If the recession has touched your life financially, you might want to do some tax planning to either postpone or accelerate your tax deductions and/or income.   For those anticipating more income this year than next, it may be prudent to accelerate deductions and postpone income.  For those anticipating less income this year than next, consider postponing deductions and accelerating income.  Here are some ways to do that. 

        One example might be to do a conversion of a Traditional IRA to a Roth IRA. This will result in more income in the year completed, but will reduce taxes in future years, particularly after the Roth has been in place five years.  It will be necessary to look at how the additional income will affect your taxes this year before you do complete the process. 

        Another option is to review the assets you hold that have appreciated in value.  As we do anticipate higher capital gain taxes in the future, this may be a good year to sell and take the capital gain in a low income year.  Again, a review of the affect on your overall taxable income is appropriate before selling. 

        From a deductible expense standpoint, consider paying real estate taxes for the year either in December or January depending on which year you anticipate being in a higher tax bracket.  This can result in two real estate tax deductions in one year and none in the other year.  This strategy makes the most sense for those close to a threshold of a higher tax bracket or for those who have itemized deductions that barely exceed the threshold for the standard deduction ($11,400 for married, $5,700 for single).  For those who do not itemize but do pay real estate taxes, this year you can deduct $1,000 ($500 single) for real estate taxes in addition to the standard deduction.  You may have the opportunity to prepay other itemized expenses on your tax return as well.  

        This is a good time of the year to review whether you need to reduce or increase withholding of your taxes.  Most people over withhold and, as a result, they end up making interest free loans to the government.  Many of these same people are borrowing money at excessive interest rates with credit cards.  If you received a substantial refund this past year, file a W-4 form with your employer and increase your number of withholdings.

        Another tax strategy is to look for an opportunity to do income splitting with family dependents.  Many business owners hire their children, transferring income into the child’s lower tax bracket to be used for paying school tuition.  It can also be done for estate tax reasons when assets are substantial.

        This is a great time of year to look at charitable planning.  Presenting gifts of appreciated assets to avoid capital gain taxes may reduce taxes at the end of the year.  The savings and tax reduction is greater with the gifts of appreciated assets.

        First time home buyers or those who have not owned a home in the past three years have an opportunity to receive a substantial tax benefit ($8,000) by purchasing before December 1, 2009.  There has been talk of extending this tax benefit but a final decision has not yet been made.

        Finally, review benefits from your employment to make sure you are taking advantage of all the pre-tax living expenses offered by your employer.  I recently published an article that addresses these opportunities in more detail (click here).

 Robert Ostrander, CFP®

SWS Advisors, Inc.

        If you are healthy and have no chronic diseases, life insurance offered through your employer will likely be more expensive than what is offered through non-group coverage. Proper selection of the coverage for reduced rates and adequate coverage is necessary and we can assist in that process. Group insurance may be the best alternative for someone with chronic diseases. It should be noted that a loss of employment will also mean a loss of group coverage.

        If you are without credit card debt, we generally recommend that you take advantage of matching contributions by your employer to your retirement plan. This is why we encourage young people to avoid debt early in their careers. Money invested early and accumulating over many years grows dramatically. Time and compound interest is often referred to as the eighth wonder of the world.

        If your employer offers a flexible spending account (FSA or 125) sit down and review all your medical expenses that you anticipate for the next year. This should include prescriptions, chiropractic medicine, eye glass care, dental, medical costs not covered by health insurance, and any other related expenses. You can find a complete list through your employer or with a Google search of section 125 medical expense deductions. Some plans allow .14¢/mile to and from the doctor’s office with proper documentation. This benefit has tax savings of a minimum of 20% and as much as 40% for some people. Be accurate in your estimates because if you do not use it, you can lose it.

        Some benefit plans allow for pre-tax payment of mass transit deductions to and from work as well as pre-tax parking. This is offered under Section 132 of the IRS tax code. If the cap and trade agreements take place this may be the preferred method of travel because of the high cost of fuel. If your employer does not offer it, suggest to you human resources manager that he/she look into adding it to the options. This plan benefits the employer as well, saving the FICA tax for the mass transit expense.

        Another benefit offered is tuition reimbursement under Section 127 of the code. This benefit allows the employee to be reimbursed for successful completion of educational courses offered that will bring value to the employer. Often it requires a commitment to the employer for a stated number of years. The permissible amount is $5,250 each year. I almost always recommend long-term disability for employees because it represents a catastrophic risk potential. In some cases I recommend supplementing group long-term disability with an individual plan.

