, or fund a Roth IRA instead of a regular IRA. This can be easily done by reviewing your federal and state income tax returns. It’s also important to project what you think your tax bracket will be in retirement.

What can make this analysis somewhat challenging is the Alternative Minimum Tax (“AMT”). There is not enough space (and ink) to address AMT in this newsletter. Suffice to say, if you are paying this tax, you are probably an unhappy camper. If you are not paying this tax, be grateful. The AMT will affect more and more taxpayers every year.

Know Your Investment Strategy

Every investor will need to have a clear investment strategy. This should be something a little more explicit than, “Buy low, sell high.” Unfortunately, many investors get caught up in the latest fad. Remember, with investing, it’s not always about the rate of return. It’s about what your goals are and when will you need the money you are investing now. This puts savers at a huge advantage. Investors that are able to save money are likely putting themselves in a position whereby they may not need to attempt to get a higher rate of return and don’t need to take as much risk. For many investors now, a conservative strategy for them has been to reduce debt. This deleveraging by many individuals has certainly begun to clean up their own balance sheets.

Know Your Estate Plan

The federal estate tax exclusion is currently $5 million. A married couple that sets up their estate plan appropriately can exclude up to $10 million. Mention estate planning and many people roll their eyes and say, “It doesn't’t affect me.” Perhaps, then again, in Connecticut the estate tax exclusion is only $2 million. So, while many may not be subject to federal estate tax, more will be subject to the Connecticut estate tax. For people who are not subject to either tax, the critical issue is….who gets your “stuff” and when do they get it? Therefore, estate planning is for everyone. A basic estate plan would include a will, power of attorney, and a health care proxy. A slightly more advanced plan may include a trust. You have spent a lifetime building your net worth. Don’t you want to have a say in how it is distributed? Also, don’t forget to review all of your beneficiary designation forms for your 401(k) plan, IRA’s, and life insurance.

Conclusion

These are the seven things every investor needs to know. Know and act on these and you will be well on your way with your financial plan.

If you have any questions or need any help with the seven things you need to know, please call me at (860) 645-1515 or e-mail Thomas.Scanlon@Raymondjames.com

Thomas F. Scanlon, CPA, CFP®

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Tax preparation and accounting services are provided by Borgida & Company, P.C., not as a service of Raymond James. You should discuss tax or legal matters with the appropriate professional. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Dividends are not guaranteed and must be authorized by the company’s board of directors. Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence and limited diversification.

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