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Tax Harvesting

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Many of you have recently received your 401(k) statements in the mail or reviewed them on line – and some are now calling them 201(k)s.  Unfortunately the losses that you have in your retirement plan are not deductible.

If, however, you have any taxable, non-retirement investment accounts in which you have losses you may be able to claim them to reduce your current years’ taxes.  There is a process known as tax harvesting that you may want to consider.

I am in agreement with most financial planners that selling assets simply because of a downturn in the market is generally not a wise idea.  Good reasons for selling include:  if you have taken more risk than you are comfortable with; if you are not diversified properly; if you feel you own a stock or mutual fund that will never increase in value; or if you will need cash in the near future.  Tax harvesting is also another reason to sell.

With tax harvesting you sell enough mutual funds, stocks or other investments to generate up to a $3000 capital loss.  If you have capital gains from other sources you can generate capital losses up to the amount of the capital gain plus the additional $3000.  On your income tax return you will then reflect the $3000 capital loss.  If you are in the 25% tax bracket the tax savings would be $750 federal plus your state tax savings.

Any loss in excess of the $3000 will have to be carried forwarded to the next tax year.

To avoid the loss being disallowed you cannot re-purchase the same mutual fund or stock for at least 30 days.  The plan is if you want to own the same mutual fund/stock is to put the money in a money market account for the 30 days and then re-buy the asset.  If you do not want to re-purchase that same mutual fund/stock you sold then you can take the money directly and re-invest in the asset of your choice. 

The 30 day waiting period is very important.  If you do not wait the 30 days you cannot claim the loss, it is disallowed.  This is known as the wash-sale rule.

There is, of course, a risk.  If the stock or mutual fund increases in price in the next 30 days you will miss that part of the up-swing.  You need to consider the possibility of an increase in stock price against the tax savings.

Be sure that prior to selling a mutual fund or stock that you actually have a capital loss.  Just because the value dropped in the current year does not mean there is a tax loss.  There is a loss if the value of the asset now is less than what you originally purchased it for.  If you bought a stock ten or fifteen years ago you may still have made a profit on the stock even though it is not as large as it was at the beginning of 2008. 


If you would like additional information about wash sales see IRS publication 550 Investment Income and Expenses found at www.irs.gov.
 

Choosing health care options

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November is normally when employees are also asked to choose their health care option and determine the funding of their FSA.

Review these carefully.  If you are a healthy individual who does not have much in the way of medical expenses you may find that a high deductible plan with an HSA option is the best way to go.

With the high deductible plan normal maintenance expenses will not be coverage.  Depending on the plan you may have to spend $1000 or more before expenses are covered so you will need to pay out-of-pocket for routine visits to the doctor and for prescriptions.  The medical premiums you pay will be significantly lower so you should save money overall.

If you pair this high deductible plan with an HSA account it gives you the opportunity to put money away, tax deferred towards future medical costs.  It would turn normally nondeductible medical costs into being paid by tax deductible dollars.  The money put into an HSA is an adjustment on the front of the 1040 thereby reducing current year taxes.  Money in an HSA remains in the account until you use it, it is not ever lost. 

If you have a lot of routine medical expenses then an FSA may be the way to go if your employer offers one.  An FSA allows you to put money into an account which can then be used to reimburse you for medical expenses such as co-pays, prescription costs, chiropractic and acupuncture expenses, vision and dental expenses, and other medical expenses that may not be covered by insurance.  You must decide how much you want to put into the account now, to start in January.  The maximum allowable is $5000 per year.

Money goes into your account before taxes.  So – if you are putting $5000 into the account and are in the 25% tax bracket you would save $1250 in taxes (plus probably state taxes).  When you take the money out of the account to use for medical expenses you do not pay taxes on it.

The caveat here is – you need to use the money by the end of the year (or in some cases March 15th of the following year, check with your employer for your date).  If you do not use it by the end of the year, then you lose it.  So – be sure you estimate appropriately in determining how much to put into this account.

Many individuals do not put money into this account because they are afraid of losing some it.  Even if you overestimate and end up losing $300 at year end from the account, the tax savings for the remaining amount you spent would probably be greater than what you lost.  If you want to protect yourself from losing money, then maybe estimate low.  Realize then you may not be getting the full benefit available to you.


Last Updated ( Saturday, 15 November 2008 18:36 )
 

Social security has come out with its new information for 2009.

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Social security benefits for those collecting are going to increase by 5.8% as of January 1st.  And as an added benefit there will be no increase in the basic Medicare premiums being deducted from the benefits.  If you have the higher income and your Medicare premiums were above the minimum amount you may see an increase in your premiums again this year.

The maximum amount of social security benefits you can collect if you retire at full retirement age increases to $2323 per month.