        I also recommend short-term disability for those with limited financial resources. I have never been a fan of accident policies or disease specific policies. They require specific risks to occur for collection of the benefit. Sometimes a family history of disease will sway my thinking.

        Dependent care benefits can also be taken pre-FICA and pre-tax for adults or children. Up to $5,000 annually is permissible as a payroll deduction. It is important to have a review of this benefit to see whether to take the pre-FICA benefit or the child credit. Your accountant can assist you with this decision.

        If you are planning an adoption this year, be sure to take advantage of the pre-FICA and pre-tax benefit that allows up to $10,390 to be payroll deducted. In addition, there is also a tax credit available for adoption. Be sure to discuss this option with your employer because this benefit saves your employer as well.

        Proper selection of benefits can be a significant benefit to employees. This is why planning is so important. Each year most of the benefits must be determined in October or November for the next year. It is worthwhile planning how to take these benefits. Be sure to call us if you need help.

Robert Ostrander, CFP®

SWS Advisors, Inc.

       What will this mean to the average family earning $50,000 per year?  Using standard deductions a family earning $50,000 will pay an extra $200 per month in federal taxes.  If this was the only tax to be concerned with it might be possible for a family to survive.  But it’s not. 

        By letting the Bush tax cuts expire, those with high net worth (over $1,000,000) will be faced with a confiscation tax (estate tax and state inheritance tax) of 55% for amounts over $1,000,000.  An additional 2% – 19% will be assessed by your state depending on the state of residence and the size of the estate.  Proper estate planning can minimize some of this tax burden.

       The cap and trade (cap and tax) agreements currently proposed before Congress will come in the form of higher fuel costs, costing this same family an additional $300 per month in gasoline prices and an extra $100 -$200 per month in increases of fuel costs in the home.  The impact will force many to look for alternative means of transportation and force those in rural communities to move closer to their place of employment.  Additionally, people will seek lower square footage homes to decrease their heating and cooling costs.

        As if these issues are not enough, the currently proposed healthcare reform may also have tax implications.  Eighty to ninety percent of Americans work for small business.  Under the new plan, if your employer does not provide health care they will be taxed an additional $100 per month and each employee will be taxed an additional $100 per month on $50,000 of income.  This may also lead to higher unemployment.

       Another concern is the impact of inflation as a result of the stimulus package and years of underfunding of Social Security, Medicare and Medicaid.  When the baby boomers begin to tap these resources, the cost of everything will rise, forcing families to increase their income, thrusting average households into even higher income tax brackets.  The impact will reduce any discretionary income the average family may have left under the previous proposals.

       So what is the cumulative effect of all these taxes on the average family making $50,000?  This family could see an increase of anywhere from $400 to $900 each month in taxes (direct or indirect).  For someone making $30,000 each year the cumulative impact would be $300-$500 each month.

       I used to think that Congress would never make destructive decisions because they have some intelligent people in Washington.  My thinking changed in 1986 when Congress caused the Savings and Loan industry collapse by changing the depreciation schedule on real estate from fifteen years to a 29 year depreciation schedule.  More recently we have seen the relaxed home loan mortgage underwriting mandate through Fannie Mae and Freddie Mac that led to the banking bailout.

       How can you respond to this impact on your cash flow?  You may want to let your voice be heard through your government representatives.  On a personal level consider the following:

1. Review assets you have that may be subject to taxes when you sell the asset. You may want to pay the tax on them now rather than later when you could be in a higher tax bracket.
2. Begin to review ways to reduce your energy consumption both in your home and your vehicle.  You may want to live closer to your employment.
3. Review ways to make more of your income fall in the category of benefits through employment to reduce taxes.
4. For large estates, begin to look for ways to reduce the impact of estate and inheritance taxes.
5. Look for the myriad of ways to reduce living expenses.  If you have a business look for ways to improve cash flow, reduce operating expenses, and reduce taxes.
6. Look at repositioning investment assets for this crisis.
7. Pray for the leadership of this nation.

        We have less than two years before these tax increases take affect.  I encourage you to begin making plans to withstand these tax measures.  Not making plans now could be devastating for you and your family in the future.  Please forward this to anyone you think might be concerned with an increase in their family budget.

 Bob Ostrander, CFP®

SWS Advisors, Inc.

Bob has spent over forty years researching ways to reduce living expenses.  He has written books and workbooks to help families and businesses on this subject.  Bob continually looks at the impact of legislation on a personal budget.  This article raises grave concerns for this nation.

Make the most of discounts. Many insurers offer discounts on services to promote healthy lifestyles, such as gym memberships, smoking-cessation and weight-loss programs, chiropractic service and acupuncture.

Sign up for employer incentives. Many employers are offering premium discounts, contributions to health savings accounts and outright cash incentives to employees who sign up for a wellness program or health assessment. Some also offer perks to people with, say, asthma, lower-back pain or diabetes for enrolling in a disease-management program.

1. Prevent rather than treat – Wev’e all heard prevention is the best cure, and it is!  One of the most effective ways to keep your costs of health care down is to take up and maintain a healthy lifestyle.  This includes maintaining or attaining a healthy weight, exercising regularly, kicking any unhealthy habits, having regualr checkups to catch any problems in their early stage, and taking advantage of any wellness programs provided through your employer or local comunity center.

2. Take advantage of free services whenever possible – Most communities have clinics that may ofer free health screenings as part of their services to the community.  Local clinics, hospitals and pharmacies often provide a variety of these, including blood pressure and cholesterol screenings and even mammograms.  They may be advertised in your local paper or on your local radio station.

3. Eat foods in their most natural, unprocessed state - The processing of foods destroys nutritional content.  The more processes it goes through before it gets to your body, the less it has to offer you.

Tax Stimulus Pros……and Cons

The recent economic stimulus bill has some advantages for certain taxpayers.  The following list represents some of the benefits:

1.                  The first $2,400 of unemployment compensation will not be taxed for those who have lost employment between September 1, 2008 and January 1, 2010.

2.                  Those paying for health insurance through COBRA will only have to pay 35% of the cost.  The balance of 65% will be paid by the employer, but reimbursed by the government.  This is available until January 1, 2010.

3.                  The alternative minimum tax exemption allows for couples earning up to $70,950 and single up to $46,700 to avoid paying the tax.

4.                  Anyone who has not owned a home for the past three years can qualify for the $8,000 tax credit if the home is purchased by December 1, 2009, as long as your income does not exceed $75,000 for an individual or $150,000 for a couple.

5.                  There is a temporary expansion of the Hope Credit for the first two years of post secondary education expenses.  The first $2,000 of expenses receives 100% credit while the next $2,000 receives 25% credit up to $500.  This credit phases out for incomes of $160,000 for married couples and $80,000 for single individuals.

6.                  Those with funds in the educational 529 plans can now use the money for computers and computer technology.

7.                  Buyers of new motor homes, motorcycles, cars and light trucks can deduct the sales and excise taxes on the vehicle up to $49,500 of the vehicle purchase price.  The deduction is phased out for incomes of $125,000 for individuals and $250,000 for couples and is only available through 2010.

8.                  There are some credits available for those who install approved energy efficient improvements in their homes.

9.                  A hybrid vehicle tax credit is available for the first 200,000 sold.

Those with small businesses also have some tax incentives available:

1.                  Equipment, supplies or capital expenses can be deducted for up to $250,000 in the first year under Tax Code Section 179 for 2009.  There are additional bonus depreciation amounts for capital expenditures.

2.                  The new Work Opportunity Credit gives incentives to small businesses for hiring military vets and disconnected youths who are 14-24 with no family or support networks.

3.                  An investor may be able to exclude 75% of the capital gain on an investment in a small company if the stock is held more than five years.  The investment must be made between February 17, 2009 and January 1, 2010.

4.                  For those business owners converting a C-corp to an S-corp between 2009 and 2010, there is favorable tax treatment.

5.                  There is favorable treatment for setting aside estimated corporate tax payments.

6.                  There are some additional incentives for writing off 2008 losses by carrying the losses back to as many as five previous tax years instead of the standard two.

   This stimulus plan was designed to give the American people incentives to stimulate the economy by buying new cars or homes, going to college, or improving energy efficiency.  It also was designed to give employers incentives to hire new employees, purchase more supplies, make investments in small companies and pay taxes.  While all this is said and done, it masks the billions of dollars spent by the government in other areas of the stimulus bill.  Few taxpayers will benefit much from these programs, but for those of you who do, take advantage of the list now.  With the government needing to borrow .46¢ for every $1 they spend this year, we’ll being paying for this for a long time to come.

Robert Ostrander, CFP®

SWS Advisors, Inc.

The short term trend in the market has been upward for equities and although we may see some rocky behavior, the direction appears to be toward recovery.  Our concern, in light of recent behavior in Washington D.C., continues to be toward a highly inflationary season for the long-term.  Warren Buffet recently talked about how inflation taxes those on fixed income by stealing purchasing power.  We fear this sentiment for everyone as new taxes devalue our currency and erode our purchasing power.  The result of these new taxes for US stocks will be repressive.  In turn, global stocks will likely rise more aggressively than US stocks.