Now is the time to review your Medicare Part D policy also.  During November you have the opportunity to change to a new vendor if you want.  Review the prescriptions you are currently taking with available policies.  Different policies have better rates for different drugs.  If you are not currently taking any prescriptions you will want to look for a policy with a low monthly premium.  Check with your local pharmacy or agency for older persons if you need assistance in determining the best policy for you.

If you are between ages 62 and full retirement age and collecting social security benefits the amount of wages that you can earn before losing benefits is increasing to $14160.  If you earn above this limit you start losing a $1 in benefits for each $2 of excess wages.

In order to earn a credit for Social Security benefits starting in 2009 you will need to earn $1090 per quarter.  You must earn 40 credits in your lifetime to be eligible to collect Social Security retirement benefits. 

For those individuals still working – the amount of wages that are subject to social security tax is increasing to $106,800.  Medicare is still collected on all wages with no upper limitation.

Last Updated ( Saturday, 15 November 2008 18:36 )
 

Take a deep breath

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If you are a news junkie times are looking really scary right now.  With the Dow dropping over 2000 points in one week, a 700 billion bail-out, global markets closing due to record drops, England bailing-out its banks, a large company in Japan going under, credit markets remain frozen and on and on.

You need to remember though that it is big headlines that sell.  I am not going to say that we are not in for some rough times.  I certainly believe we are either in or headed for a recession.  When your head starts spinning because of all of the national and international news, take a step back and look at your own personal economy.  That is what really counts.

Is your job safe?  Although no one can guarantee a lay-off might not be in their future, how safe is your job?  If it is not, then you need to start preparing.  Improve your skills by taking classes or maybe training for a whole new career.  Join networking organizations to establish contacts that may be valuable later.  Make sure your resume is up-to-date and accurate.  Make yourself invaluable at your current job by taking on special projects, coming up with cost saving measures, being flexible and available.

Is your personal financial situation in good shape?  Do you have an emergency fund of at least six months expenses, maybe even twelve?  Have you gotten rid of all debt – other than that mortgage?  If not, you need to go into expense cutting mode and work to get that emergency fund in place and get out of debt.

Expense cutting mode means nothing is sacred other than the roof over your head, food on the table, and health care costs.  The time is to get extreme.  Get rid of cell phones, cable, and Internet.  No more eating out.  No new clothes or household items.  Every expense must be questioned.  Even as far as taking the car of the road and using public transportation.  Consider a second job, starting a small business, or taking in a roommate to raise income.

Review your credit report for free at www.annualcreditreport.com.  If there are errors get them corrected.  The lower your credit score, the harder and more costly it will be to obtain credit.  Work hard to make debt payments on time.  Get the percentage of debt that you are using down to less than 30% of the total available.  

Credit scores not only affect your interest rates on debts.  Insurance premiums paid are affected by credit scores.  Many potential employers and landlords are looking at credit reports. 
 
Yes, your 401(k) or other retirement plan and the value of your house may be deceasing.  If you do not sell these assets and give them time to recover it is only a paper loss.  It is hard to swallow, but it will get better.  Probably not tomorrow, probably not even next month, but it will happen.

What counts more is your cash flow today – the ability to pay your bills, to survive a job loss, to get your kids through college in the next couple of years.  This is where you need to spend your time and energy right now.  This is what will reduce the fear and out-of-control feelings.

Last Updated ( Saturday, 01 November 2008 11:33 )
 

Summer days are over.....

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Summer days are over and you find Halloween stuff in the stores already.  Turn around and Christmas will soon fill the stores.  Get yourself prepared for Christmas this year.  It is more important than ever to prepare for Christmas this year.  You cannot put those expenses on your credit card and worry about it in January.  Now is the time to make a list.  Who do you need to purchase gifts for?  What value are you going to put on that gift?  

Talk with friends and family about paring down gift lists.  Maybe draw names in the family instead of purchasing for each individual.  Get friends together to donate to a family in need instead of exchanging another nondescript gift.  See who can purchase the silliest gift for under $10.  You will be surprised at how well received and appreciated a scaled down Christmas is received by the other adult members of your circle.

Let the children in your family know that Christmas will be scaled down this year too.  You need to take that Christmas list with its cost and stick to it.  With heating bills expected to rise by 40% this winter and gas and food costs steadily increasing you have to be diligent.  You cannot bury your head in the sand and hope it will get better later.  You need to be proactive.

Now is the time to make non-monetary Christmas traditions.  Do not make it about how many presents are under the trees.  Make it about decorating the Christmas cookies or tree.  Make it about attending Christmas church services.  Make it about donating family time or Christmas caroling.  You, as a family decide.
 


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