The government and business model is myopic and has been for generations.  We continue to see decisions made to ease short-term concerns with no long-term view of the future.  Even though government and business leaders may usher us down a path to destruction, there are plans we can all make to minimize economic damage to ourselves.  What are these plans?

First, everyone needs a Plan B.  What is a Plan B you ask?  A plan B is a plan we carry out if we lose our job, have our pay reduced, lose benefits or we find inflation makes it difficult for us to make ends meet.  How do you get a Plan B?

There are two main ways to develop a Plan B.

1.      Cultivate a network – For those of you who work as an employee subject to others, you can begin to build a network of people who could assist you in finding a new job.  Building your network now can minimize the time you remain unemployed in the future. 

2.      Create your own business – Think about your hobbies or interests.  What do you enjoy doing the most?  Could you turn that interest into an income-generating business?

Secondly, find ways to reduce your living expenses.  Reducing your everyday expenses can free up much needed resources when times get tough.

If you have questions about how this economy and the decisions our government is making affect you, please call.  We understand that you may need assistance in carrying out this process.  That is why we do a preliminary review at no cost. 

Saving Without Sacrifice has assisted countless clients develop their Plan B and we would like to help you as well.  Whether using our extensive resources for developing a network or using our workbook, Saving Without Sacrifice for Small Business, to form a strategic business plan, we can facilitate your development of the right Plan B for you.

Robert Ostrander, CFP®

SWS Advisors, Inc.

HOPE FOR TOMORROW

The United States will soon face an economic storm of immense proportions created by a Congress, who for decades have made promises that they cannot fulfill. They have engaged in a process of buying votes in the present while postponing future financial needs.  The baby boom population (78 million people) is approaching 65 and will be asking for Social Security benefits and Medicare benefits that are underfunded.  In addition, the states have the responsibility to provide nursing care for the elderly who are impoverished.  This system is called Medicaid.  It too is largely underfunded. 

On top of this, the government is engaged in a process of selectively bailing out businesses who have mismanaged their assets primarily in the financial sectors and more specifically banks.  Banks are required to have 5% in reserve and before the crisis the average bank had less than .7%.  When the bailout occurred it is my belief that the funds were used to bring the reserves back to 5% leaving no money for new loans.  The economy needs credit to work efficiently for commercial loans, car loans, mortgages and the like.

The government has only three solutions for the need for money.  They can borrow, tax, or inflate the currency.  Borrowing comes in the form of treasury notes, bonds or bills.  We have been borrowing from the Chinese and the effective rate is higher because unlike the U.S. citizens the Chinese pay none of the interest back in the form of taxes. 

Taxing is the second alternative but raising taxes does not necessarily generate more revenue for the government.  Income taxes can cause people to cheat or look for legal ways to avoid them.  The rich set up sophisticated entities offshore and the poor trade services.  Corporate taxes can reduce the ability of companies to compete in a global economy and are really a tax on the consumer who buys the goods and services.

This then leads to the most likely scenario which is to inflate the currency.  I have in my possession currency issued by a bank in 1860.  It says on the currency that this receipt can be exchanged for one bushel of wheat, barley, rye, corn etc. Let’s assume you put on reserve a bushel of wheat and I, as the banker, issue you a receipt. The next day someone comes into my bank requesting money for services to the bank, and I issue them a receipt against your bushel and likewise the day after I issue another receipt against the same bushel.  In business we call that fraud; when the government does it, we call it inflation.  Inflation raises taxes because of our graduated tax scale without a vote by Congress and steals purchasing power.

  So what are the solutions to these problems facing each of us?

1.      We need to look for ways to live within our means.  Saving Without Sacrifice is a book and workbook (Saving Without Sacrifice in Action) that can help you achieve this goal.

2.      All debt, particularly variable rate debt, needs to be eliminated. 

3.      Homes on bus lines, with low square footage, and close to commerce will have higher value than homes that are not.

4.      Assets should be purchased that will protect you from inflation.

5.      Everyone needs a plan B that will create income in the event of loss of employment.  For those seeking to start a business as their income source, begin planning and strategizing before loss of employment and use Saving Without Sacrifice for Small Business to help you.   For those desiring employment through a business or government, begin building your network of people who can help you find work, if you lose your job.  Remember, you need to be a friend to have a friend.

6.      We anticipate a short term recovery for you to prepare for the next economic challenge.

Robert Ostrander CFP®

            President SWS Advisors, Inc